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

Good morning, and welcome to Light's Conference Call for the Fourth Quarter of 2023. Today's event will be in Portuguese, but it is being simultaneously translated into English. If you would like to listen to the translation, you can click on the interpretation button on the lower bar of your screen. This event is being recorded, and its audio will be available on the company's Investor Relations website as well as the PowerPoint presentations, which are available for download. [Operator Instructions] Before we begin, I'd just like to underscore that any statements made during this conference call about the company's future business perspectives, projections, operational and financial goals are simply beliefs and assumptions from the Board of Directors based on currently available information. Remarks about the future are not a guarantee of performance. They involve risks and uncertainties and refer to future events that depend on circumstances that may or may not come to pass. 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. With that being said, we will begin the company's presentation with Mr. Alexandre Nogueira, the CEO, who will make our opening remarks, and then we will hear from Mr. Rodrigo Tostes, CFO and Investor Relations Director. I'll now pass over to Mr. Alexandre. Go ahead, sir.

Good morning, everyone. Welcome to Light's 2023 earnings call. 2023 was a time for Light to face up to challenges it has been facing for some years. As is well known, structural problems in the concession area and the high interest rates in Brazil in recent years has led the company to economic and financial imbalance that culminated in a judicial reorganization process, which began in May last year. Despite the situation, Light continued to fulfill its main goal, which is to guarantee quality energy distribution for the 12 million people in its concession area, which includes 31 municipalities in the state of Rio de Janeiro. Light SESA ended 2023 as the second best distributor in the country in FEC and the fourth best in DE among the companies with more than 1 million customers. These 2 indicators from the National Electricity Agency, or [indiscernible], measure the frequency and duration of power interruptions to the consumer. The company also remained compliant with all of its tax and regulatory obligations and with paying its employees and suppliers. In other words, the normal operation of the distributor was insured. In June 2023, aware of its operational location and its commitment to society, Light asked the Ministry of Mines and Energy and the National Electricity Agency to renew its concession, which expires in 2026. Light wants to continue providing quality services to the people of Rio de Janeiro for many years to come. The city's history of economic, industrial and social development blends with the company's century-old history of pioneering and entrepreneurship. Throughout 2023, as a member of Light's Executive Board, I was in charge of the company's regulatory area and took part in all of its strategic discussions. In January 2024, I took over as CEO of Light S.A. with the mission of leading the work to ensure the long-term sustainability of the company and its concession. We're seeking conditions for Light to remain operational and financial and economically healthy for the company to continue to be relevant and a leading player in the national scene and in Rio de Janeiro and provide an efficient service to the approximately 12 million people it serves today. These conditions should become clearer this year. They will be created from the [indiscernible] of the main discussions defined by the company in 2023. As per negotiations with creditors, we're looking for a judicial reorganization plan that will give Light financial health and make the company's recovery possible, ensuring the investments that are needed for our operation quality and for the payment of its debt. We're progressing with these talks, and we believe that a solution is close. The creditor's meeting is scheduled for April 25. On other fronts, we're still in talks with the granting authority to renew the concession through a contract that takes into account the current state of the industry and also the specific details of Rio de Janeiro, which has experienced a sharp downturn in the market and where the rate of energy theft is above the national average. Even under these conditions, we continue to work hard, and we've delivered a strong operating result in 2023. We delivered excellent results in terms of quality and revenue, and we're maintaining good financial discipline in spending as our CFO, Rodrigo Tostes, will detail. The results show the commitment not only of the management, but also of the entire workforce, which spares no effort to ensure good service to the population. I would like to thank everyone for their trust, hard work and dedication to transforming Light. I will now pass it over to Rodrigo Tostes, who took over as the company's CFO at the beginning of February and will present the results of '23. He has a career dedicated to complex projects, turnarounds and experiences in Rio de Janeiro. He was one of the people responsible for setting up the thyssenkrupp CSA steel plant in Santa Cruz. And he was also the CFO and COO the Rio 2016 Olympic Games, CEO of VLT Carioca, and one of the people responsible for the financial transformation of Clube de Regatas do Flamengo. Go ahead, sir.

