Light S.A. (LIGT3) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to Lights webinar for second quarter 2020 results. My name is Rodrigo Vilela, Head of Investor Relations, and I will be the host of this event. The presentation and comments on the results will be made by Light CEO and Investor Relations Officer; Ana Marta Veloso and by the officer, Roberto Barroso. The presentation is already available for download on our IR website, but it will also be possible to follow it here through Zoom platform. [Operator Instructions] And this webinar is being recorded and its audio will be available on the IR website. And as usual, here is our disclaimer. Forward-looking statements are based on the beliefs and assumptions of Light's management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore, depend on certain 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 note, I would like to give floor to Ana Marta. Ana, would you please?

Thank you, Rodrigo. Good afternoon. I'd like to thank everyone for attending our second quarter 2020 results webinar. This was a particularly challenging quarter for our business, mainly due to the impacts of the pandemic on the results of our distribution business. Despite this, we remain strong in operational terms, and we are taking all the precautions that the moment demands. We maintained our operations in the field and corporate activities, even more focused on achieving the results set out in our turnaround plan and on delivering outstanding results in terms of quality of the supply, in which, within this context of a pandemic, our energy is even more essential gift. And with much greater determination this quarter, we continue to achieve consistent improvements in our operating results, reduced losses, contingencies and PMSO. And we have recently obtained significant funding to strengthen our cash position. Our generation and commercialization businesses also continued to show good operational and financial performance. However, before commenting on the good operating results for the quarter, I will detail the effects of pandemic on the figures of our distribution business. The economic and social distancing effects on the customers within our concession area due to the pandemic were the main factors that resulted in a 16.5% drop in grid load in this quarter compared to the same period last year. The billed market in turn declined at 15.6%. And given that ANEEL has forbidden distribution companies to cut off delinquent residential customers, we also noticed a decline in collections, which was accompanied by an increase in the provision for bad debt. We estimate that these conditions have negatively affected the EBITDA of Light sales in the quarter by approximately BRL 212 million, of which BRL 119 million relates to the impacts of the market decrease on Parcel B and on nontechnical losses and BRL 93 million is related to the increase in provision for bad debt. As a result, consolidated EBITDA closed the quarter at BRL 145 million, which represented a BRL 240 million decline year-over-year. With the commitment to the COVID account on July 3, we will receive BRL 1.3 billion until the end of the year, of which we already hold BRL 1 billion as of today. However, this amount refers only to financial compensation, the cash effect, resulting from the contraction of the market and collection. It does not address the economic impacts of the pandemic which were quite significant, as I mentioned before. We understand that the economic conditions of the market contractions and the deterioration in collection with a consequent increase in the provision for bad debt are extraordinary events and will be addressed by the regulator. The right to maintain an economic balance at all times is crystal clear in the concession contracts of the distribution companies in Brazil. In this sense, we have been closely following the discussions taking place at ANEEL and the suggestion should be submitted to the public consultation. By the way, it has already been announced that this issue was included in the meeting agenda of ANEEL's Board of Directors to be helped this Tuesday, the 18th. These impacts of the pandemic on Light's sales EBITDA overshadowed our operational improvements in combating losses, reducing legal contingencies and reducing PMS, which generated an increase of BRL 85 million in our results as compared year-over-year, as I will discuss in greater detail further on. As already disclosed to the market, we have a loss combat plan with initiatives broken down by regionals, which is the result of a detailed diagnosis of the reality of the problem in each region. During the pandemic, we continue to work on our plan and strengthen the teams to combat losses with professionals whose activities has been temporarily suspended, such as those who work in cutting off customers without outstanding payments. We continue to provide training to our own and third-party teams and to deepen the policy of increasing the participation of our own employees in the workforce that deals with energy loss with the aim of better control and higher productive. This strategy has proven to be very successful as well as the decision to redistribute responsibilities between Dalmer who now is the officer responsible for planning, and Pimenta, who is focused on the execution of the plan in the field. This rearrangement resulted in our teams being even more productive, flexible and multidisciplinary. Even during the pandemic, we proceeded with our zero-tolerance policy towards the highest income customers who steal energy, whether they are commercial or residential, by carrying out inspections, many of them with the support of the police and reported in the media. In addition, we work tirelessly to bring forward energy stealing customers into formality. On the administrative side, considering nontechnical loss, we continue to correct measurement years and perform actual readings of customers' consumption, thus avoiding billing on the average and on the minimum. And CapEx continues in a normal path on exchanging old meters, shielding the network in more hostile regions as well as investing in physical measurement. As a result, even with the given adverse scenario, we experienced that in the second