Serena Energia S.A. (SRNA3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. We would like to welcome everyone to Omega Geração earnings conference call to discuss results for first quarter '20. We would like to inform you that this event is being recorded. [Operator Instructions] There will be a replay facility for a period of 1 week. Before proceeding, we would like to mention that forward-looking statements made during this conference call are based on beliefs and assumptions of Omega Geração's management and on information currently available to the company. They involve risks, uncertainties and assumptions as they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could affect the future results of Omega Geração and lead to results that differ materially from those expressed in these statements. We would now like to give the floor to Mr. Antonio Bastos, the company's CEO. You may proceed, sir.

Good morning to all of you, and thank you for participating in our earnings results call for the first quarter 2020. We have gone through unprecedented times with the several -- multiple compounded crisis, but we are determined here guaranteeing that the company's operations will continue forward. Despite all of the limitations imposed by the crisis, we believe that the companies have the role of activating their -- overcome at this point in time, continuing to play the role avoiding having additional crisis coming up in this very difficult moment. We have deployed all of our efforts to continue supplying energy to our consumers. This is a moment when we cannot drop this. And therefore, we have several measures, guarantees to ensure the continuity of the business and supply. In March, we adopted several measures to guarantee the normal operations in the company to ensure availability and these are some of the measures that we took quarantines for the entire team, with a very good level of assertiveness. The inbound checkpoints at the plants, we measure temperature. We use checklists. We put in home office all the personnel that was not involved in field work. We have divided the field workers in clusters, ensuring that we could have team redundancy should any of these teams have some sign of contagion by the virus. And these measures, among others, have guaranteed that we would have a various effect and determined approach to face crisis. Now a proof of this is that our availability in the first quarter was up 96% and has even grown since March up to present. So in terms of our operational front, we have been able to do good work. People are working, people are healthy. And as a consequence, we do have a normal flow of supply that is not impacted by the crisis. Also regarding the crisis in the regulatory front, we believe that the provisional measure 950, that includes the government measures to deal or tackle with this crisis has good approach, especially as respects to distributors. Distributors are regulated agents that do have that ability to adapt when it comes to tariff reviews and other mechanisms that are activated as demand changes and as we have different levels of default. And therefore, that idea of focusing on distributors to guarantee there will stability in the sector was the most effective measure, and we fully agree with this approach. It is important to underscore that we're deeply convinced that there is no regulatory space for the reduction of volumes in the regulated market. And because of this, we have -- approximately 72.5% of our clients are top line clients for revenues. We have made sure that they will have stability for the coming decade with good cost to avoid a crisis. Another important comment referring to this. And it is important to ensure opinion, we drafted an article at the beginning of last month, stating that the impact of the crisis on tariffs was, of course, inflationary because there would be a reduction of demand, but also some deflationary effects that are import a reduction of thermal dispatch, rheological effects and many others, which means that we have never truly believed that this factor with a great impact, a tariff impact, would be observed because of the crisis. Additionally, it is worthwhile highlighting that default per self does not represent a loss. Default, of course, can be collected subsequently through time and distribution companies do have some measures to take to ensure that they can recover this credit. So the general vision that we have is that the government's approach was correct that there will be no impact on tariffs. Of course, the exchange rate has nothing to do with the crisis. But regarding the crisis, these will have a limited inflationary effect, much less relevant, for example, than a dry summer as we observed a few years ago here in Brazil. Now in the free contracting market environment, we were coherent. We have a sustainable philosophy. However, we ensure that all of our contracts would be complied with our stability is important and one of the fundamental aspects of this is honoring contract for those cases where legitimately -- not in an opportunistic way, but legitimately, our clients suffered with the fluctuation of liquidity that has arisen from the crisis. We dealt with this. We carried out negotiations. We made adjustments in short term with a compensation for the long term so that the contract volumes would remain stable. Most of our cases that required adjustment represent 20% of our portfolio. The rest of our clients did not require any adjustment. They did not have a significant impact from the crisis. And there's a very small group of clients where we do have greater problems. But I do not believe that our long-term revenues will have an impact that will be greater than BRL 5 million. Of course, there is a problem of default, but we have warranties, the recovery of credit for those clients in the case of default. So speaking very generally, we're quite comfortable with the context of our portfolio in the free contracting market. And we