Thank you, Alexandre. Good morning, everyone. Well, I just arrived at Light last month to join the team at a crucial moment in search of long-term sustainability for the company. It's a complex mission. But as Alexandre said, I faced some similar challenges. And I can reinforce the fact that it will be a pleasure to contribute with my experience in restructuring companies in Rio de Janeiro. Light is a century old company respected by the population which needs and will recover in order to continue fulfilling its role of guaranteeing the quality of energy and water side in Rio de Janeiro. I'd like everyone to know that we have a mantra that has been repeated in the last 30 days, and I've heard it many times. Regardless of all the challenges that we have in our concession area, we will ensure service quality for our consumers. Well, we will now begin our presentation. And I have only 6 slides for you, starting with the distributors results on Slide 4 for 2023. As you can see, the structural market in Light's concession area grew by 2.4%, and this was mainly due to increased temperatures in 2023. On average, temperatures in 2023 were 1 degree Celsius higher and in some months, even 2 degrees higher. As Alexandre said, we also maintained the operational quality of our company, measured by the DEC and FEC indicators, which are both below the regulatory levels set by ANEEL. We also improved 1% in our revenue, 1 percentage point in 2023. And in 2023, we also presented better financial expenses, as measured by TOTEX. And we ended the period with an EBITDA of BRL 2.1 billion and an operating cash generation measured by EBITDA minus CapEx of BRL 1.2 billion. I think this shows how our transformation process is on [indiscernible], as Alexandre mentioned. Moving on to Slide 5. Here, we present the evolution of the distribution companies [ adjust ] to market, which grew by 2.4% in the period. The market grew in the residential and commercial classes as a result of the increase in temperature in the residential class and an improvement of the 3 commercial class in segments such as supermarkets and shopping malls. As a negative impact, we also saw a reduction in distributed generation in our concession area amounting to 327 gigawatts. This has been a concern for Light and other distributors. Moving on to Slide 6. Here, we look at the main factors behind the variation in adjusted EBITDA. During the year, the distributors' adjusted EBITDA was BRL 956 million, a result 43% higher than what we posted in 2022. This is mostly explained by an improvement in net margins. Net margins grew in comparison to 2022, mainly due to the higher cost of buying energy that was not passed on in the tariff in '22, what we call over contraction, which had a negative act on the result of 2022, and this did not happen in 2023. As for PMSO expenses, we saw a negative impact comparing to the previous [indiscernible]. This was caused by an accounting principle, a greater allocation and an improvement in CapEx. We had to allocate a higher proportion of our OpEx, such as the service team, emergency services and personnel expenses due to this lower CapEx. It's important to note that distributors' operating costs continue to be at a more efficient level than what was observed in the regulatory framework. When we look at PDD expenses after the methodology adjustment implemented in 2022, these expenses were in line when comparing to our annual results. Contingencies showed a positive result, an improvement of BRL 73 million, mainly due to a higher efficiency in massive civil [ lots ]. Moving on to Slide 7. I'm going to comment on the initiatives for financial balance of the distribution plan. The main driving force of the current management has been to increase Light's operating cash generation, adjusting the volume of investments and operating expenses, prioritizing initiatives with a short-term return. But our mantra is the same. We always have to guarantee the quality of service and customer care in our concession area. But we are doing this more efficiently with the use of our CapEx. For 2023, this strategy showed very positive results. On the left-hand side of the slide, we can see that the distributors' TOTEX, the sum of PMSO plus CapEx, fell by 18% in comparison to the same period last year. In general, the company managed to deliver good operating results in quality and customer service with a lower actual expense prioritizing the company's cash. This is due to the efforts of our operational team. Looking at the right-hand side of the slide, in addition to improving TOTEX, we can see all our efforts to increase the distributors' operating cash generation, as measured by adjusted EBITDA minus CapEx. For the year, this increased to BRL 546 million as a result of both the reduction in TOTEX and the improvement of the distributors' EBITDA. Continuing on Slide 8. Here, we see a simplified cash flow for Light for the period from January to December 2023. Here, we can see that despite an improvement in operating cash generation, the distributors still have significant cash outflow obligations for the year. Even with the cash generation of BRL 546 million that I mentioned earlier, we had to pay off some important commitments such as a return in PIS/COFINS, payment of interest and amortization of about BRL 700 million, of which the largest part is BRL 500 million in monthly amortization for the FIDC senior quotas, which was fully paid off in 2023. So we had to cope with a cash outflow of more than BRL 1 billion, even with the protection of the judicial recovery, which froze interest and amortization payments of almost BRL 1 billion this year. So the distributor used a cash balance of around BRL 200 million it had at the start of the year, and it did this very efficiently in managing its working capital. Finally, on the last slide, I'll speak about the EBITDA of the Energy segment in this period. Once again, we performed well with an increase of BRL 65 million year-to-date. The positive performance is explained by an increase in net margin due to the improvement in GSF. As a consequence, we had a lower need to buy energy to supply current contracts. There was also a small increase in the PLD, which had a positive [ impact ] on the trading company's margin. I think this explains our statements very well. So finally, I'll pass it over to the moderator so that we can start the Q&A session. Thank you.

[Operator Instructions] This concludes the company's question-and-answer session. I will now pass it over to Mr. Alexandre Nogueira for his closing remarks.

Thank you, everyone, for attending this meeting, and have a great day. Thank you.

This concludes the company's conference call. On behalf of Light, we'd like to thank everyone for attending and underscore that the Investor Relations team is always available. Thank you, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]