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

Good afternoon, ladies and gentlemen. Welcome to the conference call for the earnings release of the first quarter of 2020 of Energisa. [Operator Instructions] We would also like to inform that the conference call will be held in Portuguese by the company's management and the English conference will be provided by simultaneous translation. This event is also being broadcast simultaneously on the Internet via webcast. I would like now to turn the conference over to Mr. Ricardo Botelho.

Thank you very much. Good afternoon, everyone. I would like to thank you for participating in our conference call for the earnings release of the first quarter 2020. I have here with me Maurício Botelho, Investors IRO and VP of Finance; Gioreli De Sousa, VP of Distribution; Alexandre Noguiera, VP of Regulatory Affairs; Daniele Araújo, VP of Personnel Management; Fernando Maya, Regulatory Affairs Officer; and [ José Marcos de Melo ], our new [ CFO ]; and finally, our team on the Investors Relations. I'm going to start my presentation by describing our actions and the contingency plan for the pandemic, something which has impacted strongly our comfort and had made effect on the company. In addition to mention some events. On Slides 5 to 7, I'll present to you our satisfactory results of operating improvement of the quarter and also Maurício, our Investor Relation Officer and Financial VP, will speak from Slides 8 to 12, making the financial highlights, investments and the advantage we've had in the area of transmission. Next, we are going to open for our Q&A session. I'm going to start, as you can see on Slide 3, as a response to the situation of crisis we created a governance committee of the crisis so that we could make our strategic decisions, evolving the top management of the company and create a number of CapEx that are part of our contingency plan, which had to be expanded. Our routine was modified because today, we have 2 weekly meetings for checkpointing where we cover all the topics with the self-management of the company. This work groups are focused on society, people and our businesses. Focusing on society of the community, we privatized relief actions, social movement actions involving also culture and economic issues, interacting with the communities where we are based. We prioritized reliability of electrical energy services for critical areas such as hospitals and medical centers and the population in general. We started movement energy, good energy, which is a set of measures that you can check in our oil moving into Energisa today. And I'm very proud of the work that we've been performing in this moment of difficulty. We've been providing platforms of active culture, professional capacity building to young people, social initiatives to support the elderly, also guidance for healthcare, donation of the mechanical ventilators and surgical masks to hospitals. We've been providing support in electrical energy installation of some emergence department units, we've been donating food being courage in donation by our own staff members. So each BRL 1, which is donated by the stock member, Energisa doubles the same amount in BRL. And a number of other actions that really make a difference in a day-to-day practice of our commit. Focus on people. It has always been one of our priorities, and it has gained even more attention, especially in the safety and protection of our staff and maintaining our growth position. We have to bear in mind that a significant number of our staff members are out in the street to make sure that everyone else is kept at home. I would like to show our gratitude and pay, really, a tribute to the great contribution they've made to the country. As part of the contingency plan, which was activated at the beginning of March, we have had adopted actions to maintain the critical activities of the company, primarily in restarting our operation centers in many different sites, in allocating 2,000 people to work from home, promoting greater social distancing in all the activities that have to be done on site. We also have health teleconsultations, which is more on the measures for protection and care that we have offered to staff members and their family members. Those that need any kind of health support related to COVID-19 infection. With depended all rips, except for those we are absolutely required because of service needs. We have reinforced housekeeping. We have provided protection gear to all staff changes of cleaning the cars, et cetera. We have applied everything, which is recommended as general guidance according to the World Health Organization. In life-critical areas of essential services, [ exemption for low-income clients ] was applied for 90 days. The main purpose was to reduce expenses during difficult times and also to avoid laying off people without compromising the net compensation of our employees. The compensation of our executives and Board members have been cut by 25% during the same period. Finally, but not least important, focus on businesses. We have worked in different fronts to minimize the effects of the crisis in our economic financial balance of the group. Without which it wouldn't be possible to carry on with our operations, which employ over 14,000 of our own employees and 6,000 outsourced employees. Among the implemented measures, we have been reducing management expenses between 7% and 12% compared with the previous year. We have renegotiated 80% of our debt that were due in the short term. We have postponed investments, which were expected for 2020, amounting to BRL 557 million. And we've maintained the deadlines of our ongoing projects for distribution and transmission projects. As the term by contract had is really working hard so that we can even anticipate the deliverables. These measures were required to sustain our business and mitigate loss of cash resulting from margin drop and delinquency. On Slide 4, I would like to highlight some economic and financial effects of this crisis, at least as the preliminary basis, such as increase in delinquency in April measured by the indicator