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

[Audio Gap] We're going to start the Q&A session when further instructions will be given. [Operator Instructions] We would also like to inform that the conference call in Portuguese will be presented by the company's management. And for the English conference, there will be simultaneous translation. This event is also being broadcast simultaneously on the Internet via webcast. Before proceeding, we'd 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 as statements speak only for the date they are made, and the company is under no obligation to update them in the light of new information or future events. Investors should understand that overall conditions related to the industry and others may affect future results differing materially from those expressed in such forward-looking statements. I now turn the conference over to Mr. Botelho, Ricardo Botelho. Please, Mr. Botelho, you may proceed.

Thank you, operator. Good afternoon, everyone. We have another important conference result for the first quarter of 2021. Here with us, we have our Investor Relations Director, our Financial Director. We have Gioreli De Sousa, Vice President of Distribution; Alexandre Ferreira, Vice President of Regulation [Technical Difficulty]. The highlights for this quarter in Slide 4 show the energy market when we compare to the first quarter of 2020. In addition to the negative impact in this quarter, it is important to remind you that preventive measures were announced only in March 2020. In this regard, in most of the third quarter last year, we still did not have the severe effect associated to the pandemic. Energy consumption until then grew at high rate because of the economic activity during this period. In the Southeast, it was going up under the impact of strong rains. In the beginning of this year, different cities implemented restrictive measures as a result of the worsening of the conditions of the pandemic. In the first quarter of 2021, we carry over the COVID effect, which is being compared to a period of strong growth in most of the group's distributors. Under these effects, as indicated in the graph, the consumption in the commercial segment was the main problem in the quarter due to the limitation of operations of restaurants, business centers, and also on-site classes in schools and universities; and therefore, the weak results in this class is not exclusive to the Group Energisa. It was also observed in the consolidated energy consumption in Brazil. In both cases, this class has recorded a decrease in all of the different regions, especially in the North and Central West. The segments with highlights in the quarter were the industrial, especially in the construction-related chain; residential, because of the high temperatures; and also the low basis in 2020 in the Southeast. Finally, a brief comment regarding the market according to the different distributors. The highest increases were observed in the Southeast Minas Gerais and Friburgo. They were levered by residential with a combination of low basis in 2020 and high temperatures in 2021 and also in industry, especially mining, cement production, metal and paper, in these regions. On the other hand, Rondônia and Acre decreased consumption in the quarter as a result of the strictening of the restrictions associated to the pandemic. We also had strong rains, which led to a state of public calamity in different cities. In Slide 6, I present the overall losses of the group. In the 12-month curve, we saw 13.77%. Basically, it was stable when compared to the December indicator. There was a trend towards improvement in the loss curves when we look at the month of September, which was 13.82%. The accrued performance in the months of July and September was strongly affected by the first wave of the pandemic. The months of March -- I'm sorry, of December and March, still carry these effects, but with improvements in the loss curves as a result of continued action to fight losses with investments in new technologies for the detection of fraud, inspection methods and protection of the measurement network, among others. I would like to highlight that the Rondônia and Acre concession remain with an increasing trajectory of losses. This is consistent. And then in Slide #7, I highlight that 10 of our 11 distributors continued within the regulatory limitations in terms of the DEC quality indicator. In this quarter, the star of the day were Energisa Borborema and Tocantins, because they presented their historical minimum. Regarding the FEC indicators, all of our 11 distributors were below their regulatory limits with a highlight to Nova Friburgo, Borborema, Mato Grosso and Acre, which also had their historical minimum in this first quarter. Even in a critical scenario of the pandemic, we maintained our productivity and our results. With this, we have obtained important positions in ANEEL's annual ranking, which take into account DEC and FEC that was published on March 15. Within this category, above 400,000 consumer, we classify 7 distributors among the 12 best. Regarding the category below 400,000 consumers, EPO and ENF were classified among the 8-best, a reason for us to be proud of Energisa. Now moving on to the next slide, this is our last operational highlights slide. We had a consolidated rate of March 2021, accumulated in 12 months of 96.47% when compared to the total in the same period, above 96.41%, presented in March 2020. This positive performance is still more relevant since we are comparing this indicator, which captures in 2021, the whole pandemic period, including the last 12 months with the prior indicator, which is considered a pre-pandemic indicator. This slide now includes expenses for the provision of double liquidation credit, which presented a reversal of BRL 3.3 million this quarter. We had a reversion of BRL 96.5 million resulting from the session of receivable titles in some of our controlled units, where the majority was already provisioned for -- I'm sorry, DEC. In this quarter, the amount would have been BRL 93.2 million, representing an improvement of 20% when compared to the first quarter of 2020, whose provision amount was BRL 126.1 million. At the end of this slide, I turn over to Mauricio Botelho. He's going to talk about the financial highlights in this quarter.

