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

Good afternoon, everyone, and welcome to Light's Earnings Call for the Third Quarter of 2020. My name is Rodrigo Vilela, I am in charge of IR and I am hosting this event, which will be simultaneously translated into English. All you need to do is to click on the interpretation button on the lower part of your screen. So switching back to Portuguese now. This presentation will be done by our CFO and Investor Relations Officer, Roberto Barroso; and we also have Chairman of the Board, Firmino Sampaio. Nonato Castro, the recently elected CEO, could not be with us today because he tested positive for COVID-19 and is at home recovering. The presentation is available in our RI (sic) [ IR ] website and can also be seen here via Zoom. [Operator Instructions]This webinar is being recorded, and its audio will be available in our IR website. This is our disclaimer. We'd like to clarify that any declarations made during this presentation about the company's business perspectives as well as financial and operational goals are simply beliefs and assumptions by the company's directors based on currently available information. Future considerations are not a performance guarantee as they involve risks, uncertainties and assumptions. They refer to future events and therefore depend on circumstances, which may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors can affect the future results for the company and can lead to results that will differ materially from those expressed in such forward-looking statements. Well, now that we've made our important notice, we will continue with Firmino Sampaio. You can continue sir.

Good afternoon, friends. I am Firmino Sampaio. I am the Chairman of the Board for Light, and I have been since October 8. I was elected as a board member on September 28. Many of you know my background in the Brazilian electrical industry, but the last activity I had in the market was as the Chairman of the Board for Equatorial Energy. Later, I was only a board member and Chairman of the Board of its subsidiaries, which was an activity I stepped away from in order to take this position at Light. So it's a pleasure to introduce myself and to answer any questions that will be asked. And I'm going to let Roberto Barroso also make his opening remarks and discuss the results for this quarter. Thank you, and I'll be here with them to help with whatever is needed. Thank you.