of, now, in a multiple average of 30 days, which, on April 30, amounted to 7.3%. This is a number that there is wireless, if we chose maximum 16% throughout month of April. All of that compares to our historical average of 1.6%, which is the period between January 2019 to February 2020. The metrics that I have just described is exactly the same metric that has been being used by ANEEL. There has also been a reduction in consumption of energy at Energisa by 6.3% in April, over 13% in Brazil. I'd also like to say that we have ongoing negotiations, as you know, together with Nova Friburgo of energy to maintain the flow of payment of a lack of electroservice by creating regulatory assets, which will serve as a buffer to plan the operation of CCI and then distribution through CDI. In April, distributors have already received all the surplus of the reserve energy account called coner, c-o-n-e-r, considering the last account made. Referring to it, Energisa has received a total of BRL 131 million in April. Carrying on, ANEEL had a tariff readjustment of 3 concessions. And it had authorized postponement of the price readjustments through July 1, 2020. At the same time, we have to have monthly institutions of TBA of the amount that will be applicable to the same price adjustments. To conclude this slide, it's important to mention that on April 28, we suffered a cyberattack in our computing system with immediate reaction by the company. For precautions, we temporarily shut off some systems that maintain the continuity of our operations and all its components. Our systems of supervision and control of the electrical systems were not affected during any moment. We've already resumed 100% of our main systems without an indication of their loss only of commercial or third-party data. And there has been no impact on our billing processes. We have already adopted a number of measures against this criminal inflation and we have reinforced our safety systems and are running an investigation right now. Now let's go into the Slide 5. I would like to highlight that for the fourth consecutive year, we've shown market growth in the first quarter of the year. The performance in 2020 was positive by 2.5% over the reduction of 0.9% that Brazil experienced. Our results compared to the contrary may be explained by regional adversity and the presence that we have in very dynamic regions of the country. In this quarter, we highlight the month of March, plus 4.1%, with the highest growth since 2014, which was 4.9% at that time. Despite the effects of COVID crisis in the second portion of the month of March. Had it been for it, it would certainly be a record month. All classes grew in March, except -- in the quarters, they are same, except for industrial clients, which experienced 0.4% reaction. And household clients that had greater growth and their performance since 2012, plus 8.2% in the first quarter '19 and 9.4%, which was the case in 2012. As you can see in the chart, our 4 concessions, Acre, Mato Grosso, Rondônia and Paraíba, had a positive effect of high-temperature rates and also the calendar effect. And the concessions of Mato Grosso and Paraíba, has been showing a good performance thanks to every business. Conversely, owing to weather is at lower temperature and higher rainfall index, concessions of Nova Friburgo have presented reduction in consumption. Energisa has been affected by the exclusion of a large industrial client in June 2019, with a reduction of 3.4% in the total consumption of this market. The distributors that contributed the most to the growth of the market and group for market growth of 55% share; Paraíba, 26% share; and Rondônia, 19% share. The categories that had greater share in market growth were urban households and rural households at 73% and 23%, respectively. Now moving on to Slide 6. We have total losses of the group, which have to be stable for the past 5 quarters. In March 2020, our losses amounted to 13.52% of the total injected energy, somewhat above the regulatory loss of 13.06%. If we exclude Energisa Rondônia, a distributor with a greater deviation in terms of reference, the losses would have been 11.6%, 0.19 percentage points below the regulatory number of 11.82%. Out of the total of 11 distributors, only 3 are above the regulatory growth, Minas Gerais, Paraíba and Rondônia. For Minas Gerais, total loss was 10.6 -- 10.06%, a small deviation from the regulatory goal of 9.64%, which indicates nontechnical losses, which are more preponderant in this concession. Paraíba is currently above its regulatory low of 0.43%, but it does present a reduction in total percentage loss over December '19. The reversion of the trend of growth of losses in 2019 resulted from the actions that we have adopted to fight against losses in critical areas showing more assertiveness. In Rondônia, our concession still has a relevant deviation from its regulatory goal with greater impact on nontechnical losses. Therefore, since the beginning of 2019, the company has adopted the plan of measures associated with capacity building, reinforcing the team, which had contributed to the changing -- this journey since the third quarter last year. Concerning the other 8 concessions, which have presented better performance and regulatory goal, we would like to highlight market growth of -- because it's presented losses below the regulatory limit for the third consecutive quarter. The next slide, Slide 7, we can see the results of quality of services. The first quarter '20 was exceptional in terms of quality of service. All our distributors, except for London, presented the quality indicator SAIDI and SAIFI below regulatory limits and 5 of these companies have presented in this quarter the best historical performance. And now published in April, IBG ranking referring to 2019. IBG indicator measures the relative performance of quality considering the regulatory goals. Energisa classified 6 service companies among the top 10 in the ranking of large 5 companies. This consistent operational performance results from appropriate allocation of investments throughout the year and [Technical Difficulty] Can you hear me now?

