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

Welcome to Light's Third Quarter 2022 Earnings Call. My name is Rodrigo Vilela. I'm in charge of Investor Relations, and I'll be the host of this event. This event is being carried out in Portuguese and translated into English. If you'd like to listen to the translation, click on the interpretation button on the lower part of your screen. We have with us today, our CEO, Octavio Lopes who will make his opening remarks and our CFO, Eduardo Gotilla, who will make some comments on our results. This presentation is available for download on our Investor Relations website, but you can also watch it here on Zoom. [Operator Instructions] After the presentation, during the Q&A session, I'll give further instructions for those of you who wish to ask a question. This webinar is being recorded and will be available on 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 beliefs and assumptions from the company's directors based on the information we currently have available. Remarks about the future are not a guarantee of performance. They involve risks, uncertainties and assumptions. They refer to events in the future, which, therefore, depend on circumstances that may or may not come to pass. Investors should understand that the general economy, 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. Well, after that disclaimer, I'd like to pass it over to Octavio Lopes. Go ahead, Octavio.

Thank you. Good afternoon, everyone. It's a pleasure to join you for my first conference call officially as a CEO for Light. Since I arrived, we potentialized the transformation process to give speed and efficiency to the company. Our aim is to make Light a company that is less bureaucratic and more assertive. Therefore, we have remodeled our Board of Directors, and we've brought in professionals that we believe are able to face our challenges. In the last 45 days, Vinícius de Sá Rori, a very experienced executive in transformation processes who has worked for Ambev, Comlurb, here in Rio and Invepar who had been in our Board since April 2021, became the Director of People and Supply. [indiscernible], who was with me in founding Equatorial Energia in [ Marinel ] started leading our Information Technology and Digital transformation area. Eduardo Gotilla who is along with us in this call became CFO. He is very experienced, and we're working together -- we have worked together in Magnesita and in the creation of HR in Magnesita.. And last week, we finished -- we concluded the team with Alexandre Nogueira who is the Director of Institutional Relations. Many of you know Alexandre [ Nogueira Ferreira ] who has had a 20-year experience leading Regulations. Our new directors are joining Thiago Guth, who will now be the leader for the Distribution operation; Alessandra Amaral, who runs Generation and Commercialization; and Déborah Brasil, who is still the Head of Legal. Light, as you know, is a 100-year-old company, which still had some old processes and that has some specificities in its concession area, which everyone knows. We have a team focused on the turnaround we need for the company's long-term sustainability. So we are reassigning our investments, analyzing what worked in 2022 and reviewing what needs to be improved to reach our goals. At first, our efforts are focused in allocating capital, balancing return on invested capital and returns on cash as soon as possible. Our commitment is to reach better operational results and a more appropriate cash flow to the company's reality. For example, although we are combating losses among our priorities, criteria on return on investment and cash generation will be essential to adapt our loss plan to be implemented ahead. We are implementing a strong cost management process. We will have the first base-zero budget until the end of the year, maintaining our excellence. We are also focused on our regulatory strategy to guide the company during the concession renewal processes, which will begin in mid-2023. We believe that talking to regulators will allow us to reach a balance in our concession contract, capturing the challenges in our operation and ensuring our renewal, generating value to our shareholders. ANEEL recognizes that the adversities faced by Light in its 31 municipalities are unique and have a significant impact in the Distribution company's financial results. There's another point that is a part of our short-term agenda, which is managing active and passive contingencies in the company assets and liabilities. This is related to Light's past but it's important for the company's future context. Our new management has a not-so-simple task of repositioning the company in our industry. We have to build a firm basis that will create stability and allow returns to our investors. We have a challenging scenario, but we need to go through these changes to make Light a financially victorious company and continue to be a protagonist in the Brazilian market. After this introduction, I'll pass it over to Gotilla, who is going to talk about the results for this quarter.

