Centrais Eletricas Brasileiras SA - Eletrobras (AXIA) 2016 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon, and thank you for waiting. Welcome to the Eletrobras teleconference to know the results regarding the [third] quarter of 2016. Everybody participating will just be listening to the presentation. Thereafter, we will have a Q&A session. We remind you that this presentation is available in a ppt at the website of Eletrobras, Investor Relations.

Before we continue, everything that will be said in this teleconference in regards to the business perspective, projections, operational goals, are the belief of the Board of Directors of Eletrobras based on information available to the Company. These do not ensure performance, because we have certainties and uncertainties that might influence the results.

Investors should understand that economic issues and other operational issues might influence the results in the future.

Now I give the word to the speakers Mr. Armando Casado de Araujo, Director of Investor Relations and Wilson Ferreira, President of Eletrobras.

Mr. Wilson Ferreira, please.

Good afternoon to all. All of you that are here for this conference of the [third] quarter, I go to the third page, we have the highlights of the second quarter 2016, some very important issues of our results. We're not going to get into the details, you can see them. The operational revenue net over BRL33 billion, influenced by the (inaudible), it had an impact in the result, over BRL17 billion.

We have a set of provisions totaling more than BRL4 billion. We have contracts that still had liabilities and investments in equipment, the reversion of the provision in regards to the judicial process that we're going through, almost BRL400 million because we also have an monetary update of these shares of around BRL75 billion.

The Company reached BRL23 billion in the semester. I also highlight the negative result of BRL1 billion due to the variation in the exchange rate and stabilization of the renewed concessions. These adjusted [BRL18.200 billion] the investments in this trimester, BRL4 billion. We have a budget that is predicted for 2016. We have an installed capacity of 600 megawatts. So we have more than 45,000 mega.

We have the power plant of Belo Monte and we have 69,500 kilometers of Chesfs. We'll also detail the new Director, Board of Directors. We have a confirmative Board of Directors. At the beginning of this quarter, we will align the control of our distributing companies. I was talking to the team about this result to facilitate the understanding of this result, especially by the analysts.

Page 4, we have the reported value in the first line. Three main elements, net revenue and below, we have the managerial results of the Company. Once we have done the non-recurring effects, we would have a better idea to the analyst about what is the recurring result of the Company. The results are, since we talked about the net revenue BRL25 billion, a growth -- the variation was BRL33 billion, the growth in the second trimester in the last year, we have an addition of BRL25 billion, showing that the accounting of [RBSE].

Actually, the results that were reported are strongly affected for this accounting for RBSE, totaling [BRL26.75]. We reached BRL11 billion, so a loss, but is equivalent to the last trimester or quarter. This report we have a credit in the revenues reaching BRL17 billion, a growth BRL69 billion. The EBITDA of the company, an addition of BRL656 million, totaling BRL948 million and the loss of the Company based, in a recurring base, an increase of [BRL281 billion] reaching a total loss of BRL871 million.

The adjustments between the reported line and the managerial line are shown below. There is an important effect of the accounting of the RBS in the total of BRL25 billion. This is in net revenue, EBITDA and et cetera. The contingencies, a total of BRL596 billion in the last trimester. This is in that revenue. The contracts, especially of Angra, these variations allow us to have a comparison and get to the managerial results.

Page 5; just a reminder of the decisions that we've made at the General Assembly where we did not approve the concession of the six distributors; for Eletrobras and Chesf controller at Acre, Rondonia Boa Vista, Roraima and Amazonas Energia. All six were not continued. We approved at this assembly, the transfer of the shareholding control of Eletrobras associated to the bids in this concessions up until December 31, 2017.

The transfer of the shareholding control will observe the rules of PND -- will be framed in the PND. Eletrobras will be a temporary service provider until the end of this period, until 2017-end, where we imagine that there will be a transferring in the shareholding control and in this period, the services will be done in a way that we have a revenue that is adequate and that will allow to have a cash flow minus reposition investments and any other values we will have the possibility of receiving these resources from sectorial funds, not just RGR and [CD].

We predicted that throughout this period we will have a sales process that is clearer for every one of the bids we have until August 31, 2017 should do the enrollments. We have the tariffs of each concessionary, we have the adjustments. But until end of August, we will have a revision of all the issues involving the bid.

We are accelerating our work in the process of expediting the concessions, eliminating any sort of loss of cash flow in a way that we can get a value. We can recognize that these companies have with the Eletrobras Group, and once we have done that, our A plan is that we do the privatization of these concessions until the end of 2017. If we do not have any success in this public bid, the privatization, we will have their liquidation.

