Earnings Call: Q1 2020

Jun 30, 2020

Good morning, everyone, and thank you for waiting. Welcome to Equatorial Energia SES First Quarter of twenty twenty Results Conference Call. With us here today, we have Mr. Augusto Miranda, Chief Executive Officer and Mr. Leonardo Lucas, Chief Financial and Investor Relations Officer. This event is being recorded and all participants will be in a listen only mode during the company's presentation. After Equatorial Energia Esya's remarks, there will be a question and answer session. At that time, further instructions will be given. This event is also being broadcast live via webcast and may be accessed through Equatorial Energia SES website at www.equatorialenergia.com.br, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is completed. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference. Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Equatorial SES management and on information currently available to the company. These forward looking statements are no guarantee of performance. They involve risks and uncertainties because they relate to future events and therefore, on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward looking statements. Now I will turn over to Mr. Augusto Miranda. Mr. Augusto, you may proceed with your presentation. Good morning, everyone. First of all, I would like to thank you for participating in our conference call to announce the results of quarter one twenty twenty. I'd like to start by describing the highlights of the quarter, and then I'm going to talk about some recent events. And then I'm going to turn over to Leo to talk about our operational and financial results. And finally, we will open for questions. Now let's talk about the quarter's highlights on Slide number three. In quarter one twenty twenty, the consolidated recurring EBITDA of Equatorial reached BRL 1,100,000,000.0. This number was impacted by the accounting of the results of the group's transmission segment, the positive recurring results of the new distribution companies acquired and the growth in the gross margin of the currently existing distribution companies. I also highlight the relevant liquidity position of the group, which closed March at $5,700,000,000 in cash and added to the resources that we will be entitled to due to the COVID account will assure us a very robust liquidity position. In our distribution operations, I'd like to call your attention to some important points. The reduction of our losses in three or four of our concessionaires and the losses today are already very low. We're talking about very low values. And also the effect of Equatorial Hualago was within regulatory standards. So all our companies are within regulatory standards. Another highlight is the consolidated volume in quarter one. It grew by 6.2%. Yes, you heard me right, 6.2%. So we see that we were moving in a great direction. And unfortunately, the pandemic, came along. But so the the the numbers were very positive with growth over 5% in all our distribution companies. In the transmission segment, the physical advancement of our projects already reaches 81%, and we can say that we are at the final stage of construction of our ventures. 84% of the long term funding has been already disbursed, and this is contented proof that we are executing our projects at a very fast pace. In our EBITDA, I highlight the positive results and increasingly representative results of the two distribution companies that we recently acquired. BOE had an EBITDA adjusted EBITDA of 53,000,000 in the quarter and Alago was BRL 54,000,000. So in this sense, we are truly advancing with a lot of quality and safety. And we see the response of everything I just mentioned when we look at the DAC and the FAC and the PMSO per consumer. And all this is reflected in the adjusted EBITDA with positive values for companies that had negative values last year. So now let's move on to Slide number five. In June, I'm sure you all know that Enel approved the so called COVID account. The COVID account is a financial relief to the power industry to cover the impacts of the crisis. The payments will be made in the form of anticipation of CVA resources, financial effects of over contracting and anticipation of specific items of Parcel B, among others. To our distribution companies, the COVID account will mean an injection of practically 1,600,000,000.0 in cash. In addition, in order to address the economic crisis, NAO should open a public consultation within the next sixty days to regulate this issue. So now let's move on to Slide six. Here, we talk about our collection initiatives. So here, we see some of our initiatives. Slide six shows how creative we are and how we've been able to reinvent ourselves with some initiatives of the group to encourage collection in our distribution companies during the social isolation period. So let me highlight some of these points. We have the delivery payment. And what this means is that the company's representatives can take the credit card machine directly to the consumers that request this service in our channels. So we are already using this strategy, and we are seeing the results. We also have the possibility of consumers paying through debit or credit card directly on the website of the distribution companies. And they can also pay through a bank slip in any point of payment. I'm sure you remember that for a while now, we have been investing in the creation of a digital area. And this has advanced greatly. We already had some products, and now we are implementing and generating some