Enel Américas S.A. (ENELAM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Enel Américas 9 Months 2020 Results Conference Call. My name is Sydney, and I will be your operator for today. During this conference call, we may make statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements could include statements regarding the intent, belief or current expectations of Enel Américas and its management with respect to, among other things, Enel Américas business plans; Enel Américas cost reduction plans; trends affecting Enel Américas financial condition or results of operations, including market trends in the electricity sector in Chile or elsewhere; supervision and regulation of the electricity sector in Chile or elsewhere and the future effect of any changes in the laws and regulations applicable to Enel Américas or its affiliates. Such forward-looking statements reflect only our current expectations and are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. These factors include a decline in the equality -- or pardon me, the equity capital markets of the United States of Chile, an increase in the market rates of interest in the United States or elsewhere, adverse decisions by government regulators in Chile or elsewhere and other factors described in Enel Américas' annual report on Form 20-F, including under Risk Factors. You may access our 20-F on the SEC's website, www.sec.gov. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of their date. Enel Américas undertakes no obligation to update these forward-looking statements or to disclose any development as a result of which these forward-looking statements become inaccurate. I would now like to turn the presentation over to Mr. Rafael de la Haza, Enel Américas' Head of Investor Relations. Please proceed.

Well, thank you very much. Good afternoon, ladies and gentlemen [Foreign Language] and welcome to our 9 months 2020 results presentation. I'm Rafael de la Haza, Head of Investor Relations, and here with me is Aurelio Bustilho who is our CFO. First of all, I hope you and your families are well and safe. Before starting this conference call, let me remind you that this presentation will follow the slides that have been already uploaded into the company's website. Following the presentation, we will have the usual Q&A session. And in this opportunity, we will only receive questions, and this is very important, regarding our results, third quarter results. For the merger between Enel Américas and Enel Green Power, the transaction that has been proposed some weeks ago, we will have a specific conference call in a very few days. [Operator Instructions] Now let me hand over the call to Aurelio who will start by outlining the main highlights of the period for Enel Américas in Slide #2.