We can hear you now.

We are just close to the end of this slide. Please tell me where to resume?

Last paragraph, you can go to Slide 8. You were coming close to the completion of the slide.

I apologize we had a technical problem. I don't know exactly how far you heard me, I was talking about Slide 7. Yes, we talked about the quality of service. Let's see if you can hear me.

Yes. Now we can hear you best. Now we can hear you back, yes, absolutely.

I'm using my mobile phone here. It was -- I was just talking about the last slide, Slide 7. Performance on quality of service. All our distributors, except for London presented the quality indicators below regulatory limit, 5 of which presented their past historical performance ever. I was just saying that now in April, published IBG ranking, referring to 2019. This indicator measures performance and quality according to regulatory growth. And Energisa got 6 of its companies among the top 10 ranking, including those large 5 companies. It means we've been making investments for the recent years and a number of actions focused on improving this indicator. This was the last slide, and I'm going to hand it over to Maurício.

Good afternoon, everyone. We apologize for the technical problem. Now let's see Slide 8. Here, on the left, we have manageable cost of PMSO in the first quarter 2020, amounting to BRL 648 million, with 3.8% increase over the first quarter '19. But aligned with the inflation rate IPCA 2019, which was 3.30%, but still below IGPM, which was 6.82%. This increase of BRL 24 million in PMSO, we basically explained by expenses made with Mariana to improve our quality indicators. Our personnel expenses had 5.1% decrease, translated into BRL 17.4 million, partially compensating the increase of other expenses. On the right of the chart, we can see accounting EBITDA. In this quarter, there was a growth of 2.5% over the first quarter '19. If we exclude nonrecurring effects of both quarters, we would have growth of 11.6% or equivalent to a growth of Parcel B of BRL 111.7 million. Let's now see Slide 9. Slide 9, we can see company's profit. The profit of the quarter increased 352% over the first quarter '19, variation of BRL 153 million, which portrays primarily mark-to-market of subscription bonus, which in this quarter drove a positive result of BRL 141 million, with a negative effect, in the first quarter '19 of BRL 118 million. If we exclude the mark-to-market effect and some nonrecurring events of lesser relevance, the net profit of the quarter would be BRL 150.6 million and a reduction of 19.7% or BRL 36.4 million of difference period-over-period. It's important to emphasize that here, the financial results, we had some additional expenses such as financial effect on financial operations due to additional resources that we had to obtain from the market to face the pandemic and also lower profitability of financial investments due to the decrease in the interest rates. Net indebtedness deduced from sector credit in the quarter amounted to BRL 13.7 billion, with increase of BRL 21.9 million over December 2019. The average term of the net debt is 5.3 years, average cost of 6.18%, a reduction of 0.42 percentage points, over 6.60% in December 2019. Our main index is CDI, which represents 72% of our debt. In terms of net debt over EBITDA, adjusted EBITDA as leverage, we finished the quarter 3.5x over 3.6x at the end of last quarter. It's also important to mention that the company, since the beginning of the year, has made a number of fundraisings and elongated part of its debt, amounting to BRL 2.4 billion, out of which BRL 1.2 billion was used to reinforce working capital, and the remaining portion was used for postponing the deadlines to 2020, '21 and part of it in '23. This initiative focused on reinforcing our liquidity position of Grupo Energisa anticipating difficulties that would come from the pandemic. This is why in March, we have very robust cash amounting to BRL 4.2 billion, with an increase of BRL 1.2 billion over December 2019. Now Slide 10. We continue the investments of the group totaling BRL 740 million, growth of 31% over the first quarter 2019. Out of the total, the segment of distribution of those 89% and transmission had 10% of its use, BRL 69 million in the quarter over BRL 50 million last quarter. Slide 11, you can see our plan of investments for 2020 fully reviewed. You can see the reduction pointed out by Ricardo of BRL 557 million, to protect our cash position considering the moment of crisis. We've maintained our plan of the potential investments. To maintain and to have continuity of our operations. It's important to point out that out of the total reduced amount, 55% concerns special publications. The estimates of investments were reviewed amounting to BRL 2.4 billion, which are still very relevant to our group. 85% of this amount will be concentrated on distributors and 13% on transmission operations. On Slide 12, concerning transmission. Energisa Goiás, with 136 kilometers, which was obtained in the auction in April 2017. This is the energy on March 15 this year. 17 months in advance, and this project will have an annual permitted revenue of BRL 40.7 million. There are 3 more projects in Energisa Pará I, we started its construction in 2018 with a physical event of 83%. We have Energisa Pará II, it was something that we got in an auction in June 2018, and we have covered already 30% of the schedule and Energisa as we continue purchased in December 2018 were a coverage of 12% of the brand. We have some interruptions of construction due to COVID-19 because of some specific cases of obstruction, but we have been successfully negotiating on a case-to-case basis. Concerning the schedule, we are confident that despite minor interruptions we are not going to affect any of our anticipated delivery plan. Together with 4 projects amount -- submitted annual revenue of approximately BRL 193 million and estimated CapEx of BRL 1.6 billion. Since the beginning of the constructions of transmission lines, from 2017 up to March this year, we have already invested BRL 323 million, to which BRL 245 million were invested at Energisa Goiás. With this, that concludes my presentation, and I will be glad to answer your questions. Operator, please.

[Operator Instructions] Carolina Carneiro for Crédit Suisse has a question.

I have 2 questions. First, could you please make some comments about the following: In the first quarter, we've seen good volume of operations in your concessions, provisions for delinquency has gone up, but still not much affected by the crisis yet. So I would like you to share with us some more details about the progression in April and beginning of May. What have you been observing in terms of delinquency in your concessions? Secondly, we would like to ask you to tell us something about the co-media account, especially 2 points. Some news -- is it incorrect news saying that maybe companies will have to pay for part of the financial cost resulting from the loans that have been made? We've heard some news that there might be some additional requirements should the companies accept to use the resources. So then they wouldn't be free to us for any competition data. So I'd like to hear your take on it.