incredible products to facilitate digitization and communication and make consumers' lives easier. Another highlight that's worth noting is that in the first quarter of twenty nineteen, we added three and twenty two thousand low income consumers to our consumer base. And finally, last but not least, we launched the campaign Energia in Gia, where consumers can generate lucky numbers through non defaulting payment, enrollment in the low income registry, and they can exchange those points for discounts and gift cards. And we'll also have a draw for a car in each of our distribution companies. Our products are very customized, and our customers respond really well to this type of product that we have introduced in order to encourage, collection. Now Slide seven. With the temporary closing of our brick and mortar customer service stations, there was a strong migration of our demand to our digital channels, either on our website or interaction interaction with Clara, our virtual customer service operator on WhatsApp. So that's the effort that we made to take customers from our brick and mortar points and take them to the digital channels. We see the need to include more services in these channels, such as the possibility of enrolling as a beneficiary of the social tariff, as a low income consumer, the possibility of self redeem, the payment of bills. And we have been working tirelessly so that the user experience in our digital channels can be positive. And even after the crisis, after we go back to our normal in person customer service, these virtual tools can become more and more relevant in the relationship with our customers. So we have been investing a lot in digital to improve the tools that we have and facilitate our customers' lives. Now I'd like to turn over to Leo, and he is going to talk about our financial and operational results in details. And in the end, we will open for questions. Leo? So now let's look at the results for the quarter. The billed energy volume consolidated for the four distribution companies grew by 6.2% in the quarter when compared with the same period last year. The 5% growth seen in Maranhao is a result of the resumption of the economic activity in this state with relevant growth of the industrial segment, boosted by one specific customer in the mining industry and also a healthy growth of 4.9% in the residential segment. The 6.9% increase in Tara was mainly driven by the more favorable weather in the quarter and the expressive decrease in the losses of the period. In PLOE, despite the weaker growth compared to our other concessions, POE showed a variation of 5.3% in its build market, strongly driven by the reduction in energy losses, which have been dropping for four consecutive quarters in that state. And Alagrohas grew by 7.3% in the quarter, also a reflection of the decreased energy losses and better weather conditions. Slide number 10 shows the growth of the injected energy and a consolidated number for all concessionaires in this quarter. Consolidated numbers show a growth of 3.6% in quarter one. Except for PLE, which showed a decrease in injected energy, all our other concessions showed increases mainly due to the economic resumption of the states and the better weather conditions. For some quarters now, we have been intensifying the enrollment of consumers classified as low income who are eligible to the social tariff benefit. And due to the campaigns implemented by our distribution companies, in the last twelve months ending in March, we were able to add more than three and twenty two thousand consumers in this category, reaching a total of 1,900,000 families enrolled. Slide number 11 shows information about the behavior of the injected energy for April and May, which were months that were strongly impacted by the pandemic. Combining the two months in terms of injected energy, we see a consolidated drop of 3%. Among our concessions, we believe that a more residential profile compared with the national average helps explain this relatively smaller drop, particularly in the states of Maranhao and Para. As for the build volume, we see an effect of the pandemic, although a little more restricted with a consolidated decrease of 2.2% in our concessions. It's worth noting that the accumulated volume in the year 2020, which means from January to May in injected energy, increased by 0.9% and the billed energy, 2.9% despite the pandemic. So this means that we are showing positive growth in these two indicators despite the pandemic. Now moving on to Slide number 12. Here, we show the evolution of the number of consumers in the low income category after the start of the crisis in Brazil, which was one of the actions that we established as a top priority right now to try to attenuate the impacts of the economic crisis in our collection. Since the from the March to the May or in a period of two months only, we added 223,000 consumers as beneficiaries of the program, an increase of 12% of the base in the past twelve months versus the 20% in the past twelve months that ended this quarter. The growth seen is a result of a set of measures. For example, we included the possibility of consumers enrolling for the benefit on our websites and WhatsApp. And we also ran campaigns in our distribution companies to encourage enrollment. It's worth noting that between April and June, the discounts and consumer bills of consumers classified as low income with consumption up to two twenty kilowatts hour months were expanded to 100%. And the states also granted full exemption in the ICMS for during this period. In