believe that the impact of the crisis will be limited, will be a minor impact based on the conversations and negotiations that we have carried out since the onset of COVID-19. Regarding our results and the company as general, in the first quarter, we had the conclusion of the Delta 7, Delta 8 and Assuruá 3 acquisitions. All of the acquisitions announced in 2019 were concluded. This led our cash level, which was quite steep at the end of December of BRL 1.15 billion to BRL 875 million. It continues to be a high level. But this gives us margin, first of all, to properly face the crisis with a great deal of safety even with this higher stress level, but it also gives us room to reactivate our investment strategy going forward as we have greater clarity in this scenario in the coming weeks. The production in the first quarter was 29% above that of 2019 the first quarter. It increased significantly, even with the unavailability of Serra das Agulhas. If you recall, we had to halt production because we needed to make a repair in the dam and this should be concluded in the second semester. Even without the availability of Serra das Agulhas, we increased production. This shows our capacity. Our gross margin was BRL 105 million, 14% higher than the first quarter of '19, but 57% lower than the last quarter 2019. Now the reasons for this, first of all, seasonality. We know that the beginning of the year, especially from January to April, our portfolio has less production because of the rainfall, the harvest. But besides this, this year, more specifically, we observed something that is truly not common historically and statistically. Assuruá, Pirapora and Delta, our 3 largest clusters had a level of resources below the historical average. It's always good, however, to remember that as in 2018 and 2019, even with a weaker harvest at the beginning of the year, we have a great conversion of production to historical averages, leading to higher production volumes from May to the end of the year. In Slide #5 of the presentation, it should be on the screen there. We can see that, in fact, the first quarter in the regions of the Delta and Assuruá clusters have a high availability of resources, but lower this year, as already mentioned. Our EBITDA because of all of this reached BRL 123 million. Adjusted EBITDA, BRL 99.97 million (sic) [ BRL 99.7 million ] with an adjusted margin of 69%. Of course, our margin at the beginning of the year is lower. And this year, specifically lower because of the lower resources available at Delta, Pirapora and Assuruá simultaneously. Now with this present day panorama in terms of resources, crisis, COVID-19, we believe that a scenario to pursue this year is a year-on-year growth between 2019 to 2020 of 15% to 20%. And to be able to attain this, we have already reviewed our 2020 business plan with some initiatives, of course, cost cutting, we carried out a thorough review to guarantee maximum availability during the wind harvest. Despite the pandemic, of course, we have to face this and guarantee that our availability will not be impacted by the crisis in the second quarter, especially beginning in May. And besides this, we're making efforts to guarantee that Serra das Agulhas returned to operation in the second quarter. And we're going to repair the dam and work with, of course, a compensation of profit because of the unavailability. Now going forward in the strategic viewpoint, this is a difficult moment. But very generally, I believe that the interest rates will remain at extremely low levels. We have observed this. I can't guarantee that this will be the scenario, but it is a good base scenario, a reasonable one. And with this, we have a scenario very similar to what we had before, perhaps slower, but associated to a recession in terms of supply and demand. And this, of course, leads to the need for readjustments in our strategy. What we are able to observe for the time being is that, first of all, we believe that new acquisitions will be originated from our development partners, with a reduced volume at least for the years 2020, 2021. Because new developments depend on demand, on the health of companies, and this is not what we're going to observe. So from the viewpoint of growth associated to our development curve, Delta 7, 8, CEA IlI and other operations in the hinterlands, this volume should be lower than what was observed recently. Now on the other hand, the process of sector consolidation remains active, especially because there are assets -- fragmented assets in the hands of different players in an inflationary environment, of course. And in a crisis, what is recommended is to face the crisis with larger repertoires, a greater capacity to face the crisis. And we believe that the sector consolidation will continue perhaps with different models, with acquisitions among players with different profiles but it will continue. And finally, we also believe that there will be a migration process of debt to equity. And those companies that have a better management, a better execution, standard sound values will be the ones that will have a greater volume of capital to attract, of course, from debt to equity. And we believe that we're well positioned in that sense. Finally, perhaps the most important point, I would like to express my thanks to the team that has shown strong tenacity. They're very determined during the crisis. This allowed the company to go forward, to have availability, to continue on with its mission in a very decisive way, which confirms a perception that we have had for some time already the fact that our best asset, our most valuable assets are the people that work in it. We're extremely satisfied with that. And once again, I would like to thank everybody for their support, their partnership and their collaboration. With this, I would like to give the floor for question and answers. Always myself, Andre and the team at your disposal for discussions. Keep well, keep safe and let us keep going forward.

