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Edited Transcript of LIGT3.SA earnings conference call or presentation 8-May-20 6:00pm GMT

Q1 2020 Light SA Earnings Call

RIO DE JANEIRO May 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Light SA earnings conference call or presentation Friday, May 8, 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, IR Officer & Member of Executive Board

* Roberto Caixeta Barroso

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

* Rodrigo Vilela

Light S.A. - IR Superintendent

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Presentation

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Rodrigo Vilela, Light S.A. - IR Superintendent [1]

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Good afternoon, everyone. I'm sorry for the delay. Welcome to Light's webinar for the first quarter 2020 results. My name is Rodrigo Vilela, Head of IR, and I will be the host of this event. The presentation and comments on the results will be made by Light's CEO and Investor Relations Officer, Ana Marta Veloso; and by the officer, Roberto Barroso. The presentation is already available for download on our Investor Relations website, but it will be also possible to follow it here through Zoom platform. (Operator Instructions)

After the end of the presentation by Ana Marta Veloso, we will host a Q&A session. Further, I will provide instructions for those who want to ask questions. And this webinar is being recorded, and this audio will be available on our Investor Relations website.

As usual, here is our disclaimer. Forward-looking statements are based on the beliefs and assumptions of Light's management and 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.

So after due legal notice, I would now give the floor to Ana Marta. Ana, would you please?

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Ana Marta Horta Veloso, Light S.A. - CEO, IR Officer & Member of Executive Board [2]

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Thanks, Rodrigo. Good afternoon, everybody. I'd like to thank everyone who is watching our live webinar for the first quarter results for 2020. And based on the concrete results that will be detailed shortly, I'm very confident that we are on the right track to deliver Light's turnaround plan, which began to be built when I returned to the company just over a year ago. We are a united and motivated team with everything that is required to make Light one of the best energy companies in the country. Facing challenging context and coming out stronger is in our DNA.

A lot has changed since the most recent results presented on March 13 as a consequence of the COVID-19 pandemic in Brazil. For this reason, after the comments on the highlights of the first quarter, we will be briefly go over the initiatives we've been taking and how we've been proceeding in these new times. Then Barroso will outline some results that can already be measured from the pandemic on the company numbers.

Coming back to the results. Since the beginning of our team, we have already performed the follow-on, sold Renova, and the distribution company's turnaround is now a reality. The 4 main initiatives of our value-creation plan, already disclosed to the market, are as follows: combating energy losses, reducing legal contingencies, reducing PMSO and prioritizing CapEx and liability management. We have already achieved concrete progress in at least 3 of them.

For the first time in the last 3 years, we saw a reduction in energy losses, both in volume and in percentage terms during the quarter, in addition to the continued reduction of manageable costs even further to what we've been observing in the recent quarters. As a result, the distributions company EBITDA increased 4.3% over the first quarter 2019, mainly as a result of reductions in energy losses and in expenses related to personnel, materials and outsourced services. As already disclosed to the market, we have a plan of action in place to fight losses that is segmented by regions and explained the result of a detailed diagnostic of the realities and issues in each region of our concessionaire. Our own teams as well as outsourced teams are now better trained and enabled to carry this plan out.

We improved our third-party contracting and control processes, aligning them to the effective generation of results for the company as well as in-sourcing part of our workforce with the double objective of improving ethical control and increasing productivity. We have been relentless in dealing with higher-income clients who steal energy, whether they are business or residential, by performing regularization actions, many of them with the police support and publicized in the media. Moreover, we've been tirelessly working to bring and keep clients in the formal markets.

We have also been working in the administrative aspects of the commercial losses by correcting measurement errors and working with clients billed by average and by minimums. We are improving CapEx by replacing meters that have been 45 years or more in service, [shooting] networks on those clients located in areas with high rates of energy theft and also investing in physical measurement of the product. As a result, we closed the quarter at 25.44% of total losses on grid load, over 26.05% during the fourth quarter, a 0.6 percentage point reduction equivalent to 472-gigawatt hour. Nontechnical losses over the low-voltage market closed at 1.8 percentage point, lower this quarter over the previous one.

It's important to highlight that indicators are falling whichever way we measure energy loss, whether in percentage terms or in gigawatt hour and whether we include or exclude the REN, the retroactive billing of the robbed energy. We still have a long way ahead since we are more than 6 percentage points above the regulatory tariff transfer of 19.2% of the grid load, according to the tariff readjustment parameters set out this March. However, we are convinced that once the more critical months of the pandemic are over, we will be able to reinforce our plan of action, which has already been showing concrete results.

