Energisa S.A. (ENGI3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to our conference call of the earnings release of the fourth quarter of 2019 of Energisa. The audio for this conference is being broadcast simultaneously through the Internet in the website ir.energisa.com.br where you can also find the presentation available for download. [Operator Instructions] We'd also like to inform that the conference call will be held in Portuguese with the company's management and for -- the English conference will be simultaneously translated. I would also like to clarify that forward-looking statements that are subject to known and unknown risks and uncertainties, that could cause the company's actual results to differ materially from those in the forward-looking statements. Such statements speak only as of the date they are made, and the company, Energisa, is under no obligation to update them in light of new information or future developments, and this should be always taken into consideration. Investors should understand that general economic conditions, industry conditions and other operating factors may impact the future results of the company, leading to results that materially differ from those expressed in forward-looking statements. I will now turn the conference to Maurício Botelho, who will start the presentation. Mr. Botelho, you are now on the floor.

Good afternoon, everyone. Thank you very much. I would like to start by thanking your participation in our teleconference of the fourth quarter '19. We have here Ricardo Botelho, President of Energisa; Gioreli de Sousa, VP of Distribution; Alexandre Ferreira, VP of Regulation, Finance Corporation; and finally, our Investor Relations team. I'm going to share with you some slides, and then we are going to open for questions and answers. Let me remind you that similarly to previous quarters, we are going to present the results of ERO and EAC considering 2018. But the financial part where we have pro forma balance, we are not going to consider the acquisition of these companies presenting our results. We only acquired the distributors that had already been part of the legacy. Slide 3, let me remind you of the positive noncash effect that happened in fourth quarter '18 of BRL 1.2 billion, referring to the results that have been accounted for in the combination of businesses related to acquisition of Energisa Rondônia and Energisa Acre, which ends up distorting some of the comparisons. Adjusted EBITDA totaled BRL 1.056 million in the quarter and BRL 3.840 million in 2019, showing decrease of 44% in the quarter and 6% in the year according to accounting method. If we don't consider the recently acquired company, adjusted EBITDA has reached BRL 1.078 million in the quarter and BRL 3.968 million in the year-to-date '19, which means 58% increase in the quarter and 38% increase in the year. Profit reached BRL 466 million in the fourth quarter '19 and BRL 1.177 million in 2019, with increase of 639% and 107%, respectively. We would also like to exercise some important events after the closure of the quarter. First of all, the presentation of dividends BRL 0.32/unit, which means BRL 116.1 million, which are going to be paid as of April 3. Finally, in mid-February, we presented our CapEx projections and forecast that we are going to share with you later. Slide 4 now. We can see the distributors market. Sales increased 4.1% in the quarter or 1.7 percentage point above national consumption level. In 2019, the growth was 4.2% against 1.4% of growth in Brazil. Since 2009, consumption progression in the concession areas have been at about 2.2 percentage point above the national average. The growth of the fourth quarter '19 is primarily due to the performance at household customers, which increased 6.7% in the quarter and commercial applications, which grew 4.2%, both influenced by high-temperature levels and also calendar effect. I would also like to highlight Energisa Mato Grosso do Sul, which had growth of 8.4% in the quarter, and household customers grew 11.9% or 58 gigawatt-hour. Another important highlight was Energisa Sul-Sudeste reaching the second-best performance in the group, 6.9% increase, also influenced primarily by the household segment. Now we can look to Slide 5. And here, we can see once again our efforts to deal with low-income population between 2018 and 2019. There was increase of 170,000 new customers registered as low-income customers, primarily for Energisa Rondônia, Energisa Acre amounting to 27% of this growth. Now on Slide 6, we can see on the left our total electrical losses. There was a decrease in total loss reaching 13.48% as injected energy, 0.12 percentage point below September '19 and 0.09 percentage point below December '18. This equation shows our consistence in our activities against fraud and theft of energy. If we exclude Energisa Rondônia and Energisa Acre, total electrical losses represent 11.52% of our amount of energy or 0.27 percentage points below the regulatory average. And the total market growth maintained its improvement journey, presenting a reduction of 0.06 percentage point over September '19 and 0.50 percentage point compared to December '18, once again, closing the year within the regulation or the regulatory limit. There is still a number of challenges to be dealt with, and we are going to keep on working to maintain risk-mitigated deal versus regulatory goal. Another highlight was Energisa Tocantins. There's a reduction of 0.45 and 0.64 percentage points over September '19 and December '18, respectively or 1.37 percentage points below the regulatory limit. Energisa Paraíba, which is currently above the regulatory goal, this is due to the increase in some predefined connections and types of energy. We've applied a number of actions defined against that in 2019, which meant an increase of 37% over what we had in 2018. Regardless, it was not enough to compensate what has been lost throughout the year. But in 2020, we are going to reinforce our action to really correct this deviation. Slide 7, we are going to talk about quality. Highlighting here, Energisa Rondônia -- so except for Energisa Rondônia, all distributors were below the quality regulatory limits. In relation to FEC or tariff, Energisa Minas Gerais and Tocantins and Sul-Sudeste, which is there at historical levels. Excluding the recently acquired distributors, Energisa Tocantins presented its second-best evolution in the group in DEC side with a reduction of 1.54 hours compared over December '18, reaching 21.55 hours. Another highlight for industry success rating was the second-best performance in Sergipe in FEC with a reduction of 1.52x. For Acre, Rondônia in the year of 2019, we've been training our own team in terms of quality, focusing on quality. And we've made