Good afternoon, everyone. It's a pleasure to present our earnings results once again. So I'll start with the presentation on Slide 2, where we have our quarter highlights. The third quarter of 2020 presented very positive results and they were consistent with our turnaround plan. We also, once again, presented excellent service quality results. About the legal contingencies, we managed to make strides not only in the -- not only in management, but also in servicing clients. And in the company's litigation, we presented a reduction of BRL 129 million in contingencies this quarter versus the second quarter of 2020 with some important contingency reversals resulting from labor lawsuits, litigation with clients and also with management. We also managed to get an excellent management result. Our OpEx results were positively impacted by the reduction of personnel and services, a BRL 25 million reduction this quarter with a total reduction for the year of BRL 64 million. There was a slight increase of 0.7 (sic) [ 0.9 ] percentage points considering the total grid load. This was due to the temperature. The temperature this quarter was 1.2 degrees higher than the temperature in the third quarter of 2019 and also losses in the risk area. It's worth highlighting, though, that the losses in the possible area continued their downward trend. We managed through reduce about 50 gigawatts in possible areas with an increase of around 300 gigawatts in risk areas. Based on these 3 factors especially, we were able to present an EBITDA result of nearly BRL 600 million, an increase of 102% million over the third quarter 2019. This performance was 90% higher in the Distribution company and 205% in the Generating company. We also continued our liability management with 2 important issuances for debentures and infrastructure, which were concluded in June 2020, BRL 500 million and BRL 600 million in the second quarter of -- excuse me, yes, in the third quarter of 2020. We also received BRL 1.2 million (sic) [ BRL 1.128 billion ] from the COVID account, which reduced our leverage ratio to 2.4x net debt-to-EBITDA. Most of our debt maturities have a limit of 3.75x. And finally, the company's net income reverse the recurring loss that we had of BRL 11 million in the second quarter -- excuse me, in the third quarter in 2019 for our current income of BRL 136 million, which is presented in the third quarter of 2020. Continuing with Slide 3. This shows our operational indicators, starting with the grid load. We managed to reverse a reduction of 16.5% in the grid load presented in the second quarter of 2020. This was because of the pandemic. And in the third quarter of 2020, we had an increase of 0.9% in grid load versus the same quarter last year. This was an increase mostly due to the temperature, which I've already mentioned, and also a recovery in industry where the major highlight was steel work and the residential industry due to the use of air-conditioning because of higher temperatures. Looking at the billed market, the graph in the middle of the slide. There was a reduction of 3% there in comparison to last year. This reduction took place, especially, because of commercial clients who were impacted by the pandemic and had a reduction of 10% versus the third quarter of 2019. The right-hand graph shows variations. The residential segment went up 9.5%. The industrial segment went up 7.9%. And the commercial segment led the reduction this quarter, a reduction of 10%. Continuing with Slide 4. Here we see the losses I mentioned in the first slide, an increase of 7%, approximately 250 gigawatts this quarter. However, if we look at how much we've evolved this year, even despite the pandemic, we were able to reduce by 648 gigawatts the total loss for the company. We continued working on this, especially in areas we consider to be possible, areas where we don't have any severe operational limitations. We're still working strong in order to maintain this loss reduction ratio that we saw in the first and second quarters of 2020. Moving to Slide #5. Here we see the development of losses in possible areas. Another quarter of loss reduction, a reduction of 58 gigawatts. And in the last 12 months, we were able to reduce 1,248 gigawatts in the possible area. In the right-hand graph, we see that we went from 16.8% total losses to grid load in possible areas to 14.5% in the third quarter of 2020, the same figure for the second quarter, which is a reduction of 2.3 percentage points in the last 12 months in possible areas. Just as a reminder, in risk areas, Light losses around 80% and this has been stable over the last years. Moving on to Slide 6. Here, we see nontechnical loss in the low-voltage market. Because of the same effect due to increased temperatures and because we've had an increase of 2.3 degrees, especially in September 2020 versus September 2019, the non-invoiced value was lower and this has led to a different level in October because of the reading cycles. And this impacted losses, but the non-invoiced revenue was recognized as an indicator of the company's performance. So the losses went up 2 percentage points this quarter, but we continue to work in possible areas to keep the same trend reducing these losses as we saw so far. Looking at the losses between possible areas and risk areas, we now have 67% of nontechnical losses in the risk area and 33% in possible areas. When we look at gigawatts, it's basically the same number reported in the second quarter, 2,210 gigawatts, an increase of 9 gigawatts only versus the nontechnical losses in the risk area reported in the second quarter of 2020. Moving on to Slide #7. Here we also have the evolution of the loss-combat program. Again, we had a positive quarter. We were able to have 19,000 inspections using the months in which we could not cut power from clients who are delinquent. We used our teams for fraud inspections in clients in our concession area. So we had 19,000 inspections where we found fraud, and we invoiced some retroactive values for clients who can pay. And this generated a volume of nearly 30% increase versus the volume presented in the second quarter of 2020. From the energy incorporation point of view, which was our focus, we also managed to make big steps in this time. If we look at the third quarter last year, this volume is nearly 2.4x higher than in the third quarter of 2019 when it comes to energy incorporation. So we're still focused on fighting losses in possible areas, and we hope to continue in the next quarters not only in the possible area, but also to try to advance some more in risk areas. This is a diagnosis that we have been doing over the last months and which we will discuss with Nonato and Firmino here in the company. When it comes to collection, we closed this quarter with a percentage of 94.9%. This is mostly due to the restrictions in power cuts by the regulators, which took place until