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

Good afternoon, everyone, and welcome to Light's Earnings Conference Call for the third quarter of 2021. My name is Rodrigo Vilela, and I will be hosting this event. This event will be held in Portuguese and translated into English. If you'd like to listen to the translation. All we have to do is click on the interpretation button on the lower bar. So this presentation and all of the comments will be made by our Financial Director and Investor Relations Director, Gisomar Marinho. We also have our CEO, Nonato Castro. The presentation is already available for download on our IR website, but you can also watch it here on Zoom. [Operator Instructions] This webinar is being recorded, and its audio will be made available on our IR website. This is our disclaimer. We'd like to clarify that any statements made during this conference call about the company as a business perspective, any injections and financial and operational goals are simply beliefs and assumptions from Light's Directors and they're based on currently available information. These remarks are not a guarantee of performance. They involve risks, uncertainties and assumptions. They refer to future events and therefore, depend on circumstances that may or may not occur. 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. After that, I'll pass it on to Nonato Castro. Nonato Castro, over to you.

Good afternoon, everyone. It's a pleasure to speak to you again. And we're going to be talking about our achievements for the third quarter of 2021. there have been advances in combating energy theft and improving collection. We significantly extended the number of normalizations in hotels and households and also in some communities. Obviously, we also significantly replaced obsolete gauges. We implemented new guidelines in the billing process for normalized clients. To expand our collection and guarantee sustainability to the entire process, taking into our clients background and their economic reality, that creates an incentive for them to remain in the formal market so that they can integrate our clients bases. Our total loss ratio for the third quarter of 2021 was 26.67%, down 0.17 percentage points versus the second quarter. This is due to educational processes, which takes time and is repetitive. So it's very common to go back to hotels, to houses 2 or 3 or 4x until you get -- until it becomes expensive to try to create illegal connections. So again, this 26.67% is a reduction of 0.17 percentage points. We have to remind you that combating losses is a long-term effort. It requires dedication, planning, understanding and our aim is to build sustainable results. And this loss plan should be connected to collection, increasing collection. We're advancing a different project in our communities, initially in 4 locations. In areas where you have traffic -- drug trafficking commanding the area. So we are making our presence known in these communities. We created a community relationship management. But not only was it created, but managers are people who live in these communities for over 40 years. So they're the community manager that creates this interface between the company and the leaders of the community as well as the entire community. We have a permanent relationship with 200 community leaders. So we have constant meetings with them. And the guidelines for our plan were based on, first, having a presence in these communities, which we already have; and also benchmarking ourselves with different companies in the country. We want to adapt bills or adequate bills to their -- to how much they can afford. So we were able to reduce the ICMS tax, which has already been approved. So it dropped from 32% to 12% in communities. And we're moving forward with other incentives with ANEEL, which showed that this is a great possibility. The use of local labor, building up citizenship, we're creating streets. In communities, often there are no addresses. When people get the mail, they have to find their names and mail boxes and so on. So we have to guarantee sustainability, discounts and purchasing, as I said. The quality of our service and the advance that Light has had is not up for discussion. We have great assessment rates in Brazil and our complaints rates are much lower than what is established as the minimum for ANEEL. We have a robust investment plan. We're modernizing our grid and substations, and we're centralizing our operational centers. We had 5 of them throughout the state. And now we have 1 operational center. So we've increased our quality. We have better productivity with our teams and we're learning and perfecting our technical indicators of the company. Considering generation. We've been facing a challenging water supply, there has been a shortage of rainfall. GSF has also reached historically low values. But we are managing our hydrological hedge throughout the entire first half of the year. And it's led to economic results in our Generation. Considering our debt and cash management, it's important to underscore the captures that we had during this quarter, which improved our profile -- excuse me, our debt profile, extending our average term from 3.3 years to 3.8. Last Wednesday, we liquidated 1 more issue of BRL 532 million in 5- and 7-year series. By the way, this has been very well accepted by the market, which shows the confidence that investors have had in our work and in our ability to generate results. We're very used to doing that. Our cash remains robust so that we can meet all of our obligations. With regard to sustainability and management, our team's experience in ESG has contributed towards perfecting our in-company discussions and creating engagement with the entire company. We created an operational ESG Committee, which looks at our ESG goals every month, and it also goes into the directors' variable remuneration as well as executives and the technicians under each topic. So these goals include diversity, waste and reforestation. Light's management model aims to obtaining the best routes, the best procedures, the best follow-up and reaching all of the challenges that we set for ourselves. Having excellent processes is a major competitive edge, and it allows us to reach all of the goals that we lay out with our stakeholders, with our Board, with our investors and so on. I'd like to highlight to conclude that our work going into communities is starting to advance. Our management model is being put into practice with our meetings, with weekly follow-ons. Everyone is trained and we're thinking about the recovery that is working with our employees. Again, at a scale at first, but so that we can go back to seeing clients in person and so that we can advance with the company's results. That's all. It's a pleasure to be here with you, and I'll pass it back on to Rodrigo Vilela.