quarter, we reduced losses by 439 gigawatt hour over the previous year. This means a decrease of 4.7% in the volume of losses in this quarter. If you consider the volume of loss in the semester, we saved 911 gigawatts, which is equivalent to the consumption of a city of approximately 300,000 inhabitants during a year. And even with a 16.5% retraction in the grid load, which is the index denominator, the indicator of total losses per grid load decreased by 0.15 percentage points closing the period at 25.29% compared to 25.44% in the first quarter. Non-technical losses on the low voltage market fell by 0.7 percentage points in this quarter compared to the previous one. Looking now at the indicators for the semester, in the first half of 2020, despite the pandemic, the indicator for total loss on the grid load decreased by 0.75 percentage points when compared to the closing of last year. And if you consider the indicator of possible areas for our business, the reduction in total losses over the grid load was 2.1 percentage points in the first half of 2020, even with the decrease in the denominator on account of the pandemic. This half year drop in the grid load loss indicator is compared to or even higher than that of other Brazilian Discos that operate in complex areas and which have been highly successful in their plans to combat loss. This result shows that we are on the right path towards sustainable loss reduction, one of the main pillars of our turnaround plan. But we still have a great deal of progress to make since we are 6.09 percentage points above the regulatory transfer in the tariff of 19.2% of the grid load according to the parameters agreed in the tariff adjustment of March 2020. As of the second half of March, after resolution by ANEEL, we no longer rely on cutoffs as a collection instrument for residential customers and with this, we observed an increase in delinquency, also impacted by the economic downturn as a consequence of COVID-19. The collection rate closed the quarter at 95.4%, 1.5 percentage points below the one we achieved in the first quarter. However, when compared to the second quarter of last year, the drop in collection was much higher of about 5.7 percentage points. The deterioration in collection was softened by some innovative and proactive initiatives in the relationship with our customers, including service via WhatsApp, saving of bar codes through text messages, helping the issuance of duplicated invoices and sending QR code for the payment of outstanding invoice in installments. In addition, since the beginning of the year, we have been using motorcycle-based collection agents to reach an even larger audience in a more agile and effective way. Until June, we carried out more than 40,000 settlements, achieving a total value close to BRL 90 million. The increase in migration of bill payments to digital means, such as ATMs, Internet banking and automatic debit continued in the second quarter of 2020, which ensured some resilience in our collection. In June, about 85% of the collection of the distribution business were made through digital channels. However, the increase in delinquencies during the pandemic associated with the expectation of noncollection future bills within this period resulted in the provision for bad debt for the last 12 months, this regarding the nonrecurring impacts at the end of last year, closing the quarter at 3.3% of the gross revenues, 1 percentage point above the figure posted in March 2020. According to our estimates, the isolated effect of COVID-19 on provision for bad debt considering the aging of accounts receivables for March, June is approximately BRL 93 million. If this effect were not taken into account, the provision for bad debt in the second quarter would have been BRL 130 million, practically in line with that of the first quarter. That was BRL 123 million. With the lifting by ANEEL of the prohibition to cut residential clients in August, we now are strengthening our relationship with those customers with outstanding payments to offer them opportunities for regularization. We believe that at this time, this policy is beneficial for these type of customers and for our business, as pursuing the disconnection approach, despite its high-efficiency is much more expensive than to negotiate payments in installments. As previously mentioned, the pandemic has also accelerated the digitalization of our customer relationship. With the ANEEL determination to close our physical stores in March, we redirected our representatives to our digital service channels, such as our virtual store to the newly launched interface via WhatsApp in addition to e-mail based customer service. The public's receptivity to these new tools was very positive. When we launched the interface via WhatsApp in March, about 15,000 service calls were taken. In April, we registered more than 127,000 calls. In the recent survey of users, more than 75% of respondents stated that they prefer to use WhatsApp, even if the physical stores were open. This increased digitalization is without question an irreversible path in the relationship with our customers. And these positive results will be submitted to ANEEL to contribute to a future discussion on the modernization of obligations by distribution. Furthermore, regarding customer relationships, although ANEEL authorized in March, the measurement of consumption by historical average, we continue to perform actual readings for the majority of our customers. We only achieved these results, thanks to our in-sourcing plan into the low rate of absenteeism of our relationship agents. The situation has ensured the integrity of our billing and reduced any possibility of deteriorating the relationship with clients, which could lead to future lawsuits. In fact, the number of customer complaints regarding billing in our service channels was greatly reduced during the pandemic from more than 33,000 complaints in the second quarter of 2019 to 7,000 complaints in the second quarter, a reduction of 77%. This indicator clearly reflects the improvement in our business process. Since August 3, as determined by ANEEL, we have resumed our physical store service following the protocols necessary to ensure the health and safety of our