It's important to mention that the synergy between commercial and engineering areas has been deepened in the past last month after responsibilities have been redistributed between Dalmer, who is more focused on planning and relationship with clients; and Pimenta, who is responsible for execution in the field. This has made our teams more productive, flexible and multidisciplinary. This is putting our motto, #umasólight, what means one light only, into practice, by breaking down barriers, motivating the team and making things different to deliver sustainable results despite the enormous challenges of our concessionaire.

On the collections side, we keep the normal instruments in place until the first half of March, include our SMS, power cuts and negativizing the clients, looking to keep the bad debt provision under control, while at the same time, making progress on combating energy losses. For the second half of March onwards, after the resolution from ANEEL, we lost power cuts as a collection instrument over some clients, and we are already observing the first impacts with an increase in defaults as a consequence of COVID-19. The collection ratio closed the quarter at 96.9%, 0.8 percentage point below the one achieved in the first quarter of 2019. This ratio is in line with our expectations. It also reflects the impact from regularization initiatives with clients who were informal, obtaining energy illegally.

Bad debt provision for the last 12 months, disregarding the extraordinary impacts from last year, has closed at 2.8 percentage points of the gross revenue, 0.9 percentage points above the figure of December '19. In response to the current situation, we drew several scenarios with estimates of the default. We are following the progress of collections daily as well as monitoring client behavior, such as punctuality of payment and migration of physical channels to digital ones. Until the end of March, approximately 75% of Light's revenues in financial volume were coming in through digital media, such as ATM at bank branches, Internet banking and automated debt.

We are also providing clients -- we are also improving client relationship management, which has a direct back in reducing contingencies, having been lowered to BRL 84 million in the past quarter, excluding the effect of voluntary dismissal program, during the first quarter of the year. As already disclosed to the market, we reviewed all our relationship fronts, such as our call center, stores and the ombudsman; improved our internal processes to provide a more streamlined service and, thus, avoiding the filing of new lawsuits against the company. Also, our legal department is now even closer to the regionals, working jointly with the commercial team in the root causes of the legal demands. With these actions, we are already reducing the filing of new lawsuits against the company, which should be reflected as reduced contingencies in the following quarters.

We were able to maintain a downward trajectory for the third consecutive quarter at the Special Civil Court, the JEC. And comparing the first quarter '20 against the first quarter '19, we can observe a 26% drop in the number of new lawsuits filed against the company and 19% (sic) [18.6%] in the amount of provision for those clients. Following the trend from the previous quarter, there was also a significant reduction in the number of complaints recorded at our stores through our call center or ombudsman and also at ANEEL.

Please, let me remind you that these indicators work as a key predecessor to [judicialization] against the company. And to help us in this important initiative of Light's turnaround plan that is reducing judicial contingencies, on March 17, our management team has been reinforced with Déborah Brasil, who recently held the position of Legal Director for the distribution business at the Enel Group in Brazil. Before joining Enel, Déborah worked in the legal areas of Globo, Oi and NET Claro.

Another pillar of the turnaround of the distribution company is reducing manageable expenses. Today, our PMSO expenses are close to those embedded in our tariff, but we must reduce them even further. In this sense, we have been working since mid last year on various fronts: improved management of materials and contracts with third parties; adjustments to the staff, including the launching of a voluntary dismissal program; improvements to the variable compensation policy linked to objective goals, including for the field workforce; greater synergy between the areas; increased productivity and ethical control of field teams with progressive in-sourcing. As a consequence, personnel, material and third-party services expense of the distribution company, the PMS, excluding the voluntary dismissal program, fell 5.6% over the first quarter of 2019 in nominal terms.

Moving on to financial aspects. The net debt EBITDA ratio of Light S.A. closed the quarter at 3.06x, well below the limit of covenants that is 3.75x, established in most of our debt contracts. Light's consolidated debt as of March 31 was BRL 6.7 billion. We closed the first quarter with a robust cash position of BRL 1.5 billion over debt maturities of BRL 1.2 billion until the end of 2020. In April and in the beginning of May, there were additional cash infusions at the distribution company from: BRL 105 million from sectorial funds released by ANEEL; BRL 400 million in debentures at the cost of CDI, plus 2.5 per year; and BRL 500 million of an intercompany loan from Light Energia, the group's generation company. Further, as a cautionary measure and given the uncertainties arising out of the pandemic, on March 28, shareholders approved that dividends to be paid in 2020 were retained, amounting BRL 315 million. Under the leadership of Barroso, in 2019, we accomplished a series of successful initiatives to improve the profile and cost of Light's debt, which would be continued if not for the now restrictive context of the pandemic. We hope the local and international debt markets reopen soon to allow us to resume our reliability management agenda as soon as it becomes feasible.

