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

[Audio Gap] [Operator Instructions] This webinar is being recorded, and its audio will be available in our Investor Relations website. As per usual, this is our disclaimer. We'd like to clarify that any statements made during this presentation about the company's business perspectives, projections, operational and financial goals are simply beliefs and assumptions by the company's directors based on currently available information for the company. Remarks about the future are not a guarantee of performance as they involve risks, uncertainties and assumptions. They refer to future events and therefore, depend on circumstances that may or may not come to pass. Investors should understand that the general economic conditions, industry conditions and other operational factors may affect the company's future results and may lead to results that differ materially from those expressed in these forward-looking statements. So with all that being said, I'd like to pass the floor now to Nonato Castro. Nonato, over to you.

Good afternoon, everyone. It's a pleasure to be in this results call for the company. And I'm very happy to share with you how much progress we've made on our journey. When I took the position of being CEO for Light, I knew what challenges were ahead of me. But myself and the other directors who join me on this path know what can be done, and they know the real potential of this company. Earlier this quarter, we concluded our 100-day plan. We've renewed our Board of Administration. We are now made up of all independent members, of which 1/3 are women. Our operational and financial strategy and our long-term plan have been defined. And moreover, we're implementing a management model that is tested and that will ensure that we reach solid results. One of the pillars for our administration is to fight energy theft, a historical challenge in our distribution company, which is in charge of the second most complex concession area in Brazil. We adopted a strategy that involves discipline and taking the market focusing on operations and including routine operation -- inspections, regularization and incorporating clients to our base as well as replacing obsolete equipment and implementing new technologies. We are also continuously training and managing our field teams. They've been tireless, even despite the challenges created by the pandemic, which shows the commitment for all of our team. From the beginning of the year, we've invested over BRL 170 million in energy theft combat actions to improve our collection. We invested 40% more than in the first 6 months of 2020. At the distribution company, we've already seen that collection has improved for the second quarter in a row. We reached 96.7%, a major advance versus December 2020. We have to highlight that Rio de Janeiro, when it is compared to other states in the Southeast, presents the slowest pace in its economic -- and the recovery of its economy because it's based on commercial and services industries. So major consumers like shopping malls have reopened, and they're starting to go back to the same power consumption levels that we had before the pandemic. But the recovery of the market that services small retailers and street stores is slower. As population vaccination rates increase and as more activities in the service industries are allowed and as people circulate more, we expect that the state will recover at a faster pace. Regarding losses. During the second quarter, our total loss was 26.85%, a reduction of 0.33 percentage points versus the first quarter. It's a small advance, and we're working hard to turn it into a trend. Currently, the difference between it and the regulatory level of tariff losses is 7.55 percentage points. Therefore, there's a long way to go, and there are no shortcuts to reach sustainable results. At the generator, even with a challenging scenario, we have minimized the impact on this quarter, and we posted an operational result only 9.4% below the second quarter of 2020. We're also working preventively to mitigate the risks of increased exposure to the short-term market, GSF reduction and increased prices for the second half of the year, as Barroso will discuss later on. Our commitment to sustainability is not recent. ESG is a part of our business. We provide an essential service, and we make sure that the population has quality of life. And we play a very important social role in all of our concession area. And we have a power-generating plant that is 100% renewable. We've worked to leverage these advantages and with our Board to strengthen the company's ESG agenda. Recently, we created a specific committee to assist the Board, the ESG+ Committee. This year, besides our operational and financial metrics, the goals that make up my variable compensation include ESG indicators connected to diversity, waste and reforestation. In that context, I'd like to share with you that this Wednesday, we successfully concluded the first issuance of Light sustainable bonds. I'd like to conclude by saying that we continue to be strong and confident that we're on the right path. We're shaping a new company, one that is more efficient, dynamic, agile and modern. The light of the future. I'll now pass the floor to Barroso, our Financial and Investor Relations Director, who will discuss this quarter's results in more details. Barroso, over to you.