June. In August, we worked on renegotiations of outstanding bills. And from September, we resumed power cuttings. And we had around 9,000 cuts in the same -- excuse me, in the month of September and we continue to work on that in September and October, so that we can increase our collection. And in September, specifically, we got over 100% collection in a month, which gives us a sign that we are on the right path to collect what was not collected during the pandemic. Due to that collection of 94.9% in the quarter, this reinforces our BDP, our bad debt provision, which went up from 3.3% to 3.8% in the third quarter of 2020. Moving on to Slide 8. It discusses operational quality for are indicators, both DEC, which is the frequency of interruptions; and FEC, which is the duration. It continues to be very positive when we look at duration. Even in a warmer quarter, we had a reduction versus June, an improvement in quality, and it reached 6.19 hours, far below the target we have in our concession contract, which is 8.14 and even below the indicator for 2021 and 2022. FEC is similar. We were over 20% below the concession contract limit. And we're also below the limits for 2021 and 2022. Moving on to Slide 9. Here we see a summary of our operational performance. We managed to improve our EBITDA with BRL 296 million recurring to BRL 587 million, an increase of nearly BRL 300 million, which came from several parts of the company: an increase in that revenue, both for the Distributor and the Generator; part of it is related to the new replacement value for BRR; part of it is related to the 0.9% increase in the grid load; GSF is down, and we also have higher energy allocations in the Generator for the third quarter. Besides that, we also see that manageable expenses improved. And even with the reinforcement of PDD, the reduction in bad debt provisions were enough to improve our operational results by nearly BRL 50 million. We have to underscore that we are still in a pandemic. We had an impact in the Distributor, which was 52 million estimated by us, of which BRL 29 million was due to the 3% lower invoicing this quarter versus last year, an impact of BRL 29 million in Installment B and nontechnical losses and also a BRL 23 million impact in our bad debt provision since we had to spend so many months without having any power cuts. Slide 10 shows our EBITDA growth in the third quarter of 2020 versus 2019 and this is per segment. This BRL 296 million increase came mostly from the Distributor. This was due to the items we've mentioned, contingencies and PMS, but significant volume came from Light Energy and Lightcom, BRL 103 million. This BRL 103 million increase comes from our trade strategy and a lower GSF and also reduced spot prices in the third quarter of 2020. Slide 11 shows the company's litigation and the provisioning we've made for it. We had a reduction of BRL 129 million in provisioning this quarter versus the same quarter last year and a reduction of nearly BRL 260 million in the first 9 months of 2020 versus the first 9 months of 2019. If you look at the right-hand graph, the green bars show the number of new lawsuits and we can see that it is going down. It went down by 60% this quarter. So we can say that a part of it is related to the pandemic, but what really makes us feel confident that we are in a positive trend is that besides the 60% reduction in JEC litigation, we also had a reduction in complaints in our call center. It was 24% in the company's website and 24% in ANEEL complaints. And this reinforces that downward trend we've seen in the last quarters. If we add the number of lawsuits in the second quarter with the number of new litigation in the third quarter, it's still far below what we saw in previous quarters. Looking at Slide 12. We also see the company's financial results. There was a recurring net loss of BRL 11 million in the third last year and we now had an increase of -- BRL 136 million in the company's results. Most of the effect comes from operational efficiency, which impacted our EBITDA this quarter. And there was a reduction from a financial result led by IGP-M increases. IGP-M is the index that updates our GSF liabilities, which are recorded by Light Energy. We currently have BRL 800 million in Light Energy, which have been recognized because of the litigation that we hope will conclude in the next months. And we will settle this BRL 800 million with an EBITDA of BRL 280 million, which was the number CCEE disclosed, which is still in a public hearing and can vary after the public hearing has concluded with an extended concession of 15 months in the case of Light Energy. Slide 13 shows what results we will -- we have had so far of the turnaround plan in the first 9 months of 2020. And also the impacts we expect from the pandemic. We had an approximate gain of BRL 15 million in reduced losses, BRL 62 million in PMS reduction in the first 9 months and BRL 135 million in contingencies, a total of BRL 212 million gained from the company's turnaround. However, the estimated impact from the pandemic is BRL 116 million increased in the bad debt provision and also loss of BRL 148 million due to market reduction versus the same market last year. So our total is nearly BRL 264 million estimated from March to September. Slide 14 shows the company's cash position and its amortization and we also see some of the financial highlights. Our cash position closed at BRL 2.969 billion in September, which is enough for the amortization that we still have for 2020 and for all of the ones coming to term in 2021. We also reduced the debt cost for one more quarter. The nominal cost is under 7% on a consolidated basis and the real cost is 3.61% a year, which allows us to save cash in the first 9 months of 2020 of around BRL 200 million. If we look at the covenant indicator in the first graph to your right, you'll see that there was a reduction of 3.7x to 2.4x. Part of it is due to improved EBITDA in the third quarter of 2020 and part of it is due to receiving the COVID account, which was BRL 1.1 billion this quarter. We suffered impacts from cash generation in the first 3 months of the pandemic, and they were significant. But now that we are able to cut power again and with the COVID account coming in, we've already stabilized the cash losses we had been having in the last months. Finally, in terms of debt indexes, we are still balanced in a mix between being indexed by IPCA and CDI. 60% is indexed by the CDI and about 40% in IPCA. Finally, we'd like to reinforce that we continue to be committed to generating results for Light. We're still engaged and committed to the progress of the program, and we will continue making a constructive effort with regulators, with state governments to continue to improve our operations every quarter. Thank you, and I will now give the floor to Rodrigo, who will continue with the Q&A session. Thank you.

