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

Good morning. Welcome to Q3 2023 Light's earnings call. This conference will be held in Portuguese and interpreted into English. Please choose the language you wish to hear by clicking on an icon at the bottom of the screen. This is being recorded. The recording will be available at the company's website as well as the presentation. [Operator Instructions] Before we proceed, I would like to once again state that forward-looking statements regarding company's projections, operational and financial goals are based on assumptions on the part of the company's management as well as information currently available to the company. These forward-looking statements are no guarantee of performance because they involve uncertainties and assumptions because they relate to future events. They depend on circumstances that may or may not occur. General economic conditions, industry related and other operational conditions may impact the company's future results. Those results may differ materially from those expressed in the forward-looking statements. I turn the floor over to Mr. Octavio Lopes; and then Mr. Eduardo Gotilla, CFO, and IR Director will be explaining the company's results. Over to you.

Welcome to Light's earnings calls. It has been 8 months since we published 2022 results and the reorganization measures which aimed at preserving the sustainability of the group. We can now confirm that the main objectives of this current administration are being met. Our distribution business continues to operate normally, maintaining the quality, continuity and the expansion of the electrical system in Rio de Janeiro. At the same time, the distribution business remains strictly compliant with regulatory goals and its industry obligations. During this period, Grupo Light has been discussing the realignment of its capital structure as well as the renewal of the distribution concession on a sustainable basis. These objectives are being met due to the reversal of the historical cash consumption of the distribution business, with costs and expenses optimization and increased efficiency in investments without compromising the quality of the service we provide to the population. Let me point out as an example of these efforts, the distribution business, TOTEX, which is the sum of the manageable operating expenses, which is known as PMSO and CapEx, investments in other words. In the first 9 months of this year, there was a 24% reduction in TOTEX with -- or BRL 373 million when compared to the same period of last year. It's a positive highlight in the same comparison, the cash generation of distribution business measured by EBITDA minus CapEx grew 10x and reached BRL 354 million year-to-date. The result was achieved even after the distribution business returned BRL 1.3 billion to consumers through tariffs while offsetting only BRL 628 million in tax credits of PIS and COFINS. That difference of BRL 684 million represented a cash consumption by the distribution business. Our EOD index measuring the average duration of outages per consumer and our EOF index measuring the average frequency of outages per consumer remain comfortably within the limit set by the regulatory agencies, ANEEL, even with adverse weather conditions in the year. In 2023, Light presented the second best EOF among all large distributors in Brazil and remains among the top 10 distributors with the best EOD. Our generation business remains a solid cash generator with an adjusted EBITDA of BRL 604 million year-to-date and a net profit of BRL 326 million. In the January to September '23 period, the consolidated net profit of Light Group reached BRL 205 million, reversing a loss of BRL 178 million in the same period of last year. In the same comparison, consolidated cash generation measured by EBITDA and CapEx improved -- for the group as a whole, that improved 125%, reaching BRL 879 million year-to-date. In October, the group obtained a 180-day extension of the stay period for its financial obligations. Discussions with creditors are moving forward optimistically as we seek a conclusive resolution for the financial sustainability of Light. I will now hand over to Gotilla for the results of the company, and I'll be available during the Q&A.