Thank you, Nonato, and good afternoon, everyone. It's also a pleasure to be here to share our results for the second quarter. So going to the second slide of our presentation. Here, we see what build sales were like during the second quarter of 2021. We had an increase of 5.8%, and we finished at 6,176 gigawatts built. We haven't recovered the prepandemic levels yet, but it was the first step in a recovery as vaccination goes up. We grew by 339 gigawatts this quarter. And when we exclude the utilities, which reduced our percentages by 35%, we don't lose EBITDA here because we continue to get the connection cost. But when we look at our total market, it went up 9.7%, the captive and free market when we compare it to the second quarter of 2020. When we look at the market, residential went up nearly 4%. Industrial was the biggest highlight with a 17% growth, which is above the level we had before the pandemic. But commercial is still recovering slowly. In the second quarter of 2020, it dropped by 28%. Our growth was 17%, but this is still the segment that is recovering slowly in our concession area. Looking at the grid load in the last 12 months, we can see that the growth was 1.5%. And when we look at our total consumption, 32% came from free clients and 62.4% from captive clients, especially the residential market but also commercial. Looking at Slide #3, we see losses in the company. There was a reduction of 35 gigawatts this quarter, and we finished at 9,512 gigawatts. Our reduction was 0.33 percentage points. So we went from 37.18% to 26%, which is still 7.55% points higher than the implicit loss level in our tariff. When we look at our nontechnical losses, our reduction was 69 gigawatts in this quarter. So this slide also shows our nontechnical losses separated into conventional approach area and the special approach area. So the special approach area was at 60%, and 40% of nontechnical losses are in the conventional approach area. So this expansion of the conventional area is due especially to our work in 8 communities, which were classified before as special treatment areas. Besides that, since the temperature was slightly lower this quarter than in the second quarter of 2020, losses in special areas where you have more fraud is also reduced. Continuing with the next slide. We see how our collection rates have improved and also our ADA. The biggest highlight was our collection, which grew 1 percentage point from 95.7% to 96.7% on our gross operational revenue. When we look at our collection rate per segment, we can see that it was higher across all of them. In retail, it went up 0.9 percentage points. And from large customers and from the government, we had 1.2 percentage points gain. This allowed the company to reduce the provisions it had for doubtful liquidation credits. So we can see that we were able to go down to 3.2% in ADA per gross revenue in 12 months. So this was a reduction of about BRL 100 million in provisions this quarter. Continuing with the next slide. Here, we see the evolution of our operational quality indicators. Once again, we were able to improve our operational indicators both in the duration of interruptions as well as their frequency. We can see the EOD and EOF were below the limits established by our concession agreement. And this shows that we're on the right track. We're assertive in our pluriannual investment plans and in our preventive maintenance activities. We're proud of being among the 3 best distribution companies in the country in quality. So we were third for our EOD and second -- we were the second best EOF among our utilities with 1 million customers or more. The next slide shows the indicators that confirm we're on the right track. As Nonato said, earlier this quarter, we concluded our 100-day plan. We're implementing a management excellence program. And we have several actions being implemented in the field such as team management, training our electricians, training our entire field team, and this has brought short-term results already. Normalizing clients, for example, went up by 114%. The number in the first half of 2021 was that much higher in comparison to the first 6 months of 2020. We were able to normalize 118,000 clients during this period. Our team productivity also went up by about 50% in the first 6 months. Another example that we can highlight here is the percentage of right selections in choosing the clients, and we went up by 21 percentage points. So our detection went up from 33% to 54%. These results give us the confidence that we will be able to advance with these results in the next quarters. Slide #11 shows our Generation business. We know that we're going through a water shortage moment. And that, of course, creates an additional challenge. So we showed here how we -- what are the seasonal effects in our guarantees. So we follow the MRE profile, and we leave more energy volumes for the second half, which is what we expected was going to be more challenging when it came to our GSF. The right-hand side graph shows our contracted capacity for the next years until 2026. So in 2021, we started the year with 19% of energy not under contract. But considering the water situation, we have preventively purchased power from the beginning of the year for the second half. We didn't want to keep it too long and have to buy energy in the market at PLD prices. We're also comfortable with 2022. We have 28% of energy not under contract for 2022. And we believe that's going to leave us at a very comfortable level so that we can do active management and avoid any potential losses for GSF next year, too. Continuing with Slide 12. Here, we see our optimized power balance. We were very careful from the trading perspective for the second half of 2021 and for the first one as well. Given how much prices are higher, we have traded less energy during this period. So we were able to hold the results from the Generator despite the GSF conditions that we had during the second quarter of this year. The right-hand side graph shows how we got prepared to avoid any kind