Alagoas, ICMS exemption for low income consumers with consumptions of up to 100 kilowatt hours was approved. Slide 13 shows the total losses of our distribution companies. In Para, we once again see a drop of 0.6 percentage point in total losses, which is a result of the resumption of a more integrated combat plan with a change in the type of distribution grid in specific areas of the metropolitan area of the lane, which makes it more difficult for consumers to execute fraud. In POE, we see losses for four consecutive quarters and a significant retraction of one percentage point. In Olagolos, for the second consecutive quarter, we showed positive results with the entry and operation of our new combat teams after they were trained and after we structured a more consistent plan in the end of last year. On Slide 14, we see that the quality indicators for Para and Maranhao are still far below the regulatory targets. And in the continuity ranking of ANEEL in 2019, Para is number two. The growth in the deck for POE is a result of the adjustment in the calculation after our arrival. And this should be the last quarter impacted by this change. In Hana Gaulas, there was a similar adjustment to the calculation. However, this was a retroactive adjustment since the beginning of twenty nineteen, which caused a change in the indicators that had already been disclosed in previous quarters. After these adjustments, we can see a relevant evolution in this indicator with a drop of twelve hours and interruptions in only one quarter. Now let's move on to the SEC on Slide 15. It's important to note that all our concessions are within regulatory standards with the recent evolution in the indicator presented by Alagoas. In the eleven months that ended in this quarter, consumers have less than half a day of power outage. And in Para, it's less than one versus more than 4x per month before we reached the before we arrived in Para. Quality indicators are a central point of our business model. And we are always striving to offer the best quality possible to our consumers without losing focus on the operational costs and investments required. Now Slide number 17. Here, we see the evolution of our manageable expenses. Now that we have four distribution companies, we are constantly chasing opportunities through the use of comparisons and benchmarks, gains in scale, productivity and standardization. The most emblematic cases of opportunities being tapped are PoE and Alagoas, which once again reported significant drops in the OpEx for the quarter and are gradually coming closer to the efficiency levels presented by Maranhao and Para. Of course, there's still a difference to be covered, but we believe that we are on the right track. In Para, where we still have open opportunities, manageable expenses showed a decrease of 3% due to the organizational redesign of some activities in the company. In Maranhao, the PMSO increased by 1.7%, but it's still below the inflation rate for the period. Now Slide number 18. All our distribution companies had a relevant evolution of their EBITDAs in quarter one. Maranhao showed a 13% increase grounded on the evolution of its build market, the Parcel B and a reduction in the quarter's PDA. The EBITDA growth of Para of 56% in the period is mainly due to the tariff review of August 2019, in which there was an expressive increase in the RAB and also the growth in the volume of the quarter. And this expressively contributed to the improvement in the gross margin. As for Piaui, with a 51% growth and Alagoa, which was able to reverse its negative numbers. This was positively influenced in the quarter by the drastic reduction in their manageable expenses, volume increments and reduction in energy losses. Now Slide number 19. Here, we show the consolidated EBITDA of Equatorial. The adjusted EBITDA for quarter one 'twenty reached BRL 1,100,000,000.0, a 77% growth over quarter one twenty nineteen. If we consider Equatorial Transmiso and Equatorial Desrubuiso in Alagroas, the growth in the group's EBITDA And this concept would still be very relevant and would reach 30% quarter on quarter. In this light, the main contributor the main contribution would come from Para followed by Maranhao in absolute terms and POE in relative terms. Now Slide number 20. Here, we see the debt payment schedule and the leverage of the company. The leverage of Equatorial, considering the 100% consolidated assets, reaches 2.2x this quarter after consolidation of the numbers from POE and Alagoas and the accrued investment already disbursed for the construction of the transmission assets. The group closed the quarter with $5,700,000,000 in cash, which is enough to cover more than two years of debt payment. Considering that we have another BRL 1,600,000,000.0 of liquidity from the COVID account, which is under evaluation and that the financing for investments this year are entirely contracted and that we had already reprofiled the payments this year even before the crisis, we believe that our capital structure and liquidity is puts us in a very comfortable situation to go through the current crisis. Now let's move on to Slide 21. Slide 21 shows the main investments made by Equatorial in the past few years. As you can see, investments in transmission have intensified in 2019. And we are coming to the end of the construction of several lots. So there was a decrease in the amounts expended in the first quarter. It's worth noting that 100% of the funds predicted for transmission lots are already contracted with public banks such as BNDES, FDA and Banco do