Thank you, Rafael. Good afternoon, good morning, everybody. During this quarter, we have seen an important recovery compared with the second quarter in terms of demand and collection. COVID-19 impact had its peak during the second quarter. And in the last months, we have seen that operations had a positive trend and almost reached their normal level by September. We continue doing our best to help our communities to face these difficult times. In this context, EBITDA for the third quarter reached USD 725 million, a decrease of 20% compared to the third quarter of 2019. This significant reduction is mainly explained by the currency devaluation in the 4 countries that we operate and to lower energy demand in the period. Without considering the FX impact, EBITDA would have decreased by 2% in the quarter. It is important to highlight that despite this difficult scenario, we have -- we were able to significantly improve our cash flow in this period, mainly due to the positive impact of the COVID Conta in Brazil that we booked in July, improving the FFO in 60% compared to the 9 months of the previous year. Regarding the merger with the EGP, Américas proposed a few months ago, let me tell you that the process is well on track. At the end of this presentation, we will review the main milestones coming ahead. On the next slide, we will see a summary of COVID-19 main impacts on our business. Local currencies have suffered significant devaluations against U.S. dollars during this year. Brazilian reals has decreased 40%, while Argentinian peso, Colombian peso and Peruvian sol dropped by 27%, 19% and 9%, respectively. Regarding electricity demand distributed, we have reductions in 4 countries where we operate compared to -- 9 months of 2020 with the same period of 2019. We can see that Peru was the most affected with a decrease of 9% as in the mining industry is still partially affected, while Brazil, Colombia and Argentina decreased by 5%. Finally, in terms of collections, we have seen that Peru was the most affected country with a drop by 7.9 percentage points; then we have Argentina with 7.3 percentage points; Colombia with 2.5 percentage points; and Brazil with 2.5 -- 2.4, sorry, percentage points. It is important to highlight that despite these negative impacts, both demand and collection have improved compared to the second quarter of this year as we'll see in the coming -- in the next slide. Here, we can see, in terms of electricity sales, Brazil, Colombia and Peru show a positive trend since April. And in September, we already reached the same level of the last year and of course, of the beginning of this year also and even better in case of Brazil. In case of Argentina, the trend has been different due to slower economic recovery, in particular, in the industrial sector. In terms of collection, the positive trend is not as clear as in demand charts, but anyway, we are in a much better position compared to the second quarter, as you can see that in September, collection has been better than last year. Now let's have a look on our investments for the period in Slide #5. Looking at the third quarter of this year, our CapEx increased by 3.4% compared to the third quarter of last year. This includes a negative impact coming from currency devaluation of $84 million. Without this effect, CapEx would have increased by 25%. We are affirming our commitment to continue investing according to our strategic plan despite the current scenario and the current situation. Considering the first 9 months of the year, CapEx amounted by $981 million, a decrease of 8.9% compared to the same period of last year. This reduction, however, is also explained by devaluation of local currency. Without considering this FX effect, our investment increased by 14%. Our investments were mainly devoted to maintenance CapEx and focusing network business, especially improving quality indicators. From a geographical point of view, almost 60% of the investment is in this quarter were made on our subsidiaries in Brazil with a significant increase in our 4 distribution companies, especially in Enel Goias. Now on the following slides, let's see the main ESG indicators. Following our focus of contributing with the United Nations Sustainability Development goals, we have been supporting our community with more than 460 projects, which, in total, have a positive impact in 1.4 million people in the countries in which we are present. At the same time, we are doing our best effort in order to help our society in these difficult times of pandemic. We are implementing more than 100 initiatives, which aim to help mainly health institutions and people with economic needs -- according, especially the poverty -- the energy poverty that we have in the region. In the 4 countries where we operate, we have made several donations, including electricity generators, food supplies and medical equipment and supplies among other initiatives. We will continue to -- on this path as long as it takes, hoping that we can collaborate to overcome this crisis altogether. Now I will comment about the financial results for the period in the coming slides. As mentioned before, COVID impact had its peak during the second quarter of 2020. But in the third quarter, we continued being affected mainly by a lower demand since there is a low recovery of economies in the countries that we operate. Reduction of electricity demand due to COVID had an impact of $195 million at EBITDA, while bad debts impacted by $19 million. At net income level, both impacts were $53 million and $6 million, respectively. After deduction of the FX and COVID impacts, we get to an adjusted EBITDA of 3 billion -- almost USD 3 billion for the first 9 months of the year and USD 1 billion for the third quarter, while adjusted net income reached USD 1.1 billion and $396 million, respectively. On the coming slide, #9, we will see the main financial indicators for this period. In the third quarter, reported EBITDA reached $725 million, a 19.5% decrease compared to the same period of last year. This is mainly explained by the negative impact of currency devaluation in 4 countries we operate, especially in Brazil -- after Colombia, but mainly in Brazil. Without considering this effect, EBITDA decreased 2.2% as a consequence of lower energy sales, both in networks and generation businesses. If we look at the first 5 months of the year, cumulative EBITDA reached to $2,196 million, a 26.1% decrease compared to the 9 -- to the same period of last year, mainly explained by the above-mentioned FX