of exposure in the second quarter of 2021. According to our assumptions, we would have to buy 110 average megawatts during the third quarter and 43 for the fourth quarter of 2021. But we have already purchased 123 mega for the third quarter and 46 for the fourth quarter of 2021. So that covers our potential exposure based on the current scenario. And this was purchased at a price of BRL 275 per megawatt hour. So that avoids some exposure to PLD prices, which right now are at BRL 584 per megawatt hour. So this strategy prevented any potential disbursements of BRL 100 million for the second half of 2021. Continuing with the next slide. Here, we see how consolidated adjusted EBITDA evolved for the second quarter of 2021. We were able to go up from BRL 145 million to BRL 386 million. The biggest increase in EBITDA came from distribution, especially because of the higher VNR, which is an update of BRR during this period because of inflation and also from operational improvement with lower manageable costs and expenses. PMSO expenses were down 8% this quarter versus the second quarter of 2020. We were also able to reduce our PCLD, as I mentioned, by about BRL 100 million given our improved collection. And we also reduced contingency provisions given that there is less litigation against the company now. So we also had a reduction of 9%, as Nonato mentioned. But when we add up the results from generation and trading, with our strategy, we were able to increase the company's EBITDA by BRL 15 million for the second quarter of 2021 versus the second quarter of 2020. Continuing on the next slide. Here, we see our net results. So we went from a loss of BRL 45 million during the second quarter of 2020 to a profit of BRL 3 million during the second quarter of 2021. Most of this result came from our adjusted EBITDA, as I previously mentioned. And this was hedged by our financial results, especially the pricing of our swaps and bonds, which are protection mechanisms or buffers against exchange rate variations. We also had a depreciation due to inflation, IPCA and also a higher CDI rate this quarter. Continuing with the next slide. Here, we see our robust cash position this quarter and also how our debt profile improved. Our cash was over BRL 6 billion, and we were able to improve the company's debt profile this quarter from an average term of 2.1 years to 3.3 years. So we managed to conclude 2 relevant financial operations. The first, a $600 million bond set to expire in 2026, which was 100% swapped to CDI. And we were able to capture infrastructure debentures with a 10-year maturity. That's 5 years more than our concession, which underscores the confidence that our investors have in that we will renew this concession. With subsequent events, we were able to pay the bonds that were due in 2023 amounting to BRL 2 billion, and we are also able to issue a new BRL 500 million debt this week that will come to maturity in 2028. So on leverage, after paying the GSF debt with Light Energy, we finished at 2.6x net debt to -- excuse me, 2.06x the net debt-to-EBITDA ratio, which is far below what we see in most of our contracts. Our net debt was BRL 6.2 billion. When it comes to the cost of the debt, we were basically flat. The nominal cost was around 7% a year. In actual terms, we were able to have more reduction of the real cost of the debt. When it comes to debt indexes, we'd like to underscore that we don't have any dollar exposure. 2/3 of the debt are backed by the CDI and 1/3 by IPCA. Finally, we have our ESG agenda, which has gained a lot of traction in the company. As Nonato said, in April this year, we elected a new Board of Directors with 100% independent members and 1/3 of women. The Board has been very active. In this short amount of time, it's already created an independent committee made up of members of the Board specifically for ESG+, and we're going to go into our sustainability agenda for the next quarters. This new Board has already approved goals for the new directors, the new Board of Directors. So we have diversity goals, waste reduction goals and also reforestation goals for Nonato and for several of the company's directors, also executives and topic owners. And finally, we'd like to highlight that among the BRL 500 million issuance this week, BRL 400 million were social. And that is the first issuance from Light that was sustainable, and it's underlined by the benefits created by the Nilo Peçanha Dam for Rio de Janeiro. Thank you for listening to our presentation, and I'll now pass it on to Rodrigo, who's going to organize the questions-and-answers session. Thank you.

Thank you, Barroso. So we'll now begin the questions-and-answers session. [Operator Instructions] So we'll pass it on to Andre Sampaio from Santander Bank.

I have a quick question here. I'd like to understand from you what is your expectation on the regulatory discussion on the loss of methodology. From our point of view, I think that's the most important point so that we can begin the tariff review discussion. So I'd like to hear from you how this has been moving forward. We know that there's a lot of demand on that. So I'd just like to get a time frame on when that will be concluded.

Thank you for your question, Andre. We are keeping an eye on that along with the technical area and also with the agency's director -- Board of Directors. As you mentioned, they have several items in their pipeline, but that item, which is public hearing 29 from 2020, is quite mature in the agency from what we understand. All the distribution -- all the distributors and all the -- all of society have sent their contributions. The technical area has analyzed and we believe that they are concluding their contributions. And we expect that in the next months, there will be a technical note concluded for the directors to appreciate. We believe that by the end of this year, this will have been concluded and approved by our Board.

If I can add to that question and if I can connect it to tariff revisions. So when do you believe that public hearing will take place?