employees and customers. This quarter, we continue to make progress with another important element of our turnaround plan, which is the reduction of legal contingencies, especially those related to customer relations. This quarter, we recorded total contingency in the amount of BRL 74 million, excluding the voluntary layoff program, a reduction of BRL 14 million or 15.8% compared to the second quarter 2019. This positive progress already captures the improvement of processes throughout our customer relationship front, such as physical stores, call center and ombudsmen, in addition to the continuous improvement in our internal process to result in improved service. And since Déborah took over the legal department, we have been carrying out a wide restructuring of the area with the hiring of new professionals and firms, improving the training of our internal lawyers and officers with the objective of continuing to deliver good results, along with the reduction of legal contingency. In Special Civil Court, we remained at a downward trend for the fourth consecutive quarter. Year-over-year, we can see a 78% reduction in the number of new lawsuits and a 62% reduction in the value of the provisions. Following the trend from the previous quarters, there was also a significant reduction in the predecessor indicators to contingencies such as the number of complaints registered at our physical stores, call center, ombudsman and ANEEL. With regard to manageable expenses, to-date, we have a PMSO close to those included in our tariff, but we need to reduce them even more. Since the middle of last year, we have worked on several fronts in this regard. First one, improved management of materials and contracts with third parties, adjustments to the staff, including the launch of a voluntary layoff program, improvement of the variable remuneration policy linked to objective goals, including the field workforce, greater synergy between the departments, increased productivity and supervision over few teams with the advent of new stores. As a consequence, the expenses with personal material and third-party service of the distribution business, the PMS was reduced by BRL 23.8 million or 9.9% compared to the second quarter of 2019. Over the semester, we observed a decrease of nearly BRL 37 million in those expenses when compared to the first semester from last year. Moving on the -- moving on to the financial aspects, we began the quarter with our net debt-to-EBITDA ratio at 3.07x, in line with the previous quarter and well below the 3.75x covenant limit established in most of our debt agreements. You must keep in mind that for the purpose of our debt covenants a 12-month horizon is taken into account for EBITDA. Also, excluding noncash effects, such as provisions, VNR and other operating income and expenses. Our consolidated debt on June 30, 2020, was BRL 6.7 billion, and we closed the second quarter with a cash position of BRL 995 million. With the proceeds from the first installments of the COVID account and with the 19th issuance of debentures by Light SESA in the last 15 days, our cash position became more robust, reaching BRL 2.5 billion. Considering the above, we have now fulfilled the necessary conditions to face our future debt obligations. Under Barroso's leadership, we carried out a series of successful initiatives to improve our debt profile and cost control since the completion of the follow-on offering in mid last year. With the positive interest related to the 19th issuance of debentures benches of like Light SESA held at the end of July, we realized that the local debt market was heating up again, which allow -- which would allow us to continue with our liability management strategy. Regarding the DEC and FEC indicators in this quarter, we recorded the best results in our history in terms of quality of the service provider, even during the entire quarter with the pandemic. We remain at the same level at the best and largest distribution companies in the country. And within the quality service limit established by the regulator in the concession agreement. In June, the DEC for the past 12 months closed at 6.42 hours, a decrease of 7.8% compared to March and the FEC ended at 4.27x. In the generation segment, we achieved an EBITDA of BRL 153 million in the second quarter of 2020, above the BRL 148 million recorded in the same period of the previous year. We were successful at our seasonal strategies and energy trading deals closed throughout the year. This served to mitigate short-term exposures and optimizing results based on our projection of our GSF and PLD. With actions taken to preserve the health and safety of our employees, we could ensure that our plants continue to operate normally, maintaining their rates of availability in the generation branch. In addition, in May, we began to spill away renovation works at the Ilha dos Pombos hydro plant. On our trading arm, whose client portfolio is focused on wholesale operations, mostly with large companies with a AAA credit profile, we have the necessary strength to face the most adverse scenario brought about by the pandemic. Lightcom received some requests for increasing the flexibility from smaller customers and was well succeeded in the negotiations making payment conditions more flexible in order to ensure that revenues are recognized within this year. And I need to comment on the results of yesterday's approval by the Senate of the bill, which renegotiates the hydrological risk, the GSF in the power sector. According to the legal procedures, this deal will now be submitted to the President's approval and later regulated by ANEEL. So within approximately 3 or 4 months, we'll get to know the proposed terms and the conditions, and then we will evaluate if we will accept them or not. If this decision were to take place today, Light Energia would have to disburse approximately BRL 730 million, and its power plants could receive a concession extension of up to 24 months. In its term, Light Energia would [waive] legal disputes and an intangible asset would be formed regarding the extension of the concession period. I now will give the floor to Barroso, who will present our results of the second quarter 2020 in greater detail. Go ahead, Barroso, please.

