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

Good afternoon, everyone. Welcome to Light's First Quarter Earnings Call. I'm Rodrigo Vilela, I'm the IR Director. I'll be the host of this call. This is in Portuguese, but there is simultaneous translation into English. [Operator Instructions] The presentation will be made by the Finance Director and IR Director, Gisomar Marinho; Mr. Wilson Poit, our Chairman; Mr. Nonato Castro, our CEO, will comment on this call, too. All the directors will be taking part of the Q&A. The presentation can be downloaded at our IR website. [Operator Instructions]. This webinar will be recorded and it's available at the IR website. I would like to say that any statements that may be made during this presentation about business perspectives, projections, operational and financial goals are based on beliefs and premises on the senior management of Light as well as currently available information. Future considerations are not performance guarantees and involve risks, uncertainties and premises. They refer to future events and depend, therefore, on circumstances that may not occur. General economic conditions, industry conditions and other operational factors may affect future results of the company that may lead to results that are materially different from those that were expressed in these future statements. I would like now to turn over the floor to Mr. Wilson Poit.

Good afternoon, everyone. We all know that the market wants results, and they've been demanding these results. I've been in close contact with investors talking to them, listening to them, and that's my message to you. All we have to do is work hard, and I can't ensure that I am personally working with the senior management, our Board of Directors and our CEO, to generate results. And we're always showing this evolution to you with facts and data. Our #1 challenge, which is to reduce losses, this is something that can be addressed overnight. But rather, this is the path we decided to take to get sustainable and long-term results, doing the right thing with no shortcuts. We do have some results to show you today. Nonato and Gisomar will be sharing that information with all of you. But let me highlight a couple of things for today. The loss despite very limited numbers, that has been going down, and that has happened for the fourth quarter in a row. Our billing is on the rise quarter-on-quarter getting back to previous levels, and there is room for further improvement. The costs and expenses of the distributing company are going down, too, despite their inflationary pressure. We have been heavily investing both to strengthen our grid infrastructure, loss proofing and also in IT providing benefits to operations, customer service and cost reduction as well. We know we still have a long way to go, but major achievements are the result of smaller accomplishments, and we have to celebrate these small victories that are taking place on a current -- on a regular basis. We're confident we can change Light, and that change is currently underway. I'll turn it over to our CEO, Nonato.

Good afternoon, everyone. We are more and more convinced day in and day out that we're heading in the right direction. We're focused on creating results in several fronts: losses, billing, contingency, costs and operational expenses. Results are already showing. We have taken important steps in the direction of building this light of the future. Tariff review that was concluded back in March was very positive to the company. ANEEL has acknowledged the good work we have been doing with the challenges in that concession industry, based on a new regulatory model that will address the complexity of our concession. The conclusion of the process has brought positive results to both EBIT and the cash for the distributing company, about BRL 770 million a year, BRL 542 million in 2022 alone that ensures for that 5 cycle -- for the 5-year cycle, total gains worth of about BRL 2.8 billion. With those results, we are confident to move forward with our result generation process based on well proven model, and we keep on adapting our consistent trajectory to focus on cost, customer service, quality of service, to improve billing and reducing losses. Improving expenses on the distributing side has helped our EBIT, BRL 525 million this quarter and over 25% increase as compared to the first quarter of 2021. We are committed to optimizing costs and expenses, and in 2022, we have a much more streamlined budget. Next month, we expect to conclude a well-disciplined 0-based budget with the Galeazzi consulting company's support. We have kept robust investments aiming at having excellence in products and services, BRL 330 million in that period, that would represent over 50% of what was done in the first quarter of 2021. Almost half of that amount was allocated in commercial activities, especially those to fight losses. As to operational performance, Light is the second best at FEC and the fourth in DEC that improves the quality of the service we provide to our customers, and we keep getting excellent results. DEC, in fact, are below ANEEL standards in our concession contract that represent the best performance in 20 years' time. Second place, in FEC and fourth in DEC. This is quite an achievement I would like to share with you. That's the best performance we've had in the past 20 years, and that keeps improving quarter after quarter. 97.5% in billing in March, we have moving forward in billing quite significantly. That has to do with both administrative and technological aspects as well as proactive negotiation initiatives with our customers. We have reduced losses for the fourth quarter in a row, and there is a drop of 90 gigawatt hour in the past 12 months. In the first quarter, we are now loss proofing over 13,000 installations, greater number of normalizations, 87,000. And we have replaced over 57,000 obsolete meters that contributes to modernizing the system whilst ensuring the quality of the service. In the Light program, we have advanced in the areas of loss proofing. I would like to point out that just in April, we have concluded yet another collection of the distributing company that amounted to BRL 1.3 billion. Everything was allocated to the market. In other words, we have a better cash position to meet our obligations. In conclusion, I would like to say that Light has been investing in a solid management system with committed professionals to make sure we move in the right direction to have the light of the future with sustainable growth and focusing on results. We are more and more convinced in the good work that this team has put together, and we are actually transforming the company. Thank you. Have a good day.