Thank you, Nonato. I'm now going to hand it over to Gisomar, who is going to talk about our results.

Thank you, Rodrigo. So continuing on the next slide, where we have some information about the build market. So the total energy market for the third quarter was 5,704 gigawatts, 314 gigawatts below the third quarter of 2020. Captive clients consumption reached 3,484 gigawatts, which represents a reduction of 7.7% and free clients had a consumption of 1,985 gigawatts, which represents an increase of 10.8%. When we look at the right-hand side of the slide, we see invoicing or consumption per class. As we can see, the residential class had a reduction of 6.2% in the volume build in the third quarter of 2020. This reduction was due to a lower temperature during this time, which was 1.7 degrees Celsius below average. As a reminder, the main residential or rather, the main classes in the company are residential and commercial. Continuing with commercial. If we include free and captive clients, we had an increase of 0.3% versus the same quarter last year. And this was due to increased consumption, especially in condominiums, and fuel stations. However, we have to highlight that clients from the commercial class, which were smaller, still haven't gained traction due to a slower recovery in our economy in Light's concession area, which has been very impacted by the pandemic. The industrial market posted a growth of 7% in the third quarter of 2021 versus the third quarter of 2020. It continues performing well as in the last quarters, mainly boosted by clients in the steelwork industry, which have had a great demand, and that ends up benefiting us. Considering utilities. During this third quarter, there was a reduction of 47.7% on a yearly comparison. However, these results are consequence of a lower consumption from utilities across our border and our concession area. And that also includes the temperature factor, which led to a reduced consumption. Now looking at the total energy market without utilities. For the third quarter, there was a smaller reduction of only 9 gigawatts hours, so minus 1.8% versus the same period last year. Looking at our total consumption, we can see that it's still a stable basis. 61% of consumers are captive, around 35% are free and 4% represent utilities. Continuing on Slide 7. This shows our losses in gigawatt hours for the last 12 months. we have to highlight here that this is the second quarter in a row in which we posted a reduction in total losses of 198 gigawatt hours. With these results, the total loss on grid load was 26.67%, down 0.17 percentage points versus the second quarter of this year. If we compare the total loss by grid load in this quarter, and the regulatory losses or threshold, excuse me, we're still above by 7 percentage points. However, this quarter, we also have regularizations going up by 60%, reaching 29,000 regularized consumers. This is due to an inspection program, which we expanded and also a robust initiative to replace obsolete gauges. And we had over 8,700 gauges replaced. Since April 2021, we have focused on a new guideline in our billing process. so that we can increase collection and bring more sustainability to the process. This initiative aims to increase our collection, first of all, both conventional and monthly consumption and also allow clients to remain in the formal market, which generates and increase in the company's future build market. Growing losses in the conventional area as we can see here in these pie charts from the first quarter of 2021 is due to the migration from some regions, which used to be classified as special areas, which are now being classified as a conventional area. This is due to the effort we've made to connect these clients again. However, these regions have elevated loss ratios, which make our conventional area reduce a bit. Another factor that was important here for this increase of our conventional area was that throughout the year, we have suspended clients who were connected early last year -- were reconnected last year, who were located in the conventional area. This led to impact on how we build these areas. And as a consequence, it had repercussions for our loss ratios. Moving on to the next slide, where we talk about our company's collections and ADA. Can see that the total collection rate for the last 12 months at the end of September 2021, reached 96.2%, meaning that it was 0.5 percentage points under what we had in June 2021, which was 96.7%. However, it was 1.3 percentage points higher than our collection in September of 2020, which was 94.9%. This indicator syndicator has been impacted during this quarter by a higher billing in September due to the highest temperature measured in the month and also a new tariff due to the water shortage, meaning that our total will come to term in the next month. So that was a higher collection, but that ended -- excuse me, higher billing, but that ended up damaging our collection for this month. Considering our improvement process, we had several processes, which were improved such as increased volumes and ports, administrative actions, negotiations, using a