Thank you, Octavio. First of all, good afternoon, everyone. To start this explanation of our results in the third quarter of 2022, we'll start by discussing the billed market on Slide 4. We can see that the total billed market was 5,820 gigawatts, up 2% and 116 gigawatts versus the same quarter last year. This variation was made of a reduction of 140 gigawatts in Captive clients at a growth of 255 gigawatt hours in clients classified as Network Use, including the freebie clients, concessionaries in Distribution and Generation. When we look at the variation on the right, you see the biggest variation was utility companies, 123 gigawatt hours. Looking at our load, it was 0.6% lower with a 2% bigger market. On the next slide, we can see that the consequence of these 2 variations led to these loss indicators, a reduction in the number of losses and in the total losses per grid load indicator. Total losses ex REN totaled 9,066 gigawatt hours, 1.7% below what was recorded in the second quarter of 2022. Our positive movement is due to 2 factors: the temperature variation between the quarters, which justifies 80 gigawatt hours from this reduction and the results of the energy recovery activities, which contributed with 75 gigawatt hours in this reduction. On the right-hand side graph, we can see that the total losses ex REN indicators was 26.63%, down 0.43 percentage points versus June. Also, as Octavio said, we're reviewing our loss combat plan for 2023, considering better capital allocation and a payback. With Slide 6, Collections. You can see that our collection rate was 96.3% in September, down 0.5 percentage points. Collections, as you can see on the graph, are more pressured by retail. And this is a consequence of the current economic scenario in our distributor's concession area. We currently have over 700,000 clients in the low-income bracket. -- a growth of 182,000 versus September 2021. To the right, we can see the ADA by gross revenue index, which reached 1.9%. In Brazilian reals, our ADA was BRL 109 million versus BRL 254 million (sic) [ BRL 245 million ] in the third quarter of 2021. On Slide 7, we'll see the results for the third quarter of 2022. We had a recurring adjusted EBITDA of BRL 508 million versus BRL 453 million in the third quarter of 2021. So EBITDA grew in the Distribution company and in Generation. In Distribution, our EBITDA was BRL 351 million, BRL 68 million above the third quarter of 2021. This is due to the [ installment ] and the reduction in losses due to the tariff review in March. We also had reduced losses, which in the last 12 months was nearly 0.5 percentage points lower and a lower ADA. In Generation, our EBITDA was BRL 160 million this quarter, EUR 58 million higher than the third quarter of 2021. This is also due to lower energy purchase costs and better hydrological conditions that we saw this year. In the Trading company, our EBITDA was $18.5 million versus $14 million in the third quarter 2021 due to lower traded volumes. Slide 8 shows the company's net results. In the third quarter of 2022, our recurring results was BRL 8 million versus a loss of BRL 149 million in the third quarter of 2021. This is due to a higher EBITDA in the Distribution and Generation companies and better financial results. And the variation in the tax line is explained by a nonrecurring line of BRL 539 million in the third quarter of 2021 due to a legal ruling on taxes overpaid. On the next slide, we can see how our leverage improved and how our cash position is robust. This quarter, the net debt-to-EBITDA indicator for debt covenants was down to 3x. As a reminder, the limit in most of our debt contracts is 3.75x. This increase in BRL 200 million in net debt is due to higher investments made during this period. So this concludes this session, and I will now pass it over to Rodrigo Vilela, who will organize the Q&A. Thank you.

Thank you Gotilla. We will now begin the questions-and-answer session. [Operator Instructions] I'll pass it over to Marcelo Sa from Itau BBA. Marcelo, go ahead.

I'd like to understand the company's future strategy. As you mentioned, there was some cash spent in this quarter. A part of it is because the company had high CapEx, but we know that there is a concession renewal process that will be under discussion. It expires in the next few years. And right now, cash is quite negative. So I'd just like to understand if you have any idea about reducing your CapEx for the next years, so that this is a cash-generating operation. How do you see these investments?

Marcelo, this is Octavio. Thank you for your question. First, let me make a disclaimer. I still haven't been in the company for 3 months. Gotilla has been in the company for 3 weeks. So it would be wrong to give a definitive strategy position right now. But with that being said, 2 things are very clear to us right now. First, the company needs to take into account in defining its strategy for the next years, the fact that we will have our concession renewed in 2026. So I can tell you that, that will be taken into account. Secondly, as I said in my introduction, we believe that the company should prioritize, of course, without compromising the quality of its services and its regulatory requirements, it should prioritize cash generation on the short run. So this is what we're following. We're trying to go in that direction, finding balance in capital allocation and balance in how we allocate the company's resources to prioritize short-term cash generation and a better payback.

[Operator Instructions] One of the questions that we received was sent by [ Joanna Frary ] and she's asking about the funding strategy for the repurchase program.

I have the -- I think there are 3 important aspects here to answer your question. First, the repurchase from the Light S.A. company that has a very relevant cash position. That's the first thing. Secondly, it can be up to 10%. It will not necessarily be 10% And I think the third point is that if it happens, it will happen throughout 18 months. And I think we can even mention a fourth point here. We understand that the company has a relevant cash generation potential in the future, but repurchase will definitely take into account the operational cash flow of our subsidiaries.

So one of the questions we got in the Q&A asked about details on the concession renewal calendar.

Thank you for your question. We have 2 dates, 2026 will be the renewal date for the Distribution company, and we have 2028 in which we will renew the concession for the Generation companies. So renewal rules for Distribution companies and for Generation companies have not yet been defined. We hope that this will take place in the next weeks or months. As for a calendar, the 2 months that -- the 2 dates that we have confirmed is that we will need to manifest in a nonbinding way by March 2023. So 3 years after the renewal date. And this is nonbinding. And then they will have 18 months after our statement. That is the last 18 months before the renewal date to state its conditions for renewal.

So continuing, we'll hear from Mario [indiscernible] from Safra. Mario, go ahead.

If you could give us an update about the PIS/COFINS credits?

Thank you, Mario. It's a pleasure to have you. And this is Octavio again. So I'll answer in detail. As everyone knows, I believe the [ 14386 ] Act was passed in July, which returned credits to consumers through tariffs. ANEEL proposed an extraordinary tariff review for Light to implement this readjustment. We questioned the fact that there was no public hearing for this and because of that ANEEL made a new request, opened a public hearing, which will take place at the end of this month -- of November. If ANEEL continues with this public hearing, it is likely that after the 28th, ANEEL will determine that these credits should be returned. If it continues to use the same basis that it used when it proposed the [ RTA ] in July this year, it will be returned through Light about BRL 70 million per month. So we would receive about BRL 70 million less in tariffs every month. As everyone knows, Light believes that this is unconstitutional. We do not agree with the retroactive application of this credit return and we're still seeking legal ways of preventing this [ RTA ] from occurring. But of course, no guarantees can be made about that.

Excellent. Thank you. So thank you all for listening. I'd like to underscore that the Investor Relations team is always available to answer any questions you may have. Have a great afternoon, and we'll see you next time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]