effect and also by positive one-off of USD 248 million versus the last year in Argentina due to Edesur liabilities resolution. Without this effect, EBITDA would have decreased by 1.1%. Group net income in the third quarter decreased by 31.6%, reaching $190 million, while on a cumulative basis, it decreased by 40.8%, reaching $487 million. In both case, this is mainly explained by a lower EBITDA, partially offset by better financial results and lower tax payments. FFO as I said, in the first 9 months reached $1,376 million, an increase of 60%, almost 60% compared to last year, while net debt decreased by 1%, reaching $4.2 billion. We will analyze in detail cash flow and debt later in this presentation. On the coming side, let's -- we'll see the EBITDA evolution and breakdown. Starting from $901 million of EBITDA of third quarter of 2019, we see a decrease of $18 million in thermal generation business due to a lower dispatch, while hydro generation decreased by only $1 million. Networks business was affected by a lower demand in the period, showing a reduction of $41 million, while retail business increased by $3 million and Enel X, $35 million. The main impact of -- for this period was currency devaluation, which had a negative impact of $153 million. Colombia and Brazil represent 40% of total EBITDA, followed by Peru with 15% and Argentina 5%. In terms of business lines, networks represent 47% of our EBITDA, while generation contributes with 42%, from which 30% is Large hydro with retail and Enel X represents 6% and 5%, respectively. Regarding the cumulative EBITDA in the first 9 months of the year and starting from $2,971 million from the same period last year, the main decrease comes from the current devaluation of total -- for a total of $489 million. Thermal generation networks and retail suffered a significant decrease where hydro generation and Enel X performed better than last year. Colombia is the main EBITDA contribution for the period and half of total EBITDA comes from network and infrastructure business. Let's now analyze our operating highlights on the following slides. In generation business, our installed capacity remained the same as last year, reaching 11.2 gigawatts, from which 55% is hydro generation. Net production in the third quarter reached 11 terawatt hours, a decrease of 9% compared to the same period last year due to a lower production in Colombia and Argentina. In cumulative terms, net production reached 30.2 terawatt hours in the first 9 months of the year, which means a 4% decrease. Of the total production of this quarter, 65% corresponded to hydro generation. Our energy sales decreased by 10% in the third quarter due to a lower sales in the 4 countries, reaching the 17.6 terawatt hours. In cumulative terms, the decrease was 9%, explained by reductions in Peru, Brazil and Colombia. Let's analyze networks business in Slide 12. In the third quarter, distributed energy reached 28.9 terawatt hours, decreasing by 4%, mainly as a consequence of the pandemic and the related reduction in economic activity. In cumulative terms, distributed energy reached 84.9 terawatt hours, which means a 6% decrease compared to the same period of 2019. Regarding number of customers, we have an increase of around 440,000 clients, mainly explained by an increase in Enel São Paulo, Enel Ceará, Enel Goiás and Enel Codensa in Colombia. Quality indicators improved in almost all our subsidiaries with the only exception of Enel Ceará which we suffered heavy rainy season and had more interruptions due to maintenance works. On the following slides, we'll see Enel X and retail businesses. In Enel X business, we had a solid growth in charging stations, photovoltaic and credit card businesses, while public lighting and microinsurance slightly decreased. We continue with our focus on developing new solutions in order to improve our customers' life quality and to help in the transformation of cities into smart cities, improving the quality of life in the cities. Regarding retail business, the number of delivery points increased by 20%, reaching 3,310 during this period, and the energy sold amounted 11.2 terawatt hours, which means that a 90% decrease as a consequence of the pandemic and the related reduction of the demand. Let's move to country-by-country analysis on the coming slides, beginning with Argentina in the next slide, in Slide 15, EBITDA in Argentina during the third quarter increased by 37% or $11 million compared to third quarter in 2019, reaching USD 40 million. This is due to the fact that in the third quarter of last year, we registered a negative impact of $22 million in distribution business as a consequence of hyperinflation. Currency devaluation had a negative impact of USD 11 million in the third quarter. In generation business, EBITDA decreased by 26%, reaching USD 38 million. This is mainly explained by lower revenues due to the specification of tariffs and no inflation adjustments and due to lower physical sales of 8% as a consequence of lower demand. In distribution, network business EBITDA increased by $27 million, reaching USD 5 million compared to the negative results of $22 million of the third quarter of 2019. Despite this increase, our business in Argentina is still affected by frozen tariffs. In terms of demand, Argentina has been very impacted this quarter by COVID, and we had 11% lower demand compared to last year. In addition, currency devaluation had a negative impact of $21 million for this period. CapEx in Argentina increased by $23 million compared to last year, explained by a higher investment, both in generation and network businesses. Let's continue with Brazil in the next slide. In Brazil, overall EBITDA in this quarter decreased by 32% or $137 million, including $104 million of negative impact coming from FX effect. Without this effect, EBITDA would have decreased by 8%. EBITDA in generation business decreased by 7% or USD 4 million, which is mainly explained by currency devaluation, which had a negative impact of $14 million. This was partially offset by a better operational results due to higher energy price. EBITDA in networks business decreased by 36% or $138 million. If you don't consider the FX effect, EBITDA decreased by 12%. This reduction is mainly explained by lower electricity sales in Enel São Paulo and Enel Rio and Enel Ceará. CapEx in Brazil decreased by 10% compared to last year, reached $218 million. However, this decrease is only due to currency devaluation. Isolating that effect, our investment increased by 49% or $97 million