Thank you, Nonato. Good afternoon. Thank you for attending our first quarter earnings call. Let me start with Slide 4. We do have information about the billed market when we compare this year's first quarter and the first quarter of last year. The total market was down 2.7%, 6,880 gigawatt hour. That drop was driven by 2 segments. The utilities, they were down by 35%, a trend we had detected in mid-2020. Consumption was 241 gigawatt hour. There was a drop in residential consumption of about 6%, despite higher temperatures about 0.5 degrees Celsius on average. 2,354 gigawatt hour was the consumption for the quarter. The explanation for that reduction was due to the fact that in the first quarter of last year, most of our customers spent their time at home because COVID had dwindled to a extent back then and due to the vaccines. And at the same time, it's quite the opposite by loosening up these restrictions and the uptake of activities outside of their homes both for leisure and work. Moving on to the Industrial segment, another segment that was down by 2%. The main driver there was to the steel industry activity. As far as Commercial segment is, we had an increase of 2.3%, a reversal of the behavior we've had seen or we had seen in previous quarters. This is the increase of consumption of major consumers, especially in March. In this quarter, they used 1,955 gigawatt hours. At the bottom of the slide, you can see the reduction of 3.3%, and the breakdown of the total consumption about 64% of captive customers, 36 network use. On to the next slide now. We have losses evaluation of about 90 gigawatt hour when we compare to the first quarter of 2021. Total losses over the load was 26.59%. As you can see that black curve on the chart, the improvement in losses despite being small indicates a trend in the past 4 quarters. Just like Nonato said, when we consider tariff increases approved on March 15, the regulatory losses was 51.53%, that's the white number in that dotted curve in orange up until Q4 2021 was at 19.30%. Up until March this year actually when it end up to 21.53%. The gap between actual loss and regulatory losses, as you can see, was brought down in the first quarter, about 5.1 percentage points. That is very relevant considering the financial and economic effects of this indicator that will be captured in the quarters to come. Part of that reduction is also a result of our loss proofing system. 25 gigawatt hour was that contribution when we talked about that reduction, 90 gigawatt hour at the start of this slide. Okay. On to Slide 6 now. This is a quick overview of our levers in our loss program acceleration. As you can see on your left, the levers can be broken down into 2 segments. One, the market discipline and the others are related to gaining market share. The first lever is linked to the recovery process. It takes place through inspections the inspection notes that are more related to convention and fewer recurrence of fraud. And also in better or higher areas. When we talk about gaining market share, it means using more energy and maintaining our customer due to the reducing or the reduction of losses or diminishing the area or fraud prevention plans just like loss proofing. I would like to give you 2 other examples. On your left, on Slide 7, this is an example of loss proofing for the grid. We have regularized about 13,000 installations, an improvement of over 28% when we compare it to the quarterly average of last year. You can see the 3 pictures on your left. These are the lines. There is no apparent low voltage. All you have to see is the shielded boxes next to the transformers. These boxes can serve up to 48 customers, but there's another solution on the ground that can reach up to 144 customers. Depending on the region, we may resort to different solutions to make sure our distribution grid is robust. On the right, you can see examples of our extension program. This has been moving forward consistently. We have conducted over 87,000 normalizations in the first quarter. That means a 10% increase when we compare to what we did in Q4 of last year, and over 60% of what we did in Q1 of 2021. We have increased productivity, reaching 84%. And the correctness of technical visits is on the rise, too. Productivity improved by 73%. The same picture on the bottom right an example of a detour that was captured, a fraud. When we started using that methodology in mid-2021, we have identified over 7,400 frauds like this. Only in the first quarter, we identified about 1,400 detours or frauds like this one. On Slide 8, another lever, the replacement of obsolete meters. We have 4,300,000 meters. Out of that total, about 1 million are these type, as you can see on the picture on your left, the pointer meter. 