Well, thank you very much, Ricardo. Good afternoon, ladies and gentlemen. We're now going to move on to Slide #9. We're going to talk about PMSO. In the first quarter of 2021, the PMSO totaled BRL 620 million, a reduction of EUR 45 million when compared to the first quarter of 2020. The 6 companies that contributed for this reduction when compared to the first quarter were Energisa Rondônia, Mato Grosso do Sul, Acre, Minas Gerais, Paraíba, and Tocantins. The overall amount of this reduction was BRL 55.8 million or 15% when compared to the first quarter of 2020. Energisa Rondônia contributed with 53% of this reduction and Mato Grosso was 17%. It's important to highlight that we have presented a reduction in all of the items in this indicator. Expenses with personnel had an indication with labor law payments and benefits as a result of the migration of health plan. We also had a reduction in the purchase of materials and in hiring outsourced services. Rondônia had a reduction of expenses with preventive maintenance and deadline maintenance as a result of the internalization of labor for services, such as cleaning areas and pruning. The line of other expenses had a reduction of 23 -- I'm sorry, BRL 21.3 million. We're now going to move on to Slide #10. In Slide #10, we will talk about the EBITDA in the first quarter, which presented an increase of 54% or BRL 458 million when compared to the first quarter of 2020. The range in the quarter of the adjusted EBITA used for the calculation of covenants, which takes into account the delinquency increases were 53.3%. This performance is explained especially by the increment of Parcel B of the distributors in the case of Tocantins, Rondônia and Acre, and Borborema. And also because the market grew in some distributors. In addition to that, we had a reduction of PMSO costs. And the other 6 distributors had an average growth of only 2%. In other words, well below the IPCA in this period. The EBITDA without nonrecurring impacts and nonrecurring events had an increase of 33% quarter-over-quarter. And then in the next slide, we compare the EBITDA in the last 12 months, quarter-by-quarter, against the PMSO expenses. As you can see in this 12-month graph, it removes the volatility and seasonality from one quarter to the other, and we can see a constant improvement in operating expenses of PMSO, which reduced BRL 383 million on an annual basis, which helped with the evolution of BRL 944 million in the EBITDA, reaching BRL 4.8 billion. PMSO represented 75.9% of the EBITDA and is now 52.9%. Our guidance for 2020 when compared to the PMSO reduction between 5% and 7% was overcome in 2020, and we continue presenting this year, still a reduction of costs due to the efforts maintained by our management. We are still positioned among the largest PMSO in the distribution sector in this country this year. In the next slide, we compare the performance of the EBITDA against the regulatory EBITDA, and we'd like to highlight the last 2 acquisitions, Acre and Rondônia. Also, we are already operating with a performance of 43% when compared to the regulatory EBITDA. In the case of Rondônia, which left from a situation where the EBITDA was highly negative BRL 200 million, we are now moving on to positive. However, it is lower than the regulatory threshold. In Acre, we went from a situation where it was much lower than the regulatory EBITDA. And to-date, we have gone above it. Of course, this evolution is reflected on the net profit of these companies. Rondônia already has a net profit for 2 consecutive quarters and Acre for 3 consecutive quarters. In the next slides, we're going to talk about our net profit. In the quarter, we had BRL 873 million when compared to $592 million last year. We once again can see the impact of subscription bonuses in addition to other nonrecurring and noncash events. The growth remains relevant. Profit is reported at BRL 408 million, representing an increase of 256% when compared to the same period last year. In other words, additional BRL 294 million. On Slide 14, we're going to talk about our indebtedness. We have a total of BRL 14.2 billion, a growth of BRL 647 million compared to the debt in December 2020. Until March this year, we had 15 operations, including rolling and long-term loans, which totaled BRL 1.63 billion. We have concluded the quarter with a robust position -- with a robust cash position of BRL 5.7 billion. The average term of the gross debt is 4 years and the average cost is 5.15% per year when compared to 4.54% in December 2020. Our main indexator is CDI with 66.8% of the debt. In March, the annual adjusted EBITDA was 3x when compared to 3.1x in December 2021. Our limitation of covenants for this indicator is 4x. In other words, we are in a very comfortable situation. And then in the next slide, we're going to talk a little bit about our investments. In this period, in this quarter, we had BRL 698 million, a minor reduction of 2.3% when compared to BRL 714 million in the first quarter. This reduction occurred for special obligations and nonelectric assets. Taking into account the electric assets, there was an increase of investments of 7.5% or BRL 42 million. Of the total invested in this period, 80.3% were for the distributors and 15.4% for the transmitters that are under construction. We have 13 ongoing projects. 2 have been already inaugurated this quarter with investments of BRL 24 million [ and a capacity of 6.2 EBITDA depleting investments of ] the other 13 projects are in the order of approximately BRL 150 million. In 2021, we will have record investments. We have already announced it. We did so in the beginning of the year, and we'll invest BRL 3.8 million in the distributors. We will have EUR 2.8 billion invested in transmission. And in Rondônia, we have expected investments of BRL 747 million, BRL 314 million in electric assets and BLR 410 million in special obligations, including the interconnection of the 9 isolated systems in the second half of the year. And we have Mato Grosso -- Energisa Mato Grosso and Mato Grosso do Sul together totaling BRL 1 billion. And then in the next slide, we're going to talk about transmission. We have 5 enterprises that represent BRL 258 million of permitted annual revenue in -- for the 2021 cycle. We have signed a concession agreement for Energisa Transmissora Amazonas with a payment of BRL 239 million to Amazonas Generación regarding the acquisition of the assets existing in this concession. We also started the receipt of 30% of the total RAP. In terms of projects, we expect an average anticipation of 12 to 18 months, including the revitalization of the existing assets. I would also like to mention that in regards to our transmission project in Tocantins, we are now discussing long-term funding with BASA and BNDES in the amount of BRL 500 million, representing 75% of the projected CapEx. We want to continue to grow in the transmission segment and are looking at assets that make sense to us and synergies with the current assets of the group. I thank you all for your attention for another important meeting, and we are now open for Q&A.