Now we go to the results, the managerial results. Page 6, it's important to see that the decision that was made, it re-puts Eletrobras at its natural location. I will explain this. The state companies had more difficulties to operate with their distributors, because of known issues.

First, distributing companies they are entities that predict reinvestment that is daily in their operations. So thereafter, they have a compromise with productivity, quality, losses that are reviewed every tariff cycle, every four years. These state concessionaries have more difficulty to review contracts, to mobilize and reduce the number of employees. These are situations that can influence our results. Maybe it's different from a private concessionary.

The activity for generation and transmission where Eletrobras is the biggest Company of generation and transmission in Latin America, one of the biggest in the world and one of the biggest in Latin America, and we see that our results, managerial results that I can see in the second line, and we can see the importance of disposition.

Instead of having a growth of 2% in net revenues, we've grown 8%, BRL3.71 billion. The EBITDA of the Company in the quarter, we have seen the effects recurring of RBSE. We have a growth in EBITDA, BRL1 billion, and we have had -- we should have had a profit when comparing to the same quarter of last year.

Obviously, we had these results when we adjust or eliminate the consolidated results of our distributing companies that are referenced in this lower part of the page where you can see the impacts, especially these on the second quarter. These concessionary, these companies on the next year and a half we have to improve their performance and we have the managerial line with the distributors. We are focusing in the management of Eletrobras and the activities to generate production where we are the biggest, but we are still not the best, but it will be briefly according to the Directors that we will share with you now, at the end of this presentation.

Page 7, we have our consolidated net revenue, total revenue. The business of generation, transmission of energy; you can see the importance, naturally, of the transmission activities in the accounting of RBSE. But I would like to highlight that on par with this, is the growth of the net revenue from 2015 to 2016, and activity of generation of energy we had in the first line, a small drop [BRL2.4 billion].

And obviously, taking into account that the macro economical scenario should be to taken into account, and in this distributing activity we've had our growth and we've had EBITDAs that are positive, revenues that are positive. We had a first semester that is very well influenced by the accounting of RBSE in the area of transmission. Anyways, we have the consolidation of our business in this recent semester and we've had this influence on the transmission business.

You can see our participation that is much larger of the activity in the transmission activity and we can clearly see that we have a repetition. We have 21% of the segment in generation, 70% in transmission and this configuration of one-third, two-third will be not maintained when we are focused exclusively in transmission.

Page 8, we have the RBSE and you can see its registration and we have each of the four concessionaries of Eletrobras; Chesf, Eletronorte, Eletrosul and Furnas. We have this BRL7 billion, [low] historic balance. And due to the directive 120, we have an addition of BRL25 billion. Here we have to highlight that out of the companies Chesf, Eletrosul and Furnas have had their values homologated by ANEEL. And in the case of Eletronorte, we are based in the interactions that we had with ANEEL and we hope that there is less homologation happens in these next couple of days.

And we have Eletronorte something over BRL3 billion. The composition of the historic balance plus the update, we have an updated value of BRL33 billion. Not accounting for the difference of BRL25 billion, we have the effects that are referenced here below for each of the companies and we have to highlight BRL25 billion of consolidated operational revenue of Eletrobras here. We have a cost that will be deferred with a deadline of BRL8.475 billion, the net revenue of BRL17 billion.

Now we will do an evaluation. In this first moment, we have material services, personnel, we will report -- and PMS in the next semester. So at this moment, we are reporting the total growth of these three numbers of 19% and there is two important highlights. First, the issue of personnel 15% of growth, controlling naturally the increase in payments that happened in the second semester, and this influences the rest of 2016.

You can see all the numbers here incorporated 15% and materials [14,8%] reflecting the economic movement of the Company and the part of services, an increase of 31%. In this line we can compare with the last three, we have a provision for payment of the services of investigation and costs for Eletrobras.

Most of the difference is detailed in the documents that we have available for the investor analysis. You can observe the numbers. This is due to the investigation works necessary from one side so we can make it viable our opening at the New York Stock Exchange and we are working with the perspective of concluding these investigation works at the beginning of September. So, we can compare here the arguments so we can have the accounting and our defense along with the New York Stock Exchange.

Page 10 where we detail the provisions, the operational conditions. Here three elements that you can highlight; contingencies regarding the evaluation BRL394 million regarding to the provisions of the compulsory loan beyond those contracts. The main contribution for the preservation of equipment of Angra 3 power plant and the reduction, basically everything is from Angra that has been lowered or dropped.

We had an increase in provisions in the third quarter to over BRL3 billion in the second quarter of 2016, [the third] we observed that mainly in the semester evaluation. We will have an adequate provision of the onerous contracts of Angra and Belo. These are the main values that determined this variation.