major investments in these 2 concessions, and this is going to help us recover quality in provision of energy and services. Now let's move on to Slide 9 -- 8 [ excuse me ]. Here, we're going to go into financial highlights. The explanations of distributors here are excluding the results of Energisa Rondônia and Energisa Acre. In PMSO pro forma, we had an increase of 6.8% in the quarter. In the year, the total amount was 2.1% above '18 or half of the inflation rate in the period. Part of the increase in the quarter may be explained by the line others as a result of cost provided by Alsol, which is a turnkey project for customers. It amounted to BRL 48.3 million (sic) [ BRL 45.3 million ]. In 2018, in the fourth quarter, there was no correspondence to these services. There is a counter back in revenue with a positive effect over EBITDA. If we didn't consider this effect, PMSO in the quarter would be aligned with the fourth quarter '18 and also the year 2019. Slide 9. Now we can see a brief analysis of PMSO of Rondônia and Acre in the quarter and in the year. We can see some nonrecurring effects. These exclusions have really made the whole performance to be more aligned with the activity of the companies adopting very important actions that are going to be repeated during 2020. For these companies, these nonrecurring events refer to disconnections or/and also termination of some employments. For example, some retirement plans, some voluntary rescission, then we had to pay some labor cost as well, especially with headcount. There are also some additional services, consulting services, and some related to extraordinary tax and legal consulting. Based on the charts, you can see a relevant impact of these events, BRL 136 million spent in nonrecurring events in the year, whereas for Acre, it was BRL 33 million. Now we can see Slide 10. On the left, we can see the whole provision of pro forma consolidated EBITDA of the fourth quarter. On the right, we have accounting consolidated EBITDA. The adjusted EBITDA, if we don't -- we already -- if we exclude Rondônia and Acre, it was BRL 1.1 billion in the fourth quarter '19 and about BRL 4 billion over '19, amounting to 58% in the quarter, 138% increase over the year. I'll also highlight nonrecurring effects. If properly excluded, the EBITDA of the quarter would have been increased by 20% as a result of the increase of BRL 148 million in Parcel B of distributors. In 2019, this improvement would have been 22%, with an increase of Parcel B of BRL 759 million. If I may ask you to hold, please. We seem to have a technical issue here. [Technical Difficulty] Well, it seems that we are back. I apologize for the inconvenience, and I hope nobody has lost anything important from Slide 10. Should you need any additional clarification, we can go over that during the Q&A session. Slide 11. On the left, we can see significant progression of pro forma consolidated net profit with an increase of 639%. With the nonrecurring effects in this quarter, and we mentioned that in the annex of the presentation, there will be bonus of subscription related with the severance and issuing of debenture revenues in Energisa amounting to BRL 144 million without cash effect as opposed to BRL 165 million in the fourth quarter '18. Pro forma net profit amounted to BRL 385 million or 73% over the fourth quarter '18. If we exclude these effects of the market and the amount of the subscription bonus, we're going to total BRL 1.2 billion or 95% over what had been observed in 2018 amounting to BRL 1.4 billion. Now we have Slide 12 to cover where we talk about indebtedness. Total consolidated amounted to BRL 13.7 billion, including BRL 1.1 billion referring to the issue of debentures and the debt associated with retirement bonus amounting to BRL 628 million. Once executed the bonus, we are going to have the effect of a reduction of approximately BRL 1.7 billion in net debt amounting to 0.5x the net debt indicated by EBITDA. The covenant indicator reached 3.6x in the end of the year. It's also affected by the combination of the businesses from 2018, which would amount to BRL 1.2 billion. But we are operating within the limits and all the factors that have been negotiated, and it brings it between 4.5x and 5x during 2019. Let's talk about investments in Slide 13. It grew to BRL 3.2 billion at the end of the year or 60% increase over '18 and BRL 2.7 billion related to the segment of distribution, meaning an increase of 52% period-over-period. In the area of transmission, we invested approximately BRL 366 million in 2019. The -- another of the trans projects were Pará I and II and Goiás I, in which we invested BRL 350 million in 2019 and BRL 172 million in 2018. Slide 14, we can see investment planned for 2020 as we presented in February in our reference form. The estimates of investments amount to BRL 3 billion, 85% of which will be concentrated in our group distributors, 10% for energy transmission and 4% at Alsol. Rondônia and Acre will together receive BRL 832 million during the year. And Rondônia will be the distributor that will receive most of the investments, considering all the categories we presented. In terms of electric assets, we are going to still make relevant investments, just second to Mato Grosso. Slide 15, we are going to talk about transmission. The projects that were purchased during auction in April 2017, Energisa Goiás I, Energisa Pará I, they were started in September and October 2018, respectively, and they have advanced Goiás, who reached 99%, and Pará I, 83%. So based on these figures, we can anticipate that it will be higher than initially expected. Energisa Goiás is coming close to its commissioning test phase. And soon, we're going to have operation to fund the commercial operation of the facility. We have been negotiating with many landowners. Hundreds have been impacted with that, coming to the end of it. Concession of Block 4 in Tocantins, whose contract is being signed by 2024. Energisa Pará II, which was a lot obtained in June 2018 through an auction, will be operation -- the construction operation started in June 2019, and we've already covered 30% interest lot. Energisa Tocantins, which was obtained in December '18, we had a basic project confirmed in July 2019. And part of the initial design for requesting a previous permit have also been provided through the Environmental Agency in July 2019. In this project, we've already started negotiation with landowners that are impacted by the operation. Bringing together these 4 projects, it means RAP of approximately BRL 192 million and a CapEx of BRL 1.5 billion. Well, it closes my presentation. And now we would like to open for our questions. And once again, I apologize for having lost part of the audio conference for a few minutes. Thank you.