Thank you, Ana. Good afternoon. Going to the presentation in the Slide #2. We can see the reduction in the grid load volumes in the second quarter of 2020, mainly related to the COVID-19. The most reduction are related to the commercial clients to the industrial market and other markets, mainly public services and public buildings. The reduction in the billed market also was impacted by the COVID-19, the reduction was 15.6% in this quarter when we compare with the second quarter 2019. In financial terms, this reduction in the volumes related to COVID-19 in our best estimates for this impact is around BRL 119 million for this quarter. Going to Slide #3, we can see despite of the COVID-19, we were able to reduce energy loss for the second quarter in a row. The reduction in this quarter was 0.15 percentage points. The energy loss, we ended this quarter with 25.19% -- 25.29%, and the regulatory gap is around 6 percentage points. Going to the losses in the possible areas, non-risky areas, we are being able to reduce the losses in the possible areas quarter after quarter. This is the fourth reduction in a row, and the reduction was almost 25% when we compare in the total losses in the possible areas in the second quarter of 2019. When you compare the reduction in the total losses over the grid load in the possible areas in percentage points, we were able to reduce 2.6 percentage points on a year. In -- only in this quarter, we were able to reduce 0.8 percentage points in the non-risky areas. Moving to the Slide #4. We also are able to see a reduction in the nontechnical losses over the low-voltage market. The reduction this quarter was around 0.7 percentage points and the second time we are able to reduce in a row. In the graph in our right, we can see the nontechnical losses in the risky areas and also in the possible areas. In the risky areas, we saw a slighter increase in this quarter, but we saw a very high decrease in the nontechnical losses in the non-risky areas in this quarter. It is our best results in the nontechnical losses in the possible area disclosed since we started to measure in 2016 -- sorry. Moving to the Slide #5. We can see our strategy to combat losses in our concession area. We are focused on the incorporated energy IEN despite to focus to recover energy stolen. In this quarter, we were able to incorporate the energy in the total amount of 127 gigawatt hours and we also increased the productivity of our loss program to combat and we increased our productivity and we are able to recover energy almost 80 gigawatt hours in this quarter. We improved our training, we in-sourced our field teams to combat the losses, and we had a greater accuracy in target identification. To talk about the collection rate, we saw a decrease of the collection rate in this quarter in the total amount of 1.5 percentage points. Because of debt and the aging of the accounts receivable, we increased our bad debt provision from 2.3% to 3.2%. This 1 percentage point we booked in the second quarter of 2020, mainly related to the COVID-19. We estimate the impact of COVID-19 in our concessionaire, mainly related to the prohibition of ANEEL to cut residential clients, we are estimating BRL 93 million in this quarter. Moving to the Slide #6. We can see a very good quality results. The duration of the interruptions of energy reduced a lot in this quarter, and we closed the second quarter of 2020 in 6.4 hours to more than 20% below the target imposed by the regulator. Considering the frequency of the interruptions, we are also very nice in this quarter to more than 20% below the target defined by the regulator. Moving to the Slide #7, talking about the financial results. We saw a reduction of BRL 240 million in our EBITDA in the second quarter of 2020 when you compare with the same quarter of 2019. It's important to mention that BRL 212 million is related to COVID-19. And we are discussing a potential economic equilibrium with the regulator. Also, we have to add around BRL 100 million of the reduction in the net revenue is related to VNR. So this both effects, the COVID-19 and the VNR overshadowed the BRL 85 million improvement related to the turnaround plan, related to reduction of losses, reduction of PMS and reduction of the contingencies. To talk about the contingency in Slide #8. We can see a very high reduction in the small lawsuit against clients. We are able to reduce 62% in this quarter. And when we look for the total lawsuits provisions, we are able to reduce 22%. Talking about the number of lawsuits started in this quarter, we are able to reduce almost 80% when you compare with the same quarter of 2019, and more than 50% when you compare with the first quarter of 2020. Moving to the Slide #9. We can see the results in our EBITDA by segment. We are able to, despite of the COVID-19, increase