Now we will go to page 11, there we'll have some considerations about the leveraging of the Group. As you can see our net debt, adjusted net debt, BRL18 billion and the relation of this net liability with the EBITDA, we have an improvement of [10,4] still very far from what we want to have in the next quarters. These are very well-leveraged and we can have an investment program that is more rationalized.

Below we observe the profile of this debt, this liability, it reaches BRL45 billion. 58% of it is in reals, national currency and the main indexes are placed on the left, highlight to the debt in CDI BRL12.400 billion, the BRL7 billion debt; these are the main ones.

On the other side, our index debt is more than $9 billion in foreign currency, in dollars and 2.800 billion in the other currencies. Here is the first effort to show you the evolution of this debt and we have a specific indexer for IGE, it's fixed. We have 13.2% of this debt. The important difference of the liquid debt to the total debt is the procedures that we have for RGR and the value of the revenues of the Itaipu.

Page 12, the analysis of the business segment, so we can show clearly an addition of 625 megawatts liquid in the activity of generation totaling 46,016 megawatts, 24,400 concessions non-homologated concessions, with differentiated prices 13,000 in promulgated concessions, these are tariffs that are differentiated by the activity of operation and maintenance.

Also concession on Law 132 which is those volumes of energy that are sold in the north of the country and we have 5,000 megawatts, our participation in the SPEs of generation. We have about 136 in the area of generation [wealth].

Second element; more than 1,060 km of transmission lines. Here in a detail of the extension always above 230 Kv and the basic network. We have concessions thousands of kilometers in non-promulgated concessions, so Eletrobras and the companies that it control has differentiated tariff that higher and 57,000 kilometers in promulgating concession that will have a tariff. And now we have over 6,000 kilometers participation in 41 SPEs.

On the right, we have our work in the quarter based on the fixed concessions, 4.2 million customers and these six concessionary companies, more than 250 kilometers (sic - see slide 12, "250,000") in distribution lines. We serve these consumers in 459 cities.

[Page 3], the movement of the -- we have a reduction in the market at the stock exchange in Sao Paulo and New York. We have our shares in Brazil, we closed the year in 2015 with a market value and this movement we have over 100% -- our value at the stock exchange in Sao Paulo is over BRL18 billion. And we have an improvement in the daily volumes of shares an ATN of 1.6 million shares to 1.9 million shares. This is something important.

Same behavior that we have in New York at Page 14, we can see that the volume of shares is much less than we had last year. And we have here an important value of the shares per dollar. I believe that these show a positive perspective of the Eletrobras Group from this year on.

I'd like to highlight two important things to finish our presentation. The first one is regarding the focus of Eletrobras reaching efficiency in the activities of generation and we have over one year in the activities of preparation for the negotiation. The second focus is the governance. The government wants to improve the corporate governance of the companies it controls. In the case of Eletrobras we have satisfaction to say that we have extraordinary quality comparable to any private company in the world.

We are very well recognized in the energy companies. We have our Secretary of the National Treasury that is very well known. We have our representative of collaborators Elena Landau that has helped us in counsel us in regards to the privatization issues. We have today the Joint Secretary of Energy Rangel. He is Director of a bank that works at the Eletrobras group.

We have the former President (inaudible) participating [research company] which supports us strongly and these are all people that are part of the Board of Directors. The quality that we have here, at present we have in fact a strategy that will have a wonderful council that will control the Company.

I would like to highlight that doing the recommendations that we've received over the last year, we have a consortium, we have a specialist in risk management, in corporate governance, Carlos Rodrigues, he is the President of Private Companies, here from the area of energy and (inaudible) former President of companies in Rio de Janeiro.

We have several people that are well known in the market. One of the President of one of these six distributing companies (inaudible) that has been working with us for two years, and Armando Casado, he is our Director, Financial Director that has an enormous experience and he is one of the people that knows the size of the challenges and how to solve them in the next days.

I would like to finish and saying that we've worked with the Board of Directors and we will we work on some Directors that we've worked with strategic colleagues in the next couple of years. Here, the first threshold is improving the business model, and the management of the Group of Eletrobras companies. Restructuring the society structures, we have structured a very compartmentalized, is very big, is very heavy, and it's very broad with activates that recently have been -- we have managed the fund, and we have the programs that are managed by Eletrobras.

We are in contact with the Government. So here, our team is making a big effort to make our operational structure that it becomes more lighter, more focused on the businesses that we will work. We've received a lot of contribution of the International Consultancy and we've received these ideas, rationalizations and from the [societal] standpoint, we've had some losses, but we are updating some structures and we are evaluating the fiscal credits that we can use, using the structures that are very big in the company, very large.