due to increase in our 4 distribution subsidiaries, especially in Goiás, especially focusing improving, and the results are coming, especially in the quality plans regarding Goiás. Let's move to Colombia in the following slide. EBITDA in Colombia decreased by $32 million or 9.8% compared to the third quarter of last year. Currency devaluation had a negative impact of $34 million. In operational terms, EBITDA increased by 1%. In generation business, EBITDA decreased by 11% or $21 million. If we don't consider the FX effect, in fact, we have a decrease of only 1%. This was mainly due to lower energy sales due to lower demand in the country in the distribution -- in the generation business. In the distribution business, EBITDA decreased by 80% or $7 million, and this is explained by currency devaluation. We had a negative impact of $14 million. In operational terms, EBITDA decreased -- increased by 3%, mainly explained by the introduction of the new tariff in April 2019 and also it's important to highlight that the new regulation scheme in Colombia is revenue capped, meaning that the lower demand does not affect substantially our revenues. CapEx in Colombia decreased by 16%, mainly explained by FX effects. And without these FX effects, it would have decreased by 5% or $5 million. Let's analyze Peru on Slide 18. EBITDA in Peru reached $112 million, which means a decrease of 14% or $18 million compared to the third quarter 2019. Currency devaluation had a negative impact of $7 million. In operational terms, EBITDA decreased by 9% or $12 million. In generation business, EBITDA decreased by 7% or $5 million. This was mainly due to a reduction of 5% in energy sales, partially offset by a higher sale price. In networks business, EBITDA decreased by 24% or $16 million. In operational terms, EBITDA decreased by $9 million or 14%, mainly due to lower energy sales or 4.1%. The total CapEx decreased by 37% compared to last year due to lower investments in both generation and distribution business, especially due to a delay in the activities due to the pandemic. Let me now analyze our cash flow main indicators in the coming slides, referring to Slide 20. FFO, or funds from operations, for the first 9 months of 2020 amounted to $1,376 million, starting from an EBITDA of $2,196 million. This result includes a negative net working capital in the period for amount -- on amount of $246 million, 79% lower -- sorry, higher than last year due to the recognition of the coming funds received from COVID Conta in Brazil in July. This is very important to emphasize that our FFO had an increase during this period, especially due to this compensation in Brazil occurred in July. Tax paid during this period amounted to $404 million, while net financial expenses amounted to $169 million. CapEx amounted to USD 974 million, as indicated in the previous slides. And net dividends paid were minus -- of course, it's an outflow of USD 977. With this, we get a net free cash flow of minus $574 million. After financial receivables and extraordinary operations for minus $39 million and FX effect of 655 -- sorry, $656 million, the total net debt increased by $40 million compared to last year. It is very important to emphasize that on one hand, we are -- of course, in the countries, our revenues are mainly in local currency. But also the debt in the countries are also in local currency, which means that our exposure to FX revenues is matched to the debt that we have in the countries, which gives us a comfortable situation in terms of debt and financial structure. So this comes to the next slide, when I will give you more color regarding the debt of the company. As you can see, the gross debt amounted to USD 5.9 billion, a decrease of 5.7% versus December 2019. The FX effect accounts for a debt reduction for more than USD 1.1 billion due to the fact that most of our debt, as I explained, is in local currency. This is partially offset by debt increases, mainly in Enel Américas holding in order to anticipate the dividends for this year and also in Codensa and São Paulo and Enel Ceará. Let me emphasize that in the last quarter of the year, we estimate to receive the rest of dividends from the country to Enel Américas in order to reduce the debt at the holding level. In terms of currency in country, our debt in U.S. dollars in the whole company increased due to the debt issued in Enel Américas in the second quarter. On the other hand, our exposure to Brazilian reals decreased. Finally, regarding the cost of debt, we can see a reduction for this period going from 7.1% in 2019 to 4.8% for the third quarter of 2020. This is mainly explained by a decrease in the way of the debt coming from the acquisition of Enel São Paulo, better conditions to refinance debt in Brazil with the interest rate reduction, especially the better margins that we got performing good liability management in the companies, Colombia, Peru and holding company and lower variable rates in Brazil with a general tax reduction of the country. Now in the following slides, I will show you a brief summary of the coming steps of the proposed merger with Enel Green Power Americas, our target for this transaction. After we announced the proposed operation back on September, the independent evaluators and the appraisal began working on their reports. Once we receive those reports, which should occur by early November, our Board will analyze them and will call to an extraordinary shareholders meeting to vote on this operation. This meeting should be around the third week of December. Once the Board sets the conditions of the operation and calls the shareholders' meeting, we will have a conference call to give more details of this transaction. Now let me conclude this presentation with some closing remarks on the Slide 23. Within the difficult times that we are facing, we are actively working to mitigate any potential impact and doing our best to help our communities. The last quarter, we saw some recovery signs in terms of demand in collection, as you saw, compared to last quarter, but we are still suffering the impact of recovering devaluation -- of currency devaluation. Despite this difficult environment, we have been able to improve our cash flow in a significant way. Finally, regarding the EGP merger proposal, we are waiting to evaluate those reports in order to set the conditions of the transaction and call the shareholders meeting. We will have more information in a few days. Well, thank you for your attention. And I pass to Rafael for the closing information.