Regarding the quality of the supply, we have very good news also in this quarter. The DEC and FEC indicators were at: the DEC was -- were at -- was at 6.96 hours, below 7 hours a year is a record for the company for the past 15 years and a 10.5% reduction compared with December; and the FEC ended the quarter at 4.27x.

On March 15, Light SESA's annual tariff adjustment as approved by ANEEL was applied, and the average increase perceived by customers was around 6.21%. In March, ANEEL also approved the new regulatory walk over the remuneration basis for distribution companies, which will apply to Light upon the next tariff revision to take place on March '22. The value for 2019 was 7.78% compared to the 7.17% initially disclosed by the regulator.

In the generation segment, our results were negatively impacted by the GSF, which was 44 percentage points below compared to the same quarter of the previous year. Thus, the volume of excess energies sold in the free market are liquidated, debt with CCEE was reduced, and EBITDA for the quarter was BRL 138 million compared to BRL 231 million in the previous -- in the same quarter of the previous year. On March 10, the Senate commission on the economic issues passed the bill number 3,975. Under the terms of this bill, generation companies will be required to settle their debts with the CCEE immediately after the bill is passed in the Senate and implemented by ANEEL, and concession periods could be extended up for 24 months.

As a subsequent event in the quarter, in addition to fundraising by Light SESA, I'd like to point out that on April 9, the Brazilian Federal Revenue service enabled the fiscal credits related to the ICMS exclusion from the calculation of PIS/COFINS, which is in the order of BRL 6 billion. This was the last step required that would allow us to start taking advantage of these fiscal credits to offset federal taxes.

Talking about the effects of the pandemic in Light, since the social isolation measures, we adopted several measures that we will describe further. Among the main actions in our crisis management, I would highlight: home office work for all administrative activities, segregation of risk groups, supply of alcohol gel in buildings -- at all buildings and vehicles of the company, distribution of protection face masks, taking the temperature of employees and the public in general who enter the company facilities, anticipation of the flu vaccination campaign, medical monitoring of suspected and confirmed cases of COVID. And regarding field activities, we are maintaining relative normality in the services, thanks to the successful crisis management plan and also to the in-sourcing program, which began last year. Our own employees tend to be more engaged and show lower rates of absenteeism, in addition of being more disciplinary and flexible in being allocated among regionals when it's necessary.

In operating terms, we prioritized emergency activities and the response to requests from hospitals and clinics, whether for new energy connections, increased loads or demands. We are anticipating the needs of these clients and making procedures more flexible because of the speedy responses necessary to fulfill these requests. The recommended confinement determined that at the end of March, we had a lower demand for energy in Light's concession area, which is concentrated on commercial clients and on electricity-intensive industry. In the following presentation, Barroso will comment on some preliminary data about that.

On March 24, ANEEL passed a resolution providing for emergency measures related to the pandemic, such as the suspension of power cuts to residential customers due to their default in payment, in addition to the provision of services and activities regarded as essential. It's important to note that these measures does not prevent us from other collection actions for overdue payments, such as including defaulting customers in credit bureau lists. ANEEL also has given some flexibility to norms regarding client relations, such as, for example, in-person service to the public. With this measure, we closed in-person service at our stores and directed and serviced our clients through digital channels, such as the virtual store, Whatsapp, Facebook and Twitter, in addition to sending bills via e-mail. Until now, we have been very successful in these initiatives. And therefore, in the future, we hope to be able to have a dialogue with the regulator in sense of preserving this state of digitalization.

Also within the regulatory scope, on April 8, the federal government issued the Executive Order #950, providing for resources from the National Treasure to be directed to a sectorial fund subsidizing low-income customers. We regard this initiative positively, which should alleviate the expenses of these customers and preserve an important revenue stream for Light since around 10% of our client base is categorized as low-income clients. Currently, both our Executive Board, me, myself and regulatory team are dedicating a good part of our time dealing with ANEEL and the Ministries of Mines and Energy and Economics (sic) [Economy] to address actions that will ensure the economic financial balance of distribution companies as established in the Executive Order 950. We hope that in the following days, these talks will lead to a resolution that will establish the regulation -- the regulatory balance in the sector. We are convinced that we will come out of this crisis stronger. Various processes that were already underway such as, for example, training of multidisciplinary teams, in-servicing teams, were, in fact, accelerated during the crisis. And we have made great progresses in terms of digitalization of customer in-service, which brings in productivity gains and also contributed to reduce the filing of new lawsuits as a result of the increased effectiveness of our service chains.