cognitive URA (sic) [ ARU ] for billing, payments through credit cards and debit cards and also using credit cards for payments in installment plans of up to 24 months. In October, we started offering the PIX payment scheme as a new payment modality for the company. We now continue on the next slide -- excuse me, on the next graph showing that the ADA per gross revenue was 3 percentage points higher than what we saw in the second quarter of 2021. However, our ADA for the third quarter of 2021, which was BRL 245.8 million. So basically 42% above what we posted for the third quarter last year, which was BRL 173 million. It was impacted, it had a nonrecurring impact from a provision for 1 specific client who is undergoing recuperations. And if we look at our PCLD for the 9 months. In the first 9 months of 2021, it was around BRL 518 million. That was in line with the same that we had -- excuse me, the same ADA that we had last year. So if we exclude this effect, the ADA of BRL 40.5 million, which is one-off, our actual ADA would have been only BRL 205 million in the third quarter. And our ADA over gross revenue indicator would not be 3.5%, but rather 3.3%. The next slide shows our operational levers to fight delinquency. Throughout the last quarter, during the third quarter this year, we had, as our goal, to perfect our collection efforts. According to the graphs on this slide, you can see how it evolved. The lower left-hand graph shows that the number of clients not read or with reading errors are constantly going down. In fact, in September, we reached the lowest level ever in this indicator. Still in the third quarter this year, Light implemented, as I said before, the credit card payment method, allowing clients to pay their entire debt in 24 installments. Currently, all of our collection teams have card readers and are able to offer this kind of payment option when they visit a client. With the new procedure, over 11,000 clients have already used this new payment mode. And as I said, to underscore it again, in October, we created a new payment method for our clients by using PIX and a QR code, which is available in all of the bills issued by the company. We also have a digital wallet with PicPay and reward programs and cashback. This is all to increase the company's collection rates. Continuing with Slide 10. Here, we see our operational quality indicators, and it has been improving over the last years in the company due to all of the investments that we made throughout the last 5 years or so. EODI and EOFI in the last months or actually for the third quarter of 2021 was 6.66 hours. So a reduction of 3.1% versus June 2021. On the other hand, our EOFI also reached 3.78x, about 8.9% lower than what we saw in June 2021. Both indicators were performing below the limits established by ANEEL and our concession contract. Both EODI and EOFI in Light had their best results in the last 20 years. According to ANEEL, we are among the top 2 distributors in this category, in the category of distributors with over 1 million clients and a concession area. The next slide discusses the effects of -- excuse me, the seasonal effects and the hydrological problems that the company has faced. As Nonato said, water scarcity has increased costs in 2021. It was at its highest level until September 24. And that's why GSF reached historically low levels. Light Energia has been affected by this entire situation. So in the third quarter of 2021, the allocated energy after GSF adjustment was only BRL 317 million average megawatts to meet a demand of 456 average megawatts in energy sales contracts. So as part of our strategy, we have left a relevant part of our physical guarantees uncontracted. In 2021, 18.5% of the energy totals are allocated for this end. This part of the nontraded energy is used to mitigate the effects of seasonalities and variations in GSF throughout the year. Due to seasonal contracts, we also managed to reduce the allocation of energy sales by 14.7% versus the third quarter of 2020. On the other hand, we saw an increase of 195% in the free market. Now to look at our optimized power balance. Prudent managing of our hydrological hedge in the first half of 2021 has allowed protecting our economic results in our Generation business, which guaranteed the robustness we needed to face the most severe part of the water shortage. So Light Energia, purchased 135 average megawatts earlier at lower prices than the PLD in the third quarter. This was a great strategy, which led to an exposure of only 4 average megawatts at the end of the third quarter of 2021. Continuing on Slide 13. Here, we see the impacts of our adjusted consolidated EBITDA in the company. In the third quarter of 2021, our adjusted consolidated EBITDA was BRL 413 million, down 29.6% versus the same quarter last year, which had about BRL 587 million. If we disregard that nonrecurring ADA, our adjusted EBITDA would have been BRL 453.6 million. Looking at our distribution EBITDA for the third quarter of 2021, it was BRL 283.2 million, which was a reduction of BRL 110 million versus the same period last year. This was basically due to increased ADA