Now we move to the Q&A session. Please, operator.

[Operator Instructions] Our first question comes from the line of Javier Suarez with Mediobanca.

I have 2. The first one is on the Slide #20 on your cash flow generation. Obviously, there is a significant improvement in the net working capital absorption during the year that has been explained by the COVID Conta in -- the collection of the COVID Conta in Brazil. But I was wondering if you can help us to understand to unravel that improvement what is the amount that is -- of the improvement that is related to the collection of that COVID Conta in Brazil or any other element that can explain that significant improvement in the net working capital and therefore, in the FFO of the company? That is the first question. And then the second question is on the Slide #10, looking at the EBITDA evolution. Most of the growth during the quarter and also accumulated through the year is on Enel X. So if you can help us to understand the dynamics in Enel X? And what is the driving forces and maybe geographies or underlying businesses that explain the evolution and the good contribution of Enel X within Enel Américas?

Well, Javier, thank you for your questions. Well, regarding the Conta COVID, the impact, as you know, is a mechanism that injects, let's say, the funds in the distribution companies, right, in order to maintain the chain of payments of the chain in the industry to pay the transmission, the generation and so on. It is a mechanism that already -- Brazil, these took at least 2 times in the past in 2001 and 2014 if something is consolidated. So -- and these funds come from the energy chamber, CCE, and it will be paid by the customer in 5 years with 1 year of grace period. In these figures here, we consider USD 430 million in this -- injected this money on July 31. So -- but only the cash flow, we draw this money. And we are -- let me anticipate some issues that we are still discussing with the regulator -- well, all the distribution companies. The possibility, not the possibility, but the rights to recognize the economic impact is still not defined. There is a public hearing going on at -- with the regulator, Brazilian regulator. But we see that part of this figure, we see the rights to recognize because this is an extraordinary effect that impacts the economic delivering of the company. So -- but I think it was a very good issue because at least the major importance is the cash. So the cash flow was partially well compensated -- well, fair compensated by this mechanism, right? In terms of Enel X, yes, you are right. We are very, let's say, confident to see positive impacts with this. For us, it's let's say, a big -- I will not say it's start-up, but that's our vision of the distribution of the future is providing services embedded with energy, right? We're not selling commodities anymore, and we will not sell commodities in the future. We will sell service subscription, and Enel X consolidates all this vision -- of our vision of the utility of the future, right? As you see, there is an increase, but let me tell you that it still has a very low contribution to the total EBITDA. We are talking about a level of EBITDA that could reach not much, then at least now USD 60 million. And -- but again, the increase here is due to, especially the increase in the credit cards, especially in the business that we are improving in Colombia, right? So we give -- according to our score -- credit score rating with our customers. We give them -- of course, with a partnership with the bank, we give them credit to purchase white goods, more efficiency goods. And it's also a way of to include people that don't have access to banks to get credit. So it's very interesting, and it's increasing pretty much. The other issues related to the electric mobility, which is -- we launched the project in Colombia. It is still to increase more -- to double the quantity of purchase. Of course, we are not into the transportation business, but we are with a partnership with a major city and business company and provide all the electric and services, not only electric, all the service, the environment, the ecosystems regarding energy and data in these stations. It's a very, very interesting business. Let me tell you that the third one, which is -- we didn't show an increase, but I would like to emphasize the public lighting, smart lighting. We are actively participating in the process of public partnership, especially in Brazil, that's moving forward. And we were awarded in some cities. Of course, it's a new business for us. It's not the level that we estimated, but we are moving very fast. This is a learning process and very interesting because you provide energy efficiency in cities where the people are more and more in the cities. And lightning is inclusion, lighting is, you reduce pallet and you provide efficiency. So we are being awarded in cities out of our concession areas, which is very interesting despite the lower impact, but we are very confident that in the next year, we will show a very interesting increase in the revenues of this business which I repeat is a new business for us. We are advancing fast. Of course, this is a learning process. But again, Enel X is a small business, but this is our vision for a part of -- a big part of our vision of the utilities of the future, consolidating this platform of distribution, combining energy with services. And we are in a good way -- in a good path to this transition.