We are also very close to the demands of the society, and we made some social responsibility activities during the crisis also. We donated BRL 1.5 million to the emergency fund set up by Fiocruz for the production of quick testing kits for the diagnosis of COVID-19, and we are providing energy free of charge to Leblon field hospital, which has the capacity of 200 beds and is directed to patients from the public hospital network. We also donated 300,000 hygiene and cleaning items to the communities where we operate. With these actions, Light is going beyond our main mission, which is to provide clients with quality energy, and is looking to soften the impact of the pandemic and to contribute to the well-being and development of our society.

Now I'll give floor to Barroso, who will present more details on the numbers of the first quarter results. 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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Thank you, Ana Marta. Good afternoon to all.

Going to the presentation. In the Slide #2, I'd like to show the grid load. It's important to remember that the market of Light is very sensitive to the temperature. We saw an increase in the temperature between 2018 to 2019 of 1.4 Celsius degree, and we saw an increase in our grid load of 5 percentage points. Now for the first quarter of 2020, we saw a decrease in the temperature of 2.6 Celsius degrees, and which implies a reduction of 9.1% in our grid load. And also, the billed market decreased 6.7% in the first quarter of 2020. But it's important to mention that the reduction of the billed market was below the reduction of the grid load. This means that we were unable to decrease losses in our market. It's important to emphasize the reduction in the grid load in the first quarter of 2020 was concentrated in the residential and commercial markets that are the markets more related to the temperature.

Going to Slide #3, we can present the evolution of our energy losses. It's the first time in the last 3 years, we present a very high decrease in the losses. The reduction was over than 400-gigawatt hours, and the percentage of the reduction was 0.6 percentage points in the total loss. The reduction was from 26.04% to 25.44% in the total losses. It's related to the new combat losses plan disclosed to the market by the end of last year, that we are doing several measures to reduce losses, considering the unity of the field teams and trying to segregate our concessionaire in 5 regionals.

Going to the next slide, we can see also a reduction in the nontechnical losses over the low-voltage market. The reduction in this indicator was almost 2 percentage points in this quarter -- of the first quarter of 2020 when we compare the last 12 months close to December 2019. And when comparing the right side of this slide, the risky areas' losses maintain almost the same in the last 3 quarters, and we were able to reduce the nontechnical losses in the non-risky areas. That is exactly the areas we are doing our job to combat losses.

Going to the Slide #5, we can see the evolution of the ER -- the IEN programs and as well the evolution of the incorporated energy programs. It's important to mention that considering the new strategy we designed after August 2019, we are focused on the incorporation of energy, which means the new energy concerned by the clients after the identification of the frauds, and we were able to issue more than 100 gigawatts in the first quarter of 2020.

On the right side of this presentation, we can see the evolution of the bad debt over the gross revenue. We closed the first quarter of 2020 in the index of 2.8%, 0.9 percentage points increased from December 2019, linked to the decrease of the collection rate we presented in the first quarter of 2019 as well the possible effects of the COVID-19 in the collection rate of this accounts receivables.

Going to the Slide #6, talking about the quality indicators. We're able to disclose a very good quantity results, both in the duration of the interruptions and the frequency of the interruptions. It's the first time of -- in the last 15 years that Light disclosed a duration of interruption below 7 hours in the last 12 months. And as well, the effect is the lowest in the last 5 -- the last 15 years, almost 4x per year.

Going to the evolution of the consolidated EBITDA, we can see a reduction in the net revenue, mainly related to the GSF. As Ana Marta mentioned at the beginning of this call, we had almost 44 percentage points below GSF in the first quarter of 2020 when we compare with the first quarter of 2019 for the generation business, but we don't expect reduction of the GSF for the next 3 quarters in 2020. And it's important to mention a reduction in non-manageable expenses mainly related to the energy losses in the distribution company. As well, we can see below in this slide, and also a reduction in the personnel, materials and services, the reduction was almost 4.4 percentage points in the nominal terms in the manageable costs, mainly concentrated in the distribution company.

Going to the provisions. We also would like to focus on the reduction on the lower lawsuits of the -- some clients against the company. We were able to reduce almost 20% in the first quarter of 2020 when we compare in the first quarter of 2019 and is the third quarter consecutive reduction in this indicator when you can observe in the lower portion of this slide.