270,000 are 3-phase meters, and they are all obsolete mostly. These are more susceptible to fraud. And it may be difficult for reading purposes. That's why we're updating our meters. Only this quarter, we've replaced about 57,000 units over 124,000 in total ever since we started the process back in 2021. Another important segment that we've been focusing is that represented by the communities. Slide 8 on the right side. We are getting closer and closer to communities trying to establish that report, and we show them how important it is to be present to provide good quality service. We have been able to promote the normalization of over 5,000 customers. On to Slide 9, let me give you some economic and financial results, starting with collection. This is yet another good quarter when we compare year-on-year. There's a 1.2 percentage points in the company's collection. As you can see on the chart on your left, that is the result of measures taken as early as 2021, both at the administrative level and the company was proactively relating to customers that are in debt. Additionally, we have updated our customer service. For example, we implemented URA, SMS, text, collection and WhatsApp, among other initiatives trying to collect from those overdue customers. On your right, we have the ADA that's for the 12-month period. We've reached the 2.9% about 117 million of ADA, way below than what we booked in the first quarter of last year. That was about 150 million. On to Slide 10. This is our EBITDA broken down by business. It grew about BRL 106 million from BRL 420 million, give or take, in the first quarter of 2021 as you can see on the left bar, now at over BRL 525 million in the first quarter of this year. The main business, which is distribution, helped improve our adjusted EBITDA in over BRL 135 million. That was the case to the adjusted CVA, when we adjusted the tariffs, that was concluded back on March 15. Higher nonbilled energy as a result for higher temperatures that we had in the first quarter and by lower PMS. As far as generation goes, there was a 31 million decrease. EBITDA was about BRL 159 million. That drop in generation EBITDA was for -- was due to less energy allocated there due to the seasonality of physical warranties and liquidation of energy leftovers at lower PLDs, but the EBITDA of the trading company was about BRL 2 million negative, about BRL 36 million for the quarter. And the reasons behind it, lower volume and lower PLD, as I have just said. On to the next slide. This is the results broken down. Losses amounted to BRL 106 million. We had better EBITDA of about BRL 106 million, driven by distribution mostly offset by financial results of BRL 158 million, as you can see in the orange bar. I would like to point out that we had a one-off impact of VNR -- negative VNR of BRL 45 million by acknowledging provision of BRL 186 million negative due to the tariff review process that was concluded on March 15, as I said. On to the next slide. This is our robust cash position and our debt. The debt represented by the net debt over EBITDA was slightly smaller, 3.44x below the limit for most debt contracts we have, which is 3.75x. And the company's net debt reached BRL 8.1 billion. We have booked interest about BRL 400 million that is driven by IPCA and interest rates increase that took place when we compare first quarter of 2021 and 2022. And another BRL 400 million cash reduction due to CapEx investments for both the distributing company focusing losses and Light Energia, recovering our spillway and the bypass tunnel, both projects were conducted in the first quarter of 2022. The debt cost on the left at the bottom, the debt service cost that was almost 12% nominal. Actual costs was 0.5%. That's the blue curve at the bottom. Let me just point out that the top right chart, we have very important information. This is our robust cash position at BRL 3.290 billion, that cash is enough to cover for our debt in the next 2 years, both 2022 and 2023. We haven't included results of the 24th debentures emission that was concluded just last week at BRL 1.3 billion. Maturities 2 years, CDI plus BRL 1.95 billion, that was the cost. This is -- has been released to the market. In conclusion, let me just shift to the next slide and give you the highlights of the ESG agenda. We have been moving forward quite satisfactory here. First, on the left side, the injury severity and frequency reduction, we are also increasing the average hours training per employee. Customer complaints are down due to these customer service initiatives we have been implementing with our customers. We have increased investments for PEE funding. And last but not least, in the last week of April, we have announced our integrated annual sustainability report. We showed several indicators that can help us improve the assessment of how committed we are. The assessment on the part of the market as to how we are addressing ESG strategy. Thank you once again for attending, and I think we can start our Q&A session. Thank you.