[Operator Instructions] First question comes from Carolina Carneiro from Crédit Suisse.

I have 2 questions. The first one concerns regulatory issues. Some time ago, ANEEL provided a final bid by the authorities, taking some questions from ANEEL's own area and one specific area. And there, it seems -- it changed the initial interpretation where there would be an opportunity to have rescission in 2019. But later, ANEEL had a different kind of interpretation. And the companies are trying to change and revert this decision. I would like to hear your take on the specific document and what kind of implications it may have over your extraordinary reconsideration request that you've made and also the retrospective analysis that it would have in the quarter? Once again, Alsol showed a growth within its segment, gaining relevance. It's a small business concerning your group portfolio, but what can we expect for 2020 in this segment? Do you really believe that the increasing trend, quite relevant in 2019, will remain so?

The first question, I'm going to ask Alexandre to have the first, and then Ricardo is going to answer the second one.

Thank you. Good afternoon, everyone. Concerning what ANEEL presented in its position, we are in contact with them. A number of report is presented -- reported to all of those committee presented that when reviewing the taxes, and they haven't analyzed some of the arguments that we presented in our appeal. An opinion of the public authorities is nonbinding. Therefore, we believe that the whole process of analysis of the appeal is ongoing, including all the specific consideration that should be made. Let me now turn it to Ricardo to make his comments.

Good afternoon, Carolina. Concerning Alsol and our activities in the business. In our Alsol business throughout 2019, it was based on increase of revenue from turnkey projects. These are projects that are sold as a solar plant operation. This is a model that we discontinued last year, because it was just one single revenue imputed, and then you get paid over the construction by third parties. And you end up having just a small amount of OEM revenue for the future, which is not very relevant. So we changed the business model for 2020, and we changed it last year to run a model in which you explore shared generation and remote consumption -- high remote consumption. In this new model, you generate revenue from the older project fewer number of consumers. And that is a model that has gained more momentum. We've managed to have 3 projects in full operations, selling them to customers, to clients. And it has a recurring revenue flow. So what we're going to do from now on is to invest further in this model of distributed remote share, distributed generation, adding additional services such as battery, energy efficiency and some added-value services. Our perspective is still quite good. There hasn't been a difference in regulatory affairs. Because of the potential of the technologies that our company has and its portfolio of clients, it's still quite capable of experiencing significant growth in the future.

Our next question comes from Marcelo Sá from Banco Itaú.

I would like to hear about some strategic points of the company because you were more focused on buying distribution assets. But now the assets available, maybe they have a different nature and it wouldn't be that the company wouldn't be as competitive as I may believe. Now thinking about the scenario today, would it make sense to go stronger into generation? We've recently seen a movement of combining assets with ETT and diversifying portfolio. Would it make sense in your company to acquire a company and go somewhat stronger in that segment?