[Operator Instructions] Our first question is from Carolina Carneiro, Crédit Suisse.

I have 2 questions, please. The first question is regarding PMSO, which was presented this quarter. You have had since, last year, part of these amounts, and this was affected by COVID. You also mentioned some other effects such as the internalization of labor. But I wanted to have an idea of the level of cost that we will be seeing this year. Can you tell us a little bit about that? The second question is about the auction of the Amapá. I would like to know about your interest and the challenges that you see regarding this asset.

Well, I'm going to share the answer with who's here with me. One of our concerns here right now is exactly this increase of commodities in general. This may have an impact on the costs of supply. And that affects services as well, since the purchase of materials is also included. It is difficult for us to give a guidance right now because everything is very volatile. We are experiencing some increments of unit costs, and that also has an impact on CapEx. We have delayed some purchases to see if prices stabilize. I have tried to add some things. But basically, this is it. Mauricio?

We're working hard. We're now trying to buy what is really necessary because we have a lot of pressure. There is an inflationary pressure. It is difficult. We're going through a very volatile moment. This is a challenge. We're trying to optimize our purchase process. Have I answered your question, Carolina?

Regarding costs, yes. Could you comment the CEA process for the Amapá distributor? Are you interested or not? Do you see any special challenge there?

I would say the following: in general, there are a lot of opportunities in the electric sector. As a general rule. Of course, it's a complex asset. It is small. It does have problems. But we should always look at it closely. Perhaps there is not a lot of synergies to begin with, according to our current businesses.

Our next question is from Marcelo Sá, Itaú.

I have 2 question. I think I have already commented about it. It's regarding IGT. The other question is regarding CD29, which deal with loss methodology. Do you think that the changes you are discussing will have a substantial impact on the regulatory losses you have to-date? And the other question is regarding the operational cost methodology. In the beginning, we had some counterintuitive results. There were some errors in calculations and the parameters that were defined. I would like to know if this is evolving and if you could comment on it? And I also wanted to know about the efficiency ranking and what the adjusted methodology is.

We're going to divide the answer. And I will talk about the first question regarding the opportunities. We are carefully looking at all of the transmission assets. It's very interesting. We are also going to analyze generation. I will turn over to Alexandre, so he can answer the other items.

Regarding public constitution 29 and the loss calculations and recoverables, we discussed with Aneel to car contributions, and I believe that this public constitution will see results in the near future. In terms of your question of what we see -- we are a company, perhaps with the exception of Energisa Rondônia, which was recently purchased. Our companies, as demonstrated in the presentation by Ricardo, have losses at an efficient level. What we believe right now is that this signal for these companies to have an efficient level of losses chance to improve. This is what we have discussed with NIL. We believe that there will be changes in the signal regarding CP62. We are also discussing with Aneel. These discussions have been very good. I believe that this methodology will be different from what was proposed. There are improvements to be made. Contributions are regarding the salary index, and I believe that a lot of the contributions we have shared, accepted. It is a public transportation for the second half of the year, and I think we will close this deal. There was a specific aspect in this public transportation. It had to do with the impact of the labor lawsuit. Do you think that it will be confirmed? Well, the contribution was very robust, not only for Energisa, Raízen and different companies in the sector. This contribution was taken into account by the regulation -- I'm sorry, by the regulator, and we asked for a differential treatment. But we have had an improvement of the information base. In our specific case, the contribution of the salary index was robust. We also have other aspects to be taken into account. There are numerous concessions. If we consider all of them, we can see that there is a lot of opportunity for improvement of the current methodology. We believe that in the second quarter, we will conclude these negotiations. The contributions have been very good, and it will take us a while or it will take the regulator a while to accommodate. This new methodology will only have an impact on the tariff adjustments after 2022. Yes, correct.