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

[Foreign Language] Welcome to light Q1 2023 earnings call. I am Rodrigo Vilela, [Operator Instructions] Octavio Lopes, our CEO, will make his opening remarks and then our CFO, Eduardo Gotilla will comment on our results. This presentation can be downloaded at our IR website. [Operator Instructions] This webinar is being recorded, and its audio will be available at our website. On to our disclaimer. Any forward-looking statements made during this presentation concerning the perspectives, projections, operational and financial goals are based on beliefs of the company's leadership based on currently available information. Any of these statements do not involve certain results. They involve uncertainties and events that may or may not occur. General economic conditions, industry conditions, among other operational factors may impact the company's results that can lead to results that are materially different from those made in the forward-looking statements. I will now turn over to Mr. Octavio Lopes.

Good morning, everyone. Welcome to Light's Earnings Calls for Q1 2023. Before I talk about the numbers, I would like to once again point out that the leadership is confident that the Chapter 11 filing that has been approved earlier this morning is the best way possible to ensure the group's sustainability. In the previous earnings call, we shared the diagnosis that stated that the company had to go through this reorganization, given the Light S.A. high debt levels. It has had structural problems in that concession. This is the best approach for the company. At the start of the process a month ago, we had a small number of creditors that did not want to mediate. They wanted to become a hurdle in that process, that would lead to a chaos in the energy distribution. So the Light S.A. was the only alternative to preserve the financial capacity of the companies, and ensure the stability in the operations of our concessions. Light S.A. has the obligation to cover for all the debt of the entire group. The distribution company and the generation company are going to remain solvent in all its tax and the payments of all investments to ensure the continuity of concession, including workers, suppliers and service providers. Light SESA remains running normally, preserving the entire electrical industry and ensuring the quality of the service we provide to 11 million consumers. Despite that aggressiveness of that small number of creditors, we have been negotiating with a relevant portion of creditors, and we believe we can come up with a proposal on a short-term basis. This is going to be a plan to adjust the balance sheet of a private company with no burden to the government. We're going to, of course, establish negotiations with the conceding agents so that we can renew the concession. Our commitment is with the long-term stability of the company and the concession. Let me now address the first quarter of the year. We have been continuing the strategy we established in the past quarter, establishing the distribution company with more managerial control. We managed to reduce BRL 100 million in costs and expenses for the quarter. And the distributor cash generation is up 74% to BRL 141 million when compared to first quarter of last year. We have strategically redefined the fights to loss proofing. Light has been focusing on these initiatives that will help provide better results based on a very profound analysis, trying to eliminate those operations that would hurt our cash generation. Distributor is increasing 46% in adjusted EBITDA with a negative result of BRL 2 million, much better than the loss of BRL 137 million in Q1 of 2022. Despite that improvement, both the generation and the distribution companies have been provided consistent results, BRL 107 million in the quarter, reverting a loss of BRL 106 million in the same period of last year. Despite that scenario, the situation of the distributor that is far, very far from what we needed to maintain the stability. We, of course, have to readjust its balance sheet. I'll turn it over to Gotilla, and he will be showing you the results for the quarter, and will be available for the Q&A session.