and legal contingencies that took place between the 2 periods, which was partially offset by a lower PMS, due to the implementation of a new management model, where we try to have more control and better management for the company's expense. Excluding nonrecurring ADA costs, as I said, BRL 40 million, it would have been BRL 323.7 million. In Generation, EBITDA for the first quarter was about BRL 102 million, down 46.5% versus the third quarter of 2020. This reduction was due to a worsening of the water scenario throughout the year, as I said, which reduced our GSF and an increase -- and led to an increase of our PLD. And that also raised energy purchase prices. Our trading EBITDA, however was basically BRL 32 million for the third quarter of 2021. It was a growth of 284% versus the BRL 8.5 million in the third quarter of 2020. This was due to better results in trading during this time. And the average sales price was 41% higher than what had been used in the third quarter of 2020. Let's continue with the next slide. Should we see the company's net income in the third quarter? It was BRL 364 million. So this income versus the BRL 136 million from the third quarter of 2020 came from the results of the distributor and the trader. They both have profits of EUR 374.5 million and EUR 22.5 million, respectively. Results from the distribution company were impacted by a ruling from the Supreme Court in Brazil in September, which recognizes an amount of BRL 540 million that is owed to an incorrect charge-off income tax on net profits due to an update in SELIC. This was based on an IBRACON communication number 9, from October 29. So this is our results of about BRL 540 million in the third quarter. In the Generator, we had a negative result of BRL 31 million this quarter, as we said, due to the severity of the hydrological risks, which affected the company's consolidated income. Our financial results were also negatively impacted by the market price listing of our net -- debt swaps and also a higher IPCA and CDI rates throughout this period. We now continue on Slide 15, showing the company's cash position. As you can see, it's robust, and our debt profile has improved over this year. As we can see consolidated net debt at the end of the third quarter was around BRL 7.1 billion, 13.6% above the position we posted in the third quarter, which was BRL 6.2 million. For the third quarter 2021, we have to highlight that we have the seventh debenture issuance in Light Energia, our generator. In 2 series, at a total value of EUR 500 million with a term of 2028 and a final remuneration of CDI plus 1.2% a year. The first series, for EUR 100 million was classified as a sustainable debt bond and was accredited by the Veritas Bureau. All of it will be entirely used to invest in improvement in the Nilo Pecanha and Ilha dos Pombos water plants. The distributor also captured a USD 400 million from Citibank. That represents about BRL 217 million to reinforce its working capital. This operation is due in 2025, and we'll have a swap until the end of the debt at a cost of CDI plus 1.85% a year. In this quarter, we also concluded the total payment for bonds from Light SESA and Light Energia due in 2023. And we also hedged the entire debt from the -- from Light SESA and Light Energia with Citibank, a total of USD 160 million, which represented about BRL 828 million. And we also liquidated the hedge connected to that debt. Concluded these operations during the third quarter allowed the company's debt profile to be improved and the average term to be extended from 3.3 years at the end of the second quarter of 2021 to 3.8 years. We have to highlight that the operation that we just concluded will have a subsequent event of BRL 517 million, with 20th debenture from Light SESA. And it will also extend our debt maturity. So to conclude this slide, we can see that the net debt-to-EBITDA indicator for the third quarter was 2.44x, slightly above the 2.06x in the second quarter, but far below our limit, which is established for most of our debt contracts, 3.75x. I'd also like to highlight that when we look at our debt indexes, 45% is indexed by the IPCA and 55% by the CDI. And the average maturity is quite long as you can see here in our amortization schedule. The next slide mentions some of the advances that we've had on our ESG plan. So throughout this period, we created an operational ESG committee, which will track our performance against ESG targets every month, and they're factored into our executives' variable compensation. These goals are related to diversity, waste management and reforestation. We also had engagement workshops about ESG with employees, and we created an ESG Maturity Index for our partner companies. We're now updating and perfecting our materiality matrix, considering not only the current scenario with the demands of our stakeholders, but also including new analysis filters. Finally, we launched LightCast, a podcast for our employees with 4 episodes where each one discusses the best ESG practices and what our targets are. And now we'll pass it on to Rodrigo so that we can begin the questions-and-answer session.