Going -- moving to the Slide #9, we can see the EBITDA by segments. It's the first time in the last quarters we were able to increase the EBITDA in the distribution company, much related to the reduction of losses and reduction of PMSO. And considering the GSF below in the first quarter of 2020, we saw a reduction in this quarter for the generation business.

In considering the net result, we disclosed a net result positive in BRL 167 million for the first quarter 2020 when you compare with the first quarter of 2019, a evolution of -- an increase of almost 1 percentage point. And I'd like to mention the mainly positive impact in this financial -- in this net result was related to the financial results, mainly because the mark-to-market of the derivatives in our financial instruments.

Looking to the cash position. Moving to Slide 11. We closed the first quarter of 2020 in the total amount of BRL 1.5 billion. It's important to mention that in April, we issued BRL 400 million in a local debentures. As well, we received BRL 105 million from sectors' funds in the distribution company. So the position -- the cash position, considering the subsequent events, was almost BRL 2 billion, and we have an amortization in 2020 for the remaining period of this year in the total amount of BRL 1.2 billion.

Looking for the net debt-to-EBITDA indicator, it -- we closed the first quarter of 2020 very similar with the indicator we ended the fourth quarter of 2019, almost 3x -- 3.06x. And it's important to remember that the limit of this ratio for the most of our debts is 3.75x. Looking for the debt costs, we are in a positive trend, reducing the cost of our debt both in nominal costs and actual costs. And it is important to mention that we had a reduction of 0.75 percentage points in the SELIC in Brazil this week. 2/3 of our debt is related to the CDI cost, SELIC costs, and the inflation cost is 1/3 of our debt. We -- it's important to mention that we don't have a dollar exposition in our debt, considering the financial instrument swaps we had for both principal -- the interest until the maturity of this debt.

In the last slide, Slide #12, we'd like to mention the regulatory initiatives. As Ana Marta mentioned in the beginning of this call, the Federal Treasure approved the subsidized for low-income customers. As well, we received BRL 105 million from sectorial funds. We issued the local debentures, with the cost was CDI plus 2.51% per year, and the maturity is 1 year to strengthen cash position. We also performed a intercompany loan from the generation company to the distribution company in the total amount of BRL 500 million in order to improve the liquidity in the distribution company to avoid anything related to the COVID-19 in the distribution company. And also we have approved by the shareholders at the shareholders' meeting a retention of the entire amount of the dividends in the total amount of BRL 350 million that we will pay only in the next few years.

For the first impressions, the potential impacts of the COVID-19, we disclosed the first impacts we had in April '20. We'd like to disclose 3 ratios, 3 numbers. The grid load reduced almost 20%, but it is important to mention, part is related to the temperature and part is related to the social distancing determined by the government. The billed market reduced 15% in April 2020 when we compare with April 2019. And when we have a reduction of the billed market below the reduction of the grid load, it means also that the losses are reducing also. In the collection rate, we had a reduction of 8.3 percentage points in the first month since we started the COVID-19 in Brazil.

Now I'd like to pass it over to Rodrigo to continue the section of the Q&A. Thank you so much.

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Questions and Answers

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Rodrigo Vilela, Light S.A. - IR Superintendent [1]

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Thank you, Barroso. We will now start the Q&A session. (Operator Instructions)

I think we'll have a little -- we'll have a couple of minutes more. (Operator Instructions)

So I would like to thank everyone for your participation, and I will turn the floor over to Ana Marta for her final remarks. So please, Ana.

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Ana Marta Horta Veloso, Light S.A. - CEO, IR Officer & Member of Executive Board [2]

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Thank you. Thank you all for attending our results webinar. And once again, I'd like to point out that Light is making progress with the professional team, aligned to a value-creation agenda and to make improvements to governance, the same ones we announced to the market. We are on the right path to create sustainable results during a consistent trajectory to become one of the best energy companies in the country regardless of the complexities of our concessionaire. We reinforce our commitment to continue to improve our corporate governance and our transparency and our relationship with investors, clients and stakeholders in general.

As a final message of this specific quarter, I'd like to say once more that we continue to be focused on the distribution company's turnaround even amidst the challenging and uncertain context of the pandemic. We will come out of this crisis stronger than we entered. Our IR team, now reinforced by a new manager, (inaudible), will remain at our disposal for -- at your disposal for further clarifications. Have a nice evening you all, keep safe and see you next time. Bye-bye.

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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 so much. Bye.

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Rodrigo Vilela, Light S.A. - IR Superintendent [4]

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Thank you all, bye. And any questions, please give the IR. Thank you. Bye-bye.