The restructuring of the distribution of an electric energy is something that is very focused on the issue that we proposed on that in the next month, we propose a plan for operations for the distribution income -- distributing companies of Eletrobras throughout the next 12 months. So, it is validated by the agency and they have people that are prepared to do this and we can concentrate to reestablish the deficit of cash flow that we have in each of the company with a perspective of improving the operation's efficiency, only those can make the companies more profitable.

These are concessionary companies that are located in regions of Brazil with a big potential for growth. On average they grow more than the Brazilian average, due to the increase of consumers and the market. These are important areas and we have an operation that needs to be more efficient from the other concessionary companies that are operated from Brazil in the distribution business.

We have important challenges in cost reduction. I'm talking about the four main costs. We have a lot big structures that are now being optimized. There is a lot of potential in terms of rationalization of these costs.

There is an issue related to the receipt of the indemnification and generation. The law that followed [12,783] we've had following that the perfectioning of this issue of the transmission with RBSE that was closed.

Everybody that was involved has worked along with ANEEL so we can have the homologation of the two concessionaries that are left, Chesf and Eletronorte now. Finally at Eletronorte and Chesf we finished the work with the indemnifications of RBSE. But also we will have to produce reports to debate with the agency the cost of all the reports of all the concessionaries companies that are involved.

This is an important data that can prove this recuperation, can replenish the liquid assets of the Group. This is something that we need to focus. These are values that lack in the casual and in the daily operations and that obviously can produce an effect of recuperation in terms of eliminating the assets that are caused and due to the insufficiency in the tariff, that's clearly observed.

The other point is, we see a platform of IT that needs to focus correctly in terms of [RT] systems. We have to implement it in all the companies. We've had a strong effort so we can standardize these systems and with this standardization, we can make reality our shared services and so on and so forth.

The effort now is to standardize these systems, so we can have another step and we can assemble transactional operations and the financial and managerial aspects that are related to the corporate systems of the Company. Clearly reviewing investments, now we have investments that are incompatible to our generation, and we have to work with ANEEL to have more investments in the system, and we need to strengthen the management of the investments.

These is in the context of SPEs. Last night we were talking an important data that the Group will continue to have investment where we have variations whether if it's of the predictive values for our services or the deadline for the conclusion of the projects. Each of these impacts negatively the cash flow, and it's important that we have a more efficient governance of our SPEs and our investments as well as a management that is in a way that we can reach results not only investment, but we can have revenue. I'm very optimistic. We have very qualified people with a lot of information.

We are working with the government, and we need to highlight the issue of governance. Has had improvements to the Law 313 has allowed for this, we are facilitating the processes. The minister has been somebody that is very close to the Company in a way that it follows its main challenges and supports us, and the solutions their entire team the Secretariats, so we have here the conditions that are very favorable so we can in fact reverse that situation that is negative for Eletrobras, and think that the perspective are very good. Here I finish the presentation, thank you very much.

In the last page this is an important data. Here are the challenges for the Company. We have to report the accounting in both ISE and Dow Jones. This is a perspective that we will work with to improve our participation.

I give you Armando and our colleagues of accounting should you have any questions, and they can answer those questions.

(Operator Instructions) Ms. Carolina, Banco Santander.

Good afternoon. I'd like to first of all congratulate Wilson. It's great to talk to you. I have two questions today. First one in regards to RBSE and the accounting that you had in this quarter, just to understand the reasons of the non-accounting, initial non-accounting of the taxes, would it be more conservative to do this in a way of the taxes that were not accounting and we think that this item is very important.

Second question is in this same issue, once you have the public bid of ANEEL, probably this year and it's clear the right to the reimbursement of this tax we could see this re-accounting in the company? Thank you.

Carolina, thank you for your question for your wish of success. And I will give the word to Armando.

Carolina, according to what was established in the publication 120, official publication, what we have is (inaudible) but we don't have this in the final accounting. As you can see, we highlight to us the provision of this tax and the social contribution and what we've is [20], what we have this applied deferred the act of the recognition of the revenue in the period that we will receive this revenue.

At the public bid of ANEEL, we've the official publication 120, but at the public bid, all the agents are going to discuss the possibility of including this in the public audience, but this is very remote, because once you have this recognized, these taxes that are over the result and not the revenue, it would be very difficult to do a cross of the taxes over the revenue when it is a tax that is over the result -- based on the result. I know that some agents have talked about this but I think that what is fair is that this is a revenue that is recognized for the [tribulation] at the moment that you are receiving them prospecting regarding their each year.

Kaique Vasconcellos, Citigroup.