Thank you, Gisomar. So we will now begin the questions-and-answer session. [Operator Instructions] We have a question from Marcelo Sá from Itau.

I have a question about cash generation, which really draws our attention. There was a strong growth of the net debt in the third quarter. When we look at the regulatory assets and liabilities, we can see that there was a cash reduction of over BRL 500 million this quarter. There's another thing that was not very clear for me. The use of credit in the PIS/COFINS taxes. You included that explanation, but you mentioned it was BRL 1.9 billion from credit that has already been used and BRL 700 million for the payment of income tax, which would be BRL 1.2 billion net. So my question here is, if you have a negative ruling from ANEEL, that goes against the company's understanding if you have to return a part of it, would you return BRL 1.2 billion? Or has a part of it already been included in the company's fees or tariffs? I know that you included some in your account, but I don't know how much you would need to give back in case of a negative ruling. If you can tell me a bit about what happened in your cash generation for this quarter, I would appreciate it.

Okay. So to answer your question on cash generation. I have to remind you that we had amortizations. As a reminder, when you compare one quarter to the next, you have some of the resources from the second bond without the liquidation of the first. So the first event that burn cash was the liquidation of the bond that was going to come to terms in 2023. Also throughout this period, there was an issue of investments to go into our remuneration basis. The latest on a quarter, that also impacted our CapEx. And you had the company's normal costs. And Marcelo, on the PIS/COFINS credit issue, we have returned in the tariff readjustments that took place in March, we returned BRL 374 million. As a reminder, out of the total, we recognized in the third quarter of 2019, which was BRL 6.2 billion, we used BRL 1.7 billion. Out of that, we have to remember that about BRL 700 million was to offset taxes from recognizing this credit. The scenario we're working and is credit for consumers. And that's our base scenario, which we expect to be recognized by the regulators.

Great. And just a few follow-ups. You mentioned BRL 300-and some has been returned. So the net effect, I know that you're working with the best case, but if you have a negative ruling, you would have to give back BRL 900 million to BRL 800 million. Is that right? Would that be the difference?

Right. So considering the change in accounts. We had BRL 6.2 billion in the third quarter, and we deducted BRL 1.7 billion. And on the liability side, we had [ BRL 3.7 billion ] on credit returns to benefit consumers, and this was passed BRL 378 million of it was passed in the tariff. So we have about BRL 3.3 billion left. If -- and this is not the base case, as you said, if we had a negative ruling, we will have to complement this provision to the values that would balance assets and liabilities. As a reminder, in this case, as I said, the company used BRL 700 million from our own credit to collect taxes after this ruling. So again, this is not the company's base case, but if there is a transfer of it, the total amount to consumers, that payment would not be a part of this calculation.

Yes, that's very clear. And what I had mentioned was BRL 1.2 billion and not BRL 1.9 billion because that would already be the net effect. Another point on cash generation. I understand that you had a lower EBITDA this quarter, but and higher CapEx because getting new debt should not affect your net debt. So the difference you see was not impacted. So it really would be a lower EBITDA or I don't know if you had any different level of working capital during the quarter, that justified it and that could continue in the next quarter. So that's the concern considering the difference in net debt from one quarter to the next.