[Operator Instructions] The first question comes from Carolina Carneiro from Crédit Suisse.

I wonder if you could comment somewhat more about the data of the client portfolio that you mentioned at the beginning of the call. Obviously, you have had to renegotiate with the clients considering the sustainability of the clients vis-à-vis the crisis. If you could give us more color on the exposure that you have per segment of industry and percentages perhaps or which are your greatest clients and which is the representativity in the portfolio. And if you could give us more details on what your contracts are like, in general, the percentage of availability and which is the flexibility that you would have. And which would the compensation in these contracts for companies to maintain the contract for the long term.

Thank you, Carol, for the questions. Very well, let's begin. In terms of -- well, I think our material has all of this material, but I'm going to be speaking very generally now. What I would say is that at present, 70% of our portfolio from the free contracting market have not had significant problems arising from the crisis. Now who are these clients? I would say that 1/3 of them are utilities; 1/3 industries that are not suffering from the crisis, like the food industry; and the other 1/3 smaller, minor clients, but also clients without a big impact resulting from the crisis. Now the other 30%, I would say that among those 30%, 95% did suffer some impacts, some consequence from this crisis. But essentially, it is nothing structural, something that will make the company unfeasible. But of course, there is an issue of liquidity. And something very similar to what we see in distributors and the solution, of course, is to improve liquidity. Well, the contract, we always honor it. This is an important principle of stability to honor contracts. But we are able to find very creative solutions to be able to accommodate their short-term needs. There have been several solutions, but, in general, what is important was to reduce the volumes for the short term and increase the long-term volumes. Economically, this allows for stability for the company. This year, perhaps, there will be a reduction of 3% to 4% in the free contracting part. But in the long term, I don't see an impact that would be greater than BRL 5 million in terms of NPV. And well, those BRL 5 million that I mentioned previously, once again, default does not mean that this will be a loss. There are tools, there's bill and warranties that will enable us to collect or recover part of that. We did very good work on that portfolio. This year, we did have a good quality portfolio, of course. And we had clients with top quality. And given the magnitude of this crisis, we had a minor effect on revenues. Now when it comes to the flexibility, we work on an average of flexibility in our monthly contracts.

The next question comes from Guilherme Lima from Santander Bank.

In the release, you mentioned that you do have the goal of carrying out cost-cutting and optimizing your balance to attain that growth of energy of 15% to 20% this year. Could you give us more details on this? A second question on the incidence of resources, the possibility of La Nina seems to be increasing, what would be the impact of this on the company? And will this happen in 2020 or 2021?