Dordeschi as well as raised via infrastructure debentures. Of the BRL4.1 billion in contracted loans, 84% has already been disbursed, which proves our very high physical advancement. With the completion of all our transmission projects, a significant part of the cash generation of the group will come from this transmission segment, improving the risk perception of the group before the market due to the stability of the cash flow of this segment and contributing for liquidity, which could be used for new growth opportunities. We will now open for questions. Thank you. Thank you. The floor is now open for questions. The first question is from Fernando Zosie Itau. I have a question about the sanitation sector. Now that the bill was approved, we think that we could see a lot of privatization in the state of Alagogos in the second half of this year. So I'd like to see what is your appetite for investments in this industry if you're interested in participating in the Yacazau auction. And also, if you're interested in participating in the Yacazau auction, we understand that the qualification of the auction requires previous experience as operator in sanitation. And in this case, you would need to participate as a partner. You would need a partner for the auction. And would this partner need to have a minority stake to be able to participate with you in this auction? Thank you for your question. If you see Equatorial's growth, you see that the growth is exponential. If you look at the company 2012, for example, and how it has grown over the past year. So of course, we have to look for other opportunities in our segment. So today, we have an M and A a very well structured M and A department. And they have a portfolio full of projects, and they're always chasing opportunities. So sanitation is naturally one of the segments that is very attractive to us. And yes, we are considering that. We have an obligation to consider that, but we have to see what makes sense and what doesn't. And we know that we don't really have a regulatory framework. When we do have a regulatory framework, things will be clearer, and we will be able to invest in this more strongly. And you know that we need to qualify for the auction. So we have the obligation to analyze, to assess all opportunities, and we have to see whether we have to participate with a partner. This is part of complying with the rules. Yes. Thank you. The next question is from Gabriel Francisco, XP Investimentos. Good morning, everyone. Good morning, Augusto and Leonardo. I hope you're doing well. My question is what is the status of default delinquency per distribution company? I'd like to have more details. Of course, excluding low income consumers who are not in default due to the current regulatory situation. So this is my question. This is my first question. I may ask a second question later. Leo, would you like to answer that one? Yes. Thank you. Thank you for the question. When the pandemic started, when we looked at the first measurements, what we saw was that the level of default was varying between 15% to 25% in the first few weeks. The numbers were higher in the first few weeks. And what we see now is a slowdown of this default, of the intensity of this default. The latest data that we have from mid May shows smaller numbers in a range from 5% to 13% in our different concession areas. We have also been monitoring some numbers in June, which are still open. But what we see is a sentiment or some signs of improvement. But you're right. At first, it was very intense, and then it slowed down. And I think that we're moving towards stabilization at a lower level. And that excluding low income consumers, as we already mentioned, in low income, we have advanced greatly with low income consumers. And if we look at data from April, for example, we were able to add on a consolidated basis 80,000,000 additional, subsidies, which is very helpful in terms of collection, and it also decreases the need for collection efforts. And finally, it's worth mentioning that as these numbers improve, we will draw new strategies to allow for better stability in our numbers. Yes. Thank you. So as a follow-up question, if the economic balance of your concessions is significantly affected, are you prepared within the timeline proposed by NAL to request extraordinary reviews looking forward? I think that now we have to wait for the results of the COVID account, which was created to improve the liquidity for the industry and protect the entire chain and to allow us to gain some time for discussion of the second chapter, which would be balance. So before we require balance, we need to discuss how this is going to be done. And I think this is a discussion of industry with an AL, the best way to do this. Now we have to see what will be the outcome of the COVID account, which is now underway. And after this step, then we can assess the possibility of these, requirements that you mentioned for extraordinary reviews. Thank you. So just to add to what Julio said, we were very active with Abralis and other concessionaries about the COVID account and all the financial aspects involved. And this public hearing within the next sixty days to define the rules, we know that Abracci and Abrales, they have been very active and also other companies. So we expect to be able to positively contribute to this discussion. Of course, everybody wants to solve the problem. This is clear. But within the next sixty days, according to ANEEL's timeline, we hope to contribute positively to restore the balance true balance for all