Thank you, Octavio. Good morning, everyone. Let me now explain the results of Q1, that's on Slide 4. These are our efforts to financially stabilize the distribution company. Along the lines with the strategic decision started out in Q4 of 2022, we keep on investing -- adjusting investments and operational expenses. It was BRL 103 million below year-on-year. . The biggest contribution comes from CapEx. The reduction is the result of the strategic revision of the loss proofing plan. I'll be addressing that shortly. I would like to draw your attention to the smaller PMSO despite inflationary pressure. On the right, we have improved the cash generation of the distribution for the company, adjusted EBITDA and CapEx. We burned cash BRL 61 million in Q1. We have a positive result of BRL 141 million, a significant improvement of over BRL 200 million. On to Slide 5. Let me show you the context of losses. Despite nontechnical losses have been kept at reasonable flat standards, the reference market has been deteriorated for almost 10 years. We haven't even recovered volumes pre-pandemic. The simple calculation shows that the nontechnical losses on the reference market has grown year after year despite all our efforts to fight those losses. In late March, the distribution company was 22 percentage points above the loss transfer. The difference between actual loss and regulatory losses impacts our EBITDA by BRL 582 million. That search for stabilizing, the company has led us to review the loss proofing strategy. We reduced activities on the medium- and long-term basis. We discontinued those activities that would consume cash and provide limited results. We've included parameters such as possibility of due desalization by class, by region to bring those back collection will, therefore, have sustainable results in the periods to come. On Slide 6, we have the distribution company EBITDA. It grew 46% and BRL 108 million year-on-year. Most important effects came from gross margin due to price increase in '22. PMS is in line with last year's numbers, despite inflation, almost 5%. Contingencies, we had less net losses due to better settlements, reducing average cost of cases. The apparent increase in PECLD is driven by a change in recalculation method. But when we compare to BRL [ 250 ] million, PECLD was down by 35%. In conclusion, about the distribution, we have BRL 456 million of PIS and COFINS taxes, and we set only BRL 163 million. The difference demanded BRL 292 million from our cash. Finally, on to Slide 7. Our energy business had a gross margin slightly higher. And combined with smaller PMS, we have 4% more adjusted EBITDA, reaching BRL 202 million. I'll turn back to Rodrigo Vilela for the Q&A session. Thank you.

Thank you, Gotilla. Let's now begin our Q&A. [Operator Instructions] There is a question about the case of transfer of the company's PIS/COFINS taxes. And I would like to combine a couple of questions. Eduardo Gotilla, our CFO, will address all of them at once, all at once.

According to the RTA, we had back in March, we have BRL 1.7 billion to return for -- in the next 12 months. And we have a little over BRL 3 billion of liabilities to return to customers. At the PIS/COFINS pace, that will take a couple of years to return the total amount in liabilities.

Andre Sampaio from the Santander Bank will ask the next question.

I have 2 questions. I just wanted to confirm to make sure I heard that correctly. You talked about the initial plan was, first, establishing agreement creditors and then start negotiating with the government. Is that the road map? I just want to make sure. Second question, is this negotiation process include the possible sale of the generation company?

Andre, this is Octavio. Thank you for your question. As to the time frame, so they are interdependent actually. And we have no control over them. But we believe that the solution or the rebalancing of the company would be quicker. So that would be the -- within the time frame by year's end. And the final solution for the renewal would be addressed next year, expecting to do that for 2026 in advance. So in answering your question, yes, we expect to address the issue with creditors first, then the issue with the concession. Onto the possible sale of generation, just like any reorganization process, everything is on the table, but we do not have a process in place to do that. And we don't believe that would be the best solution for the group.

Henrique Peretti asks the next question.

My question is about regulation, the negotiations with Are you expecting any regulatory changes, maybe special regimen? Or is it just an adjustment of current standards, maybe just adjusting the loss percentage?

Henrique, when we look at the Light case, we have 2 parameters. According to current regulation to transfer those losses, we believe there's an imbalance as to the formula and the way it was applied last year. And we have that extraordinary request to adjust tariffs. So that would be the first step according to current standards. We have already requested that change so that we could increase that immediate losses transfer. And number two, just like we said before, in that process of reviewing tariffs, we believe that a concession -- such as that Light, that we have some a significant portion of restricted operations that requires a differentiated treatment for those ASRO. That's why we want to have that special treatment for the next concession cycle for the next 30 years.

One of the questions here from Daniel Travitzky from Safra.

How is this RJ project or will happen that reorganization? Are you going to resort to the legal system, so because one of the companies cannot file for Chapter 11. Do you believe that you can anticipate that concession renewals is?