Thank you, Gisomar. Let's get started with the Q&A session. [Operator Instructions] Daniel Travitzky. You can unmute and ask your questions, Daniel.

I have 2. In 2022, BRL 1.8 billion is maturing this year; in 2023 and '24, you have other payments about another BRL 1.8 billion. What's your strategy? What's your expectation as to the cost of renegotiating that debt taking into account interest rates and inflation rates? And my second question has to do with your expectation as to the renegotiation and its impact to the company's bottom line. The financial reports have been hurt because of inflation and interest rates. So I would like to better understand what's going to happen after that negotiation?

Thank you for your question. As to the need to finance to make that BRL 1.8 billion in debt, we have that money in cash, that BRL 1.3 billion I was referring to in my presentation. But let me remind you that in mid-November last year, we collected BRL 532 million through another debentures issuing to make up to that BRL 1.8 billion and the strategy was to use some windows of opportunity to make that loan to prevent the concentration in this complicated year, which is an election year, as you well know. As to the strategy starting next year, our goal is -- we have a BRL 2.5 billion opening to issue incentivized debentures that will help us renegotiate the debt as of 2023, the incentivized debentures, as you all know, they are longer term at a lower cost. And finally, cash constrained because of higher interest rates that had already been considered. We already believed that interest rates would go up, not only for this year, but also further down the road. And that will impact our cash after the tariff review the estimate to generate cash because of that tariff review is about BRL 540 million. That, again, that helps us in paying that debt to a certain extent. That's it.

Thank you. Pedro Castro from VELT asks the next question. The question is about reducing the PMS. It has to do with more capitalized PMS because of higher investments. His question is, is there a possibility of ANEEL not recognizing these investments? I think you should feel that one, Gisomar.

Well, first off, there's no more PMS capitalization. These are personnel and services. It did not happen this quarter when compared to the previous quarter. These were 2 quarters in which we invested heavily. Number two, there's no possibility that not recognizing it by ANEEL. We've gone through that tariff review process. We have just done it. We always conduct this expense activation process, 100% matching the accounting manuals to prevent these reversals from happening. And when you take the data of that tariff review that were made available on March 15, we have received the least amount of reversal of all tariff review processes we've gone through. So the process is very robust in a nutshell, and we're not concerned about having investments that are not 100% recognized by ANEEL.

Thank you, Gisomar. Guilherme Lira asks the next question. Go ahead, Guilherme.

I have 3 questions, actually. Can you give us further detail as to how much of that PMS drop was due to capitalization? Would you have an estimate of the adjusted PMS? Question two, can you talk about your take on billing and market and the outlook of PDD for the remainder of the year? And number three, what losses are in Dom Bosco, we've seen that getting better quarter-on-quarter?

All right. Two -- I'll be answering 2 of your questions. PMSO and expenses, it's BRL 9 million out of a total of BRL 40 million. And number two, as to the trend of PDD, is about 2%. Thiago will answer your question about Dom Bosco. Let me talk about billing. Yes, we have seen that continuous improvement in recent weeks. Positive outlook for ADA to those collection initiatives are picking up. We have been improving on the technology front so that we have more certainty and focus as well as litigation. So the outlook is positive in a nutshell.