Good afternoon. Thank you for the opportunity. I have two questions. The recognition of RBSE has a strong profit. It has five or six payouts. With this, we can see the payment being deferred throughout time, whether if it's 2017, trying to preserve cash flow it should only get in until the third quarter.

And my second question is regarding the [FLEC]. The Company said that there is going to be a deposit to ensure investors, what are the new phases for the new bid, what is the timing, how long does it take to have a public bid and what is the proposal of the Company so that the bid is successful?

In regards to RBSE in the same way that it was explained, the intention is that once we evaluate the result, annual yearly result and the effect of the revenue of the RBSE will be recognized in a way that we will receive it in a deferred way. Regarding FELC, the management bank which BNDS, it's in the PND and now it's going through a reevaluation process and BNDS is the manager of the program that did the entire process of the hiring of the evaluators and will do a review and we will participate to establish a new schedule.

It's important to highlight that differently from the former concessionaries that had the economic results, this is not a case of sale. In regards to the changing in perspective, growth of the Company, of the country, we've had (inaudible) we expected.

We are doing a revaluation process that will be reconsidered, but it is a Company that is prepared, it's one of the area -- well it is a spectacular area, the agri business of Brazil we have a great demand for energy and it is prepared for this process. The reconsideration, this can be done quicker. We hope that it is done quicker, and we are hoping to expedite the privatization process.

Just to complement the issue of RBSE, we hope that we're going to have the payouts right?

I am going to ask Rodrigue, our Accountant that can explain a little bit more this idea.

Kaique, good afternoon to all. In the case of the recognition by the controlled companies of Eletrobras this effect was recognized at the controller company with its consolidated balances and the asset evidence. For the payments of dividend, we invoke the norm that is the non-realized revenue that comes from the result of the equivalents of assets.

So I have enough economic effect on the result of the controllership, but I do not have that association with the cash flow, that is going to be done in eight years. What probably will happen is that the Company will constitute the reserves of non-realized revenues.

Ms. Barbara, Bank of America.

Good afternoon. Thank you for the results. My doubt is in regards to the debt and leveraging of the Company. This is one of the first time that we see this in the presentation. I would like to know how do you see the perspectives for the end of the year. Do you have a level of debt that the Company feels comfortable for it to work in the rest of 2016, 2017. What is the level of leveraging?

Well, Barbara, to talk about a situation today -- financial situation, our debt is BRL45 billion. Since we have BRL5.9 billion of debt of RGR which we have a counterpart in the treasury once we have this consolidated, that we have a consolidated system, and we have a cash flow of BRL7.5 billion, plus the financing in RGR that is of Itaipu basically and the asset that we have in Itaipu which has the correction of the values by the American inflation, we have a total debt -- liquid debt of BRL28 billion.

The cash provision that we have for the end of the year, we have our condition. We are now going to the market, basically we are working with the closing of our budgets based on the internal generation of cash flow. In regards to the investment budget, we should not realize the totality of the investment budget as was commented by the President. But we know that our investment budget is BRL13 billion and the realization because the approved investment is approved legally and historically, we've realized 80% of it -- of the investments, but managerially we're working with a smaller realization, so we can adjust this to our cash flow for the next period.

Just a compliment. There is a set of deferments that in regards to the moment of the market can be renegotiated. This is one of the alternatives that we have in such a way that we can modulate the investment. This seeking of the Company at the level of leveraging that is lower than that. The net losses -- what I understand is that if you look at the companies throughout the world, the business generation and transmission is more of a leveraged business.

We are looking at five, six times would be more reasonable in an efficient operation, that is adequately placed to the -- we have not done this adequately at the level of the Board of Directors and we don't have physical efficiency. It's not adequate that we have a lot of expenditure and just have a situation we will need to work up ahead.

The idea is that on the short term, in fact the efficiency of our businesses we need to work with the better evaluation of the schedule of our investments so we can see the effect of the privatizations and have a better result and I can imagine that we can clearly get to at least five times.

Now we close the Q&A session. Now the speakers Mr. Armando Casado de Araujo and Wilson Ferreira for the final thoughts, gentlemen?

Just I'd like to thank all of you, and I would just like to thank for your participation and pay attention to our call of -- this is my first call. We are going to make many more call. I hope that in this way we can -- this meeting was exceptional and we can certainly work with the team to show that we have here a company that is not just the biggest one in the Latin America, but that will provide the best service.

And I understand that we have all the conditions to produce this. And at each of our calls we will share challenges and solutions to the problems and I'm certain that we will overcome all of our challenges. Thank you very much and congratulations to all that participated in this call.

At this time, we close the teleconference of Eletrobras. We thank for your participation and have a nice afternoon.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.