the results in the Light Energia generation business, mainly related to the strategy of the commercialization to protect the company against the GSF. And to talk about the distribution company. It was impacted -- directly impacted by the pandemic in this quarter, as I mentioned in the slide before. Moving to the Slide #10. We saw in the bottom line of the results, impact of the COVID-19, but we reduced this impact by the taxes as well the equity income, mainly related to the losses related to Guanhães Energia, but it's important to mention that we sold this investment in October of 2019. So now we don't have any impact of Guanhães from October last year on. Moving to the Slide #11, we try to show in a simple way the impact of the turnaround and compare with the impact of the pandemic in this quarter. To talk about the turnaround, in the first semester of 2018, we had a reduction in losses, which impacted in a positive way for the company almost BRL 90 million for the first semester of 2020 added by our PMS, personal materials services expense of BRL 37 million and also BRL 6 million in contingency reduction. The total of the turnaround plan impacted positively our EBITDA in the first semester of 2020 in the total amount of BRL 132 million. This we expect to continue because we are -- in our overview, we believe we are in the right path in the turnaround plan. In the estimated impact of the pandemic in our second quarter results, we are estimating BRL 212 million separated in provision for bad debt is BRL 93 million and BRL 119 million related to the reduction of the grid load. But this effect, we are trying to address this economic equilibrium with the regulator. Moving to the last Slide #12. We can see the cash position of the second quarter of 2020, almost BRL 1 billion. But in July, we are able to issue a new debenture of BRL 500 million and also we received from the COVID account, BRL 1,010 million. So the pro forma cash position until now is around BRL 2.5 billion. It's sufficient to pay the amortizations maturing by the end of the year, less than BRL 400 million and the amortization maturing in 2021 around BRL 2 billion. Looking for the financial covenant net debt-to-EBITDA, we closed the second quarter of 2020 in the index of 3.07x, just point 0.01x higher than the first quarter of 2020. Talking about the cost of the debt, we were able to reduce more than 1 percentage point in this quarter when we compare it in the nominal cost with the previous quarter and more than 2 percentage points of reduction when we compare with the second quarter 2019. And the actual costs increased a little bit because the reduction of the inflation in Brazil in the second quarter of 2020, mainly related with the pandemic. But when we compare with the second quarter of 2019, we will also reduce almost 1 percentage point. And it's important to mention that our debt, 2/3 of our debt, almost 67% is related to the CDI, which reduced a lot in the first 6 months of this year. And it was important to reduce our cost of debt, together with the inflation and together with the liability management we started 2 years ago and we accelerated after the follow on in the second half of 2019. Thank you very much. I'd like to pass the call to Rodrigo to lead the Q&A section. Thank you very much.

Thank you, Barroso. [Operator Instructions] Okay. No questions for today. So I would like to thank everyone for your participation. And now I will turn the floor over to Ana Marta for her final remarks. Please, Ana.

Thank you. Thank you all for attending our webinar of the second quarter results of 2020. And once again, I emphasize that we are making progress with the professional and aligned team with the objective of generating value and improving governance that we announced to the market. We are on the right track for generating sustainable results building a consistent trajectory to become one of the best energy companies in the country despite the complexity of our concessionaire. Making an analogy with the current times, our results at the distribution business were greatly impacted by the effects of the pandemic this quarter. But for this, there is a kind of vaccine which is the economic rebalancing we are entitled to in our concession contract. The important thing looking forward is that our turnaround today is a reality, and the company has been delivering consistent operating results and represented to the market since our return to the company in May last year. As I said in the last quarter, we will become as one of the most strong companies during this pandemic. And be sure that we are prepared to face the challenges and uncertainties that we still have on the horizon. Our IR team will remain available for further clarifications. And have you all a nice afternoon and until the next time. See you. Bye-bye.