Thank you for the question. Well, initially, about La Nina, I have learned here in these more than 10 years of doing this that this topic is much more sophisticated and complex, and La Nina or El Niño to be able to make estimations on production or wind resources. What happened in the first quarter was a combination of 2 different issues. We had a rainfall level due to the South Atlantic Convergence Zone more frequent in the Northeast, and this had an impact on our resources in Assuruá and Pirapora and our wind resources in Assuruá. And in Minas Gerais, we had the problem with a dam that we are now repairing. In Serra das Agulhas, this is one of the issues. Secondly, we continue with what is called the negative [indiscernible]. The difference between the South Atlantic and the North, which is favorable for the Delta clusters. This leads to rainfall [indiscernible] much higher than the average. Once again, much higher than the average. Therefore, I would say that it is very difficult to simplify everything and boil it down to La Nina or El Niño. There are several factors that increase or decrease our production in the first quarter. We have had incredible productions and also productions way below the average because of this activity of rainfall resources in different regions, especially in the first quarter. As of May, we tend to have greater stability. Now if you look at the series from the probability viewpoint, you will see that it is not very common to have a long sequence of very bad years. And this convergence for the first quarter of the years will happen in the coming period. That's one point. Now in terms of the measures and changes in our plan, we fostered some activities. We suspended new hirings, new contracts, reducing our payroll substantially during this year. We have stability. We had a plan to change offices in Sao Paulo. We have canceled this. We're going to think about it further. And we'll do this definitely in some areas to have more home office. And once again, we have increased the cost reduction expenses. We have reduced our investments in technology for this year. We have rescheduled everything for 2021, 2022. This year, we were to have a significant investment in technology, but there was room to reschedule this. And we have also worked with several initiatives to further increase our cash, unblock it at the holding. Now all of this together to give us greater capacity, free liquidity, to be able to make investments going forward and to guarantee that our results this year will be less impacted by all of the points that I mentioned formerly. Of course, we will tend to have a great deal of capacity. And based on this revised plan, our vision at present is close to that increase of 15% to 20% in additional energy this year based in this new scenario and because of the initiatives that we have put in place.

The next question comes from Gabriel Francisco from XP Investimentos.

I have a very simple question. In this continuation of extension of gross margin, I would like to know if this contemplates the receiving of the insurance. And second question, the short-term price, it had a -- if there will be an unstructural decrease in price in the coming months, if you can foresee any opportunities, your trading company to be able to purchase energy and protect ourselves against this more adverse scenario or events as you had this first quarter and in coming as well? Those are my questions.

Thank you for your questions. Now regarding the insurance. Obviously, we've already had the hit. In terms of revenues, we're not generating this since January. And we were working when the prices were still high, and the crisis arrived and attenuated this effect. And by following the best accounting practices, we have already provisioned part of the indemnity for this insurance. It's BRL 10 million. It's not the entire amount. So we've had the hit. If you look at our revenues, you will see them since January from the first quarter until the last day of March and -- BRL 15 million, I'm sorry, for provision. Now what will happen in practice, we do not know which will be the loss until we are able to reactivate the plant. We might have a lower provisioning now and then have a full indemnity to cover all of the effects, the CapEx and the purchase price. So these are the different movements that took place regarding Serra das Agulhas and the indemnity insurance. Now when it comes to the price of energy, in the trading part, of course, if we forget our contracted energy portfolio, we have an interesting result this year already, and it could pose an opportunity to have -- because of the lower price, not only to mitigate the effects of having lower resources or having to buy energy to honor our contracts, but also to set up positions where we will have this range of growth year-on-year that I mentioned previously.

The next question comes from Fernando Zorzi from Itaú.

I would like to refer back to Gabriel's question and -- now ask the same question on energy in the medium and long term. There has been a demand shock, but what is your outlook for demand for 2021, 2022 and in the long run? We see that the price megawatt per hour is already at BRL 150. Will this drop even further? What will happen?

I'm going to speak, of course, conceptually. I never divulge prices or guidance. From the conceptual viewpoint, we're going to have 2 years of impact in the short-term price, a substantial impact. The scenario, well, it's extending for 1.5 years, 2 years for the time being. And of course, there is an impact on prices and the contracted energy. This is good news for generation. And I do believe that structurally, and beginning in the next 5 years, price formation will have nothing to do with the way we work with our pricing now. And in the third year, who knows, we will have less courage of doing operations in this range, which means that in the next 2 years, the price will remain low. Because of resources, additional operational expenses, OpEx and the crisis, the third or fourth years, we still have questions. We're not going to want to change our contracted position. And from then onwards, we will go back to reality and expansion. And after the crisis, the margin should be very similar because we have the exchange rate impacting the CapEx. And on the other hand, the lower interest rates reducing the intrinsic cost of expansion. So this is more or less our thought process.

[Operator Instructions] As we have no further questions, we will return the floor to Mr. Antonio Bastos for the closing remarks.

I would like to thank all of you for your participation. We are at your entire disposal. Convinced that the crisis will end quickly, and we will resume our full activities in the short term. Thank you very much.

The earnings result conference for Omega Geração ends here. We would like to thank all of you for your participation. Have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]