Thank you, Barroso. Well, we will now begin the questions-and-answer session. [Operator Instructions] The first question we've received game from the Q&A button, and it was asked by Pedro Manfredini from Goldman Sachs. How can you map which clients are able to pay?

Pedro, thank you for your question. We've mapped clients that can afford to pay by looking at our regional plan and by following up not only losses but also readings and charges. When we identify a fraud, since July 2019, we don't bill them retroactively in the same way with every client. We look at the kind of residents, the kind of house, in what region clients are and if they would be able to pay, for example, the last 24 months or the last 12 months. So by clustering clients based on their payment history and based on their readings, after fraud has been identified, we make an estimation on how many months we will charge them for. And we've followed up that collection, based on this clusterization, is very positive. But it is a continuous effort and you have to follow up on the billing strategy for our [ EM ] clients. Our main focus has been incorporating energy, clients who had received power cuts where we presented a plan in December last year and brought them to our recurring payment base and we have over 300 clients where that happened -- excuse me, 300,000 clients where that happened. I'm not sure if I answered your question, but if you still have any questions, let us know.

Bernardo Gomes from Itau will now ask a question.

Well, I'd just like to thank Barroso for these excellent results. I think we're very happy about the results you've been getting, but that's basically it. I don't really have a question.

Marcelo Sa will ask the next question. He's an analyst from Itau BBA.

My question is for Mr. Firmino Sampaio. If you could tell us what are the main fronts that the new administration intends to have with Light, if you're going to focus on getting better fees? The last provision was very good for Light and I imagine that this would be a point for the company to continue to be profitable in the future to have a better margin. So I'm just wondering if you're focused on that for 2022? And if you could tell us the main changes that you intend for the company. You have Nonato, and I'm wondering if you're bringing in a team from Equatorial and how you intend to implement these changes?

Thank you. That's a very important question for me, Marcelo. My vision is that I found a Light, which was above my expectation from what I had seen before. But none of it gives me the confidence that I can give you any numbers for the future. Now what we intend to do is to work to -- especially when someone from the operational side comes in like Nonato, we believe that this is going to add to our work. We're going to value what we have been doing in the company and we're going to perfect our processes in the complementary model. I'm sure that Nonato will find many good things in the company and he's going to bring many good things from his experience. We're not focused on capturing talent from Equatorial. But it's undeniable that Nonato's being here and some other employees who are close to us might find some opportunities here. My guidance for Nonato and for others is to, first, always look at your own resources in the company. And we should not be biased towards taking people away from other organizations, removing talent from other companies. But it will happen in some cases, no one can deny that. Nonato is a great leader, someone you all know in the market. You know about his work in Pará and [ POE and in Marinho ] in the past. It's something that draws our attention because he is a great leader. He's very warm and close to people, although you can't be close during the pandemic. He is a great people person. So that is the example to follow. We're going to work on it first by doing our homework. You don't have to think that we need to always request, thanks from ANEEL. And of course, we have to reiterate that all of our relationship with ANEEL is based on respect, and we have to understand that any benefits that the market will see will be translated by them mathematically. They have a mathematical model that will definitely work for Light and for other utility companies that have the same challenges in operating. So for me, this is very positive. The company is very lively. It's ready for new challenges. And we are bringing in a leader, a well-trained professional and we will be together. And I'm saying together because I will be working exclusively for Light. I'm going to stay in the company full time, which is what I had been doing from the moment I was elected. I have a seat here next to the directors and I'm always going to do that. I want to talk about my experience in the electricity industry for a long time. I don't even want to mention how long it's been in the industry, so people don't think I'm older than I am. But I have a lot of experience that I can tell you about. And of course, there's still a lot to capture. Learning is a very important variable for this position. Rio is also a live project for Firmino. Rio is my second hometown. The state of Rio de Janeiro in 1992 gave me the privilege of being a citizen of the state. So I'm coming back here as happy as I ever have been. I like working, I love Light and I'm sure that my efforts will help the company to continue to shine bright for Rio de Janeiro and for Brazil.

Thank you, Firmino. That was very clear. So continuing with the questions we received in the Q&A to all. We received 2 questions that are similar from Ricardo [indiscernible] from [ Taurus ] and from Rodrigo Mora from Moneda. They're asking if -- with Firmino coming into the company, if the company's turnaround strategy will be redesigned and how.

Okay. That was a great question. I've been talking to some people in the company and I think the word turnaround is often repeated in the company. I was a Board member in 1996 when the company was privatized. I had the privilege of transferring the company to the group when it was sold from the government. I was a Board member. I watched what EDF did at the time with CSN and with our other partners from abroad and from the industry. Later in 2008, I came back to the Board. The company was run by [indiscernible] at the time and Equatorial integrated Rio Minas Energy, and each one had a 13% stake in the company and the control block of 25%. We shared with CEMIG, with AG Concessions. It was a new experience. Equatorial stepped out later on. So we had 4 major shareholders, which means that you can't get any individual guidance. Equatorial understood that it wanted to control its assets and it sold at that time in 2010. It stepped away from Light. The CEO at the time still liked Light. So this is the moment to come back to Light for the first time since 2010. But I do believe in the company, and I'm sure that we are going to build the best for our shareholders and for clients in the state of Rio de Janeiro.

Continuing with the next questions received in Q&A. Rodrigo Mora from Moneda is asking about the possibility of a follow-on.

Rodrigo, thank you for your question. We're always looking at the opportunities for equity and for debt. But I think it's important to mention that so far, we have not had any approvals from the Board for any follow-on offers. If it is made, of course, it would help because it would reduce the rollout cost and the capture cost for the debts that are coming to term in the next year. So it would improve the company's capital structure and it could potentially lead to a better rating in the future. We know that these follow-on possibilities will be discussed with the Board and will only be carried out if it generates value for all shareholders.