Thank you, Octavio. Good morning. I'll start with the results of the distribution business on Slide 4, the main variables for the adjusted EBITDA. In the quarter, it was BRL 98 million below EBITDA of Q3 2022, explained by the liquid or the net margin variation. That's due to the REN reduction as well as the reversal of losses. Bad quality REN will impact net margin, but consumes cash and it generates negative EBITDA when you consider the losses. On top of the net margin, you had an additional increase of BRL 12 million. This is given to the accounting effect to less capitalization of labor and less investments in the period. The PECLD showed a decrease of BRL 40 million. Current methodology reflects the effects of delinquency and collection as I've said in previous quarters. Year-to-date, adjusted EBITDA was BRL 944 million, positively impacted by an improvement in net margins given tariff price increases in March '22, but offset by the difference in the methodology, as I just explained. On to Slide 5, let me address the initiatives for the financial rebalancing of the distribution business. The main driver of this administration is to generate Light's cash generation, adapting investments and OpEx, focusing on short-term return initiatives, whilst ensuring the quality of service to our consumers. The strategies has been successful in the quarter. On the left, you can see the TOTEX, which is PMSO plus CapEx, was down by 22% when compared year-on-year. In the 9-month comparison, there's a 24% reduction. On to the right side on top of the TOTEX improvement, we can also see all efforts to boost cash generation, measured by the adjusted EBITDA minus CapEx. In the quarter, cash generation was up by BRL 30 million when we compare year-on-year. In the 9 months, cash generation was BRL 354 million, 10 times more than those BRL 35 million that we had in the same period of last year. Let me point out that the group has been implementing strategic change to allocate capital, not jeopardizing the quality of the service. Short-term improvement won't hurt sustainability and profitability in the medium and long terms. Let me give you some context of the proportion of these adjustments on Slide 6, let me show you some historical data. When we consider the same indicator EBITDA minus CapEx, you can see the magnitude of the challenge we were faced with in late last year. The distribution business that consumed on average BRL 850 million of cash in the previous 4 years, that compares with the cash generation of BRL 350 million in these 9 months alone of this year. This consumption of over BRL 3 billion of cash and the interest necessary to fund it demanded over BRL 4 billion of loans to fund the distribution business just in that period between 2019 and 2022. On to Slide 7. You can see the track record of Light's TOTEX, SESA and [ Rio ] basis. We can see that distribution business has shown historically a TOTEX level that is structurally high in the past 4 years, which helped burn more cash in these past years. In the last 12 months of TOTEX, you can see a 25% reduction vis-à-vis 2022, positively impacted with the cash generation of the distribution business. On to Slide 8. We have a simplified cash flow of Light SESA for that period of January to September of this year. You can see that despite intense adjustments of the operational cash generation, the distribution business had relevant obligations for the year. Despite the cash generation of BRL 350 million, I have just mentioned, Light SESA paid some important obligations such as the net return of BRL 700 million of PIS/COFINS expenses. As Octavio said, throughout the year, we were upset with BRL 600 million credits, but we returned BRL 1.3 billion via tariffs, leading to the consumption of BRL 700 million, as I mentioned before. Another cash outflow has to do with relevant contingency, about BRL 200 million. These are nonrecurring contingencies accounted in recent periods, but the cash accounting was 2023 tax processes or fines by ANEEL, refis programs and finally, interest and amortization payments worth BRL 600 million. Most of it, BRL 400 million of monthly amortization of the FIDC quota that has been paid out completely in the quarter. In other words, Light SESA had to withstand over BRL 1 billion of cash outflows. Despite the reorganizations of [ RJ ], their frozen payments of interest, amortizations of almost BRL 1 billion for the year, to have available cash to distribution business used a remainder of that cash flow of BRL 600 million. We successfully managed working capital improvements in collection and consuming some inventory and CVA formation. Finally, on to Slide 9. Let me address the EBITDA in our energy industry. In the period, we once again had good performance, a BRL 10 million improvement in the quarter and BRL 15 million year-to-date. The positive performance in both periods can be explained by higher net margins and improving the GSF and less need to purchase energy or existing contracts despite a small PLD increase impacting positively the margin of the trading company. Back to the operator so that we can start the Q&A session. Thank you.

[Operator Instructions]

This is Octavio. We have received a couple of questions about the renewal process like SESA and the negotiation with creditors. I'll be addressing the two questions. As to the renewal of the concession, I think you have all been keeping track. The definition of the rules as to renewals of this package of concessions. They're about to be renewed in the next 5 to 6 years' time frame. I think you've seen the minutes of that the decree that is being discussed at the accounts boards. We believe that this discussion may take a couple of months more and then general guidelines will be defined by the ministry, and then it will be sent over to the regulatory agencies. And then early next year, we'll have more precise definition of rules determined by ANEEL and that timing is very good because it matches the time frame of the discussions with creditors. So once ANEEL defines these rules, we will then be able to be capable of renewing that concession on a sustainable basis. The renegotiation with creditors is a complex process, but it's moving forward satisfactorily. You cannot give a precise time frame because these processes take a life of their own.

This concludes the Q&A session. I will turn the conference over to Mr. Lopes for his final -- for his closing remarks.

Once again, thank you for attending. And once again, I would like to state that the IR team and Gotilla are available to clarify any questions you may have. Thank you for attending. Once again, have a great day.

This concludes Light's earnings call. On behalf of Light, thank you for attending. I would like to once again to state that the IR team is available. Thank you. Have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]