The next question comes from the line of Murilo Riccini with Bank of Santander.

This is Murilo Riccini from Santander. I had a couple of questions, if I may. The first one regarding the guidance. Are you looking to review the FX estimate used for the 2020 guidance and also the levels used for the 2021 guidance? The second one, if you could give us more color on this $195 million adjustment related to COVID effect, mainly in terms of countries in bad debt coming from H1? This is in the Page 9 of the presentation. And the last one, if you could give us an update on the said sales process, please?

Murilo, thank you. Well, the COVID impact, as you see, I can split the $195 million both in generation, distribution, of course, more affecting the distribution business. It's $42 million in Argentina; well, Brazil, USD 111 million in Brazil, the major impact, especially for the distribution; in Colombia, USD 20 million; and Peru USD 22 million. Well, the other question, I'm sorry, I didn't...

The privatization process of EV and the third one is related to the potential change of the guidance of the company.

Okay. Sorry, sorry, I missed this one. Very important question. Well, we are maintaining the guidance, and I will explain why. We are -- of course, if you do your calculations, you have the figures. And of course, we are considering an extraordinary impact that we can obtain, especially in the Brazilian Contaco region, right, part of this effect. So we are confident in recovering, as we explained. The operations and the economy recovering actually showing a better quarter in the last quarter than the previous one. We are seeing possibilities to compensate and this one-off that I explained to you related to the Conta COVID. And last but not least, I would like to remember that we are on an ongoing process to derisk the pension fund in São Paulo, which closes by the end of November. And we are confident that some -- that will have some positive impact. Of course, this is a positive accounting impact because when you transform your liabilities from this final benefit -- sorry, the final -- yes, the final benefit into final contribution, you equalize the discount rate from IFRS and the local discount rates. And since the local discount rate from Previc is higher, so this could bring a positive effect. So resuming the explanation, yes, we are maintaining the guidance. Of course, working in this front, in the regulatory front, working in this presidential or pension fund migration plan. And of course, the recovery of the last quarter of the year in the countries. What we cannot control is, unfortunately, is the FX exposure, right? So we cannot predict what will be the Colombian peso, the Brazilian real or the Argentina peso or sol Peruvians. But considering what -- the issues that we can manage give us the confidence that we can achieve this target, this guidance. Well, the privatization process. Well, we are participating in this process. And of course, we are -- this is a region that interests us with the synergy with ROACE, with the condition of -- the very good condition of the market of Brazilian, right? I'm talking about Brazilian, which is the most, let's say, the next -- or the announced privatization. It would be, in our view, a competitive process. Of course, we are very, very -- we are very, let's say, reconsidering, of course, our financial discipline and our criteria to purchase or to participate. But we are confident that we have good conditions to award this privatization, again, depending on the -- what level of competition and what our financial discipline allow us to move forward.

Okay. And just one follow-up question. Do you have any update on the demand during October, as it seems to be very, very positive during this last month in some countries like Brazil? If you can comment on that, please?