Energy Co Of Minas Gerais Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for your patience. Welcome to the conference call regarding the results of the first quarter 2020 press release. All participants will remain in listen-only mode during the company's presentation. Following that, we will begin the Q&A session with further instructions. Now, I would like to hand things over to Mr. Antônio Carlos Vélez Braga. Please proceed, Mr. Velez.

Good afternoon, everyone. I am Antonio Velez, Cemig's Investor Relations Superintendent. We are now starting Cemig's first quarter 2020 earnings conference call and webcast with the following executives, CEO, Reynaldo Passanezi Filho; CFO and IRO, Leonardo George De Magalhaes. This broadcast can be followed by the following phone numbers, 55-11-2188-0155 or 55-11-2188-0188, as well as on our website, http://ri.cemig.com.br. I'll now turn the floor to our CEO, Reynaldo Passanezi Filho, for the initial remarks.

Good afternoon, everyone. It's a pleasure once again to be here with you. I think there is a bit of an echo, but it is a pleasure to be here with you for the results of the second quarter. I will have a brief introduction before I turn the floor over to Leonardo Magalhaes for the presentation. I believe that we are meeting our main objectives. Obviously, the priority right now is to guarantee the health and safety of the population, our employees, and our external partners. We're proud to say that we have only two confirmed COVID cases, one in the South of Minas Gerais and one in Brasilia, among our 20,000 employees, which is a testament to our effective protection measures. Despite the challenges, we are focused on maintaining quality service and are showing positive indicators of service continuity. The results might seem negative due to the restatement of figures resulting from life issues and FX depreciation; however, adjustments show positive results in EBITDA, indicating the company's efforts for extensive control and focus on strategic businesses. We are facing two major challenges: lower volume and increased delinquency due to the pandemic. We are working on solutions with our COVID committee, focusing on reducing delinquency and improving service continuity. Digital channel usage presents a major improvement opportunity. We are also committed to investments in distribution, despite the current challenges. The pandemic might prompt a re-incentive for industrialization in general, which could be positive for Brazil and specifically for Minas Gerais. These were my initial remarks, and I will now turn the floor to Leonardo.

Thank you, CEO, for your comments. It is undoubtedly critical to address the challenges presented by the pandemic. We have established main pillars to manage the crisis, with top management gathering every morning to discuss various issues. Our primary focus is ensuring service continuity while protecting employee health, maintaining client relationships, and ensuring financial sustainability. The company has implemented several measures to prioritize essential services, particularly for hospitals and medical units. We maintain our investment program in distribution, ensuring cash flow while postponing some investments to 2021 and 2022. With effective measures in place, we have seen promising results in customer service quality. Regarding COVID cases among employees, we are taking care of those affected. We have donated 5 million to hospitals to help fight the pandemic and have established rules for payments to public hospitals to maintain essential services. Our measures also include reductions in CapEx by 13% while maintaining a base investment of 1.5 billion. Our OpEx reduction goal for 2020 is approximately 100 million, aiming for operational efficiency. We’re also looking at measures related to labor tax delays to mitigate the impact of COVID-19. Overall, maintaining liquidity is paramount as we navigate these challenges.

Now on Slide 16, we prepared some charts to explain energy consumption behavior in Cemig distribution. Overall, energy distributed saw a reduction of 2%. The decline primarily results from decreased economic activity and a 3% reduction in industrial clients alongside a significant decrease in rural consumption due to ample rainfall compared to last year's drought. As for the financial results in the first quarter of 2020, we experienced notable effects on our finance statements. This includes a market value restatement resulting in a loss of BRL609 million related to our divestiture from Centraeste, impacting our bottom line but reflecting necessary adjustments to the market context. Overall, we understand that the social isolation measures had an impact, amounting to a 2% drop in electricity sold, and contributed significantly to the increase in delinquency.

In summary, despite facing numerous accounting effects that posted losses in the quarter, we believe the foundation remains strong. We are focused on improving operational efficiencies and reducing costs. Overall, we are optimistic that the actions we are taking will yield good results in future quarters.

Next question is from Carolina Carneiro from Credit Suisse.

I have a question. You mentioned several measures for cost reduction and preparing for possible income challenges arising from the crisis. The Company has announced a new investment fund with some reductions to adjust cash generation. Can you comment on the divestment plans for non-core assets in this challenging environment?

Thank you for your question, Carolina. Cost reduction is a priority for us, and we are already seeing significant reductions compared to prior quarters. We are reviewing all our processes with a focus on maintaining service quality while enhancing operational efficiency. As for the divestment program, we currently hold non-core assets on our balance sheet. However, considering the current situation, it is not the best time to sell those assets. While we have plans in place, divestment will occur when conditions are right, and will not detract from our core focus on strengthening our finances and stability.

Actually, the covenants issue is incorporated in our bond contracts, and we have taken steps to reflect that accurately in our financial obligations. This is not controversial and aligns with our valuation practices. Our calculations now more accurately reflect our exposure, allowing us to monitor risk effectively.

In the covenant calculations, I would like to understand if you had to work with the issuing bank with the bondholders or if this did not involve any questioning from the players involved?

I have two questions. The first is about the profit-sharing program, and the second about ABA. Can you provide clarity on the expectations for these going forward?

Regarding the profit-sharing program, this year we expect adjustments aligning strictly to 4%, as we no longer have any extraordinary gains included. Concerning ABA, we anticipate that while we see a rise in delinquency, the actual impact will unfold gradually as we monitor overdue bills due to the ongoing uncertainties. Electronic payment represents 40%, while other methods occupy 60% of our revenue collection sources.

You mentioned the performance of delinquency in April. Can you comment on anything about May? It seems that you have seen an improvement in sales volume.

Yes, in May, we are seeing improvements compared to April. Delinquency is still a concern, but we are cautiously optimistic about the trend we're seeing early in the month. However, we do expect some fluctuations as the month progresses due to seasonal business cycles.

Can you comment on the free client contracts? How are you managing these clients in the current economic situation? Are they negotiating contracts, or is it primarily spot pricing?

Negotiating with free consumers can be complicated due to market conditions. In many cases, clients are seeking to negotiate better terms based on current economic pressures, although it remains a challenging process. We're proactively discussing how best to manage these contracts while maintaining viability for all involved.

I have a final question about recent changes in top management and whether these signal any shift in strategy.

There is no specific reason for the changes in management; this was an agreement we had with them. Some chose to leave, while others were offered opportunities elsewhere. It is a normal part of organizational dynamics and does not indicate a shift in our overall strategy.

Material factors related to COVID-19 and liquidity remain at the forefront of our discussions. We are currently looking at multiple options to stabilize our operations in this unpredictable environment. Our aim is to maintain financial health and manage expectations across the board while navigating these developments.

As a summary, despite the challenges reported with accounting effects that impacted quarterly results, we remain confident about our operational foundations. Our focus on cost efficiency and operational enhancements paves the way for future improvements. We are prepared and will take the necessary steps to mitigate exposure and ensure stability moving forward.

This concludes Cemig's First Quarter 2020 earnings conference call. Thank you all for your participation and have a good afternoon.