Let me address the Dom Bosco issue. It remains stabilized at 9%, 10% losses. We believe that in the first month, there's a natural effect in terms of customer registration and billing depending on the meter cycle, you estimate smaller losses in the first month. But again, the -- or it flattens out at 9%, 10% level, which is very positive for that complicated region. Our challenge today is getting bigger there in Dom Bosco. And we have to work on the collection front. First, we have to normalize the access; and the second major challenge is to collect. You cannot traditionally -- we cannot have that traditional approach, given the complexity of that region. We are innovating and their collection is at 70% and with an upward trend. So this is a positive mechanism. We've been learning community after community and so we remain positive in our outlook. Thank you.

Another question from the Q&A. Pedro Castro from VELT. What's your take on the budget restrictions? Is that a challenge to implement the investment plan to fight losses? Even more importantly, is there any room to renegotiate the debt?

Thank you for your question, Pedro. There are no budget restrictions, especially because our budget is adherent to our policy, limited by our CapEx for the year. So there's no possibility of budget restrictions. One thing is 100% linked to the next. As far as renegotiating the debt, that is the strategy the company has been adopting. We haven't been able to do so this year, unfortunately. This is a challenging year, high volatility. So that's why we renegotiated our debt for a shorter turn at a market cost that is within the company risk, we issued 100% to the market, as I said. And as of next year, we do intend to move away from that volatility of an election year, and we may have a trend to flatten out inflation -- interest rates and inflation. Once we have more favorable macroeconomic conditions, we're going to renegotiate our debt looking for better costs or smaller costs and at the same time, trying to extend the debt -- and if everything works fine, finding or those losses looking for resources to reinvest in the company. We're no longer going to roll out the debt. We're going to reduce the gross debt. This should start to happen as of 2024.

Marcelo Sá is with Itaú. Go ahead, Marcelo.

I would like to better understand your cash generation. The net debt increased substantially in the quarter. That's the CVA, the FX effect, tax, sales tax. I would like to better understand what actually the operation generated in terms of cash for the quarter?

Hello, Marcelo. The cash generation was positive in the quarter. As you said, there are other impacts. I even mentioned them, not only the CVA. In other words, when you look at the net debt, you have the gross debt and the cash on the gross debt, you have the interest rates and monetary our debt is not in dollars. We have a hedge or swap, everything becomes CDI or PCA. Again, we know that the IPCA, the average quarter-on-quarter and the average CDI are on the rise, even including from last quarter of 2021 to the last quarter that increased our gross debt and BRL 400 million. On the net debt on top of the payments -- regular payments, we had the CapEx issue. We had more CapEx for the period, aiming at speeding up our project for loss proofing. And at the same time, that CapEx from Light Energia, just like I said, that construction work in the spillway and the bypass tunnel that ended up contributing negatively using our cash in -- using BRL 400 million of our cash.

Well, let me try to better understand it. What's nonrecurring would be CVA and that foreign exchange effect that would help increase the net debt. But the CapEx is the routine, the day-to-day activity. We have to adjust using that variable?

Yes, you're right, Marcelo. The only thing we did was we anticipated part of the CapEx for the year. So you end up using more cash in the first quarter. We had to implement more quickly. As far as loss proofing goes, we have anticipated some of those investments.

So okay, I get it. When you consider the CapEx generation would be negative. But you anticipated CapEx, so recurring. Looking further down the road, this should not be happening, so the company again...

Yes, that's right.

Arthur Pereira from Bank of America.

You had negative working capital because receivables were on the rise. Is there anything you should like -- you would like to point out?

Arthur actually, we've seen variations of BRL 548 million in our receivables. How come -- or how is it structured? Number one, there was a nonbilled increase, given the reasons Gisomar is giving you, BRL 214 million there. There was an increase of consumption because of that tariff increase of BRL 675 million in March 2021 and more consumption in the summer. Financially speaking, that meant BRL 460 million. But on the other hand, we know that PDD reduced accounts receivables. That was a net BRL 117 million reduction. That composition of higher nonbilled BRL 214 million, more consumption, BRL 461 million and a negative variation of PDD of BRL 117 million that make up the variation of BRL 584 million in our receivables. I think you can understand that calculation.

That's one of the things you touched upon in the report. If you have any further questions feel free to ask them. Once again, I would like to thank you for attending. Our IR team is available to answer any questions you may have. Have a good day.