companies. And we hope to have clear rules and balanced rules because is trying to help the companies. So maybe we can find a simpler, clearer, more objective way for this recognition. Thank you. Thank you, Augusto and Leonardo. The next question is from Carolina Carneiro, Credit Suisse. Good morning. Thank you for the call. I have two questions. First question, could you please tell more about your volume performance so far between April and June? We know the SEC has been disclosing some data every two weeks by state. And, apparently, your performance in the region is still very positive, but it's a little difficult for us to understand the data because it mixes ACL and ACR. So can you please tell us if you see a positive trend for the accurate numbers for the regions where you have concessions? And the second question, could you please update us on the RT process of CPESA? We know that the process is no longer being discussed. So is there any update regarding this topic? About CPSA. Well, the the problem of that process was that because we were talking about a total opening of the base, and that was what the tender proposed. Right? So we registered that we complied with all the requirements of the process, all the qualifications. We were very diligent to deliver submit everything to ANEEL. But at the time, ANEEL told us that they wanted to test the base on in the field, which is a legitimate request. So we agreed to that. But, also, according to the rules, we are entitled to that review in December. And at the time, we there was a a delay of two, three months. But from then on, the RT process in Alagoas has fixed the rules. So the rules are no longer a problem. They went to the field, and they checked everything, and they checked our data. And now with the COVID account, Enel was very absorbed by this topic and the importance of this topic. So we are now resuming the discussions. Last week, we resumed the discussions with the reporter, doctor Sandoval. So we resumed the discussions with their technical department. So we are at that stage where we're discussing, we are serving the data, and we are, waiting waiting the the different options. And we have to discuss the values in more details to answer any questions, any open questions. So the process is now on hold. It's still being analyzed by Enel. We should have new meetings in the future to discuss this. It's that natural process of a tariff review, particularly when we talk about an extraordinary review. It's more cumbersome. It takes more time. Leo, would you like to talk about the market? About the market. We know that in the numbers accumulated until May, we had a 19% growth in injected energy. If we look at the combination of the months of April and May, we see a consolidated drop of 3% in injected. And in the build volume, the drop was 2.2. In June, we do not yet have the numbers, but what we see in June are some signs of recovery, of of improvement. Considering that the data from May, in particular, there was a drop of 3% in injected. And now we see some signs of improvement, of slowdown of this decrease for June, a month for which we do not yet have the data. Okay. Thank you. Excuse me. We are now concluding today's question and answer session. I would like to turn over to Mr. Augusto Miranda for his closing remarks. Well, and gentlemen, once again, thank you very much for participating. One thing that during this crisis, we are learning a lot of lessons. And one of the lessons learned that is that we have to meet more frequently. We have been integrating our processes, and the success of Equatorial is mainly due to the engagement of our people. From the shop floor to the executives, our people understands what the regulatory world looks like, what the game looks like, and how you can meet the needs of your stakeholders. And one thing that we have always been striving to do is to integrate our processes. Even companies like Maranhao, which is a very stable company and also Para, we have these two recently acquired companies. And we are combining our expertise and all the lessons that we can learn from these companies, seeking operational excellence. In transmission, you see that we have a lot of advancements. We are doing really well, and we're seeing very good results for Equatorial and all its investors. It's a segment that we have advanced greatly. Our team is working very efficiently and a lot of new businesses as well. And I think that this crisis can also be, the source of many opportunities. Equatorial has a very robust cash, and it is able to face this crisis and look for opportunities and come out of this even stronger, everything related with collection, with losses. And although we cannot directly interact with our consumers because we have a lot of precautions that we have to take. We have other things that we can do. And we have to be monitoring everything through a centralized system. For example, in Berlin, for onethree of the capital system, I have telemeasurement systems for onethree of the capital city. And this will allow us to come out stronger from this crisis so that we can reach our targets faster. So thank you very much for participating, and I can say that we are working hard and nonstop to tap to tackle any potential problems that the crisis may have brought us so that we can use technology more efficiently, to increase our integration, to make our company stronger and to generate better and better results for our investors. Thank you very much. This conference call is now closed. We thank you all for participating. Have a great day.