Right. Exactly as you said. In 1 quarter, we had a lower EBITDA, lower cash generation. And besides that, we also had the final CapEx split that we had to use to go into the base. But in the future, that cash need for investments is going down, considering that most of it has already been concluded by September 30 to be considered in the remuneration base.

We got a question from [ Guilherme Lima ]. And he is actually asking 2 questions. His first question is, what did we think about the technical proposal from ANEEL about loss methodologies? And the second question is, what is your expectation to generate cash in the short term considering the use of fiscal credits? Do we still have the PIS/COFINS credit to use? We have already answered that. And what will be the effect of the BRL 540 million from the third quarter of 2021? Well to answer your first question about the technical proposal from ANEEL. I'll let Alessandra answer. She's a regulatory director, and she's going to give you some comments from the company.

So in our assessment, this technical note is positive. It can be perfected, but it agrees with our understanding on special areas or special risk areas, which is the term that the agency uses. In general terms, the new technical note has some new possibilities for Light. It allows us to be more flexible in regulatory losses for companies that have restricted assets. And the restricted assets is characterized by a restriction in the mail delivery in some ZIP codes. Light agrees with it completely and believes that it can benefit from this new flexibility. This is not concluded. It will be discussed again in the next ANEEL meetings and also should affect the tariff review process for Light. This percentage that you mentioned is an estimation. Our estimation is a bit higher than that, but it's important to highlight that it still doesn't consider these flexibilities. So in general, we understand that the new technical note from CPI 29 was positive, and it takes into consideration the specific characteristics of the complexity of our concession area.

Thank you, Alessandra. Now to answer your second question. As I said, a part of it has already been answered in the first question we got, considering the PIS/COFINS credits. The question is, how will the BRL 540 million recognized as a result for the third quarter be recognized as taxes paid? Well, according to accounting norms, this can be used in any credit process with the IRS. Once the credit has been approved, then we'll start to offset them, and it will generate a cash effect. So right now, it's only an economic effect, and the cash effect will come later after the credit has been accepted by the Brazilian IRS. [Operator Instructions] So we got a question here from [ Philippe Andreoli ] asking if the BRL 540 million in credit have any overlap with the BRL 700 million paid when the company got PIS/COFINS credits in 2019. Gisomar?

Yes, if -- based on the ruling from the Supreme Court, you can get credits from the last 5 years. In our specific case, the most relevant impact was the payment from the credits we got in 2019, which was around BRL 700 million. So yes, there is an overlap.

We also got a question from Philippe Molina from Itau about the execution schedule for the bypass tunnel. Alessandra?

We have already concluded the executive project this month, and we began the field part of the bypass tunnel. Our plan is for it to take place throughout 2021, 2022 and to conclude in the first quarter of 2023.

Thanks. So [ Philippe Andreoli ] has a follow-up question about what the recovery process is like for the BRL 440 million? If we are recovering according to 30% of the taxes to be paid in every fiscal year or given that the BRL 700 million were not paid in cash, but in credit, if there is a faster way of recovering the BRL 540million?

Actually, you're not only going to get the 30%, you can recover it based on any federal taxes payable. So once it's approved, you can use it to deduct not only in the 30% limit related to the payment of income tax and social contributions on net profits, but also on other federal taxes, which don't have that limit.

And we have a question from [ Fabiola Gomez ] about the company's expectations for a new liability management exercise to extend the debt or to reduce its cost if we consider any bond issues.

No, we're in our liability management strategy. So considering the international market, the bond we issued this year, has already been used to extend our debt. And right now, we don't believe that is necessary.

[Operator Instructions] We got 1 last question from Pedro Luiz about the CapEx and estimated returns for the bypass tunnel investments.

So this tunnel will allow us to have greater operational capacity to manage our plants. The CapEx is about BRL 400 million, and we -- and got 100% of the investment recognized as an asset in our remuneration base.

So thank you all for listening. On behalf of the company's executives, we'd like to thank you all for listening. And we're now open for any additional questions you may have had. Thank you, and have a good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]