Empresa Distribuidora y Comercializadora Norte SA (EDN) 2018 Q1 法說會逐字稿

Good day, and welcome to the Edenor first quarter results conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Leandro Montero, CFO. Please go ahead.

Thank you very much. Good morning, everyone, and thanks for joining our first quarter 2018 earnings conference call for Edenor. First, we will focus on the main events that recently took place and then briefly review the results of the quarter. As you know, you can always call any member of our team for more details on the results of the period or any doubts you might have.

In first place, in view of the deep diversions between the company's assets implicit valuations and the company's market share price, on May 10 last week, Edenor's Board of Directors approved the repurchase of our own shares pursuant to certain terms and conditions like as: First, the maximum amount of up to $40 million; second, the maximum number of shares may not exceed the limit of 10% of the capital stock, and no shares may be purchased for over ARS 60 per common share and $55 per ADR; third, the term will not exceed 120 calendar days since today subject to an extension to be approved by the Board of Directors; and last but not least, an internal communication informing directors, statutory auditors and senior managers that during the life of the program, they may not sell company shares held or directly or indirectly managed by them during the applicable term.

Moving to the matters on April 23 this year. Pursuant to Resolution 118, the regulator instructed Edenor to calculate and pay compensation to residential customers affected by certain extraordinary disruptions in the utility service during semester 42 ended in August 2017. The impact of these compensations have been quantified in the amount of ARS 87 million and accounted for in the first quarter of 2018. Despite this, the company is still analyzing the possibility to appeal such resolution on considering that it doesn't conform to the applicable legislation in force and means a biased interpretation of the [chosen] disruption concept.

Regarding our credit ratings. On April 12, 2018, Standard & Poor's Global Ratings issued a report upgrading the local rating of 2022 Corporate Bonds from local BBB to local AA- and the global rating from B- to B, both from a stable to a positive outlook. The main arguments for this upgrade were the internal generation of funds during the last semester and right expectations associated with the implementation of the Comprehensive Tariff Review. The positive outlook was also based on the probability that the company may face its regulatory liabilities without affecting its long-term credit standing.

Now taking into consideration our results. In the first quarter of 2018, net sales increased by 105% to ARS 11 billion in the first quarter of 2018, against ARS 5.4 billion in the same period last year. This increase is mainly due to the application of the new tariff scheme effective as from February 1, 2018, which includes the last 18% increase provided by ENRE Resolution 63 of 2017 resulting from the comprehensive tariff review process, together with subsequent inflation assessment for an additional 24.9% in accumulative basis.

It's worth to look over that the VAD adjustment resulting from the comprehensive tariff review amounted to an initial 42% in effect since February 1, 2017, a second adjustment for 18% became effective up from December 1, 2017, applicable retroactively up from the month of November pertains to ENRE Resolution No. 603; and finally, the third VAD adjustment also for another 18% entered into effect on February 1, 2018, pursuant to ENRE Resolution No. 33.

As regards all distribution costs adjustments for inflation during 2017, the first adjustment equivalent to 11.6% was implemented on December 1, 2017, with retroactive effect to the month of August as provided for in the comprehensive tariff review. Meanwhile, the VAD adjustment for the second semester of 2017, which amounted to 11.9%, is in effect since February 1 this year. Additionally, on the same date, deferred income accrued during the February 2017, January 2018 period was incorporated into the tariff and the first 2 installments for a total approximate for around ARS 302 million was recorded in the month of February and March this year.

The increase in revenue for sale is partly due to the 0.4% increase in the volume of energy sales, which reached 5.6 terawatt hour in the first quarter of 2018, against 5.5 terawatt hour for the same period in 2017, mainly due to a 2% increase in the wheeling system volume, a 1.6% increase in the demand by small and medium commercial customers and a 0.8% increase in industrial customers. This was partially offset by 2.1% decrease in the demand by residential customers. This increase in the demand is mainly explained by higher commercial and industrial activity level, in line with the positive variation of industrial production index and was partially offset by the lower residential consumption we estimate are associated with increasing build prices and a slightly lower average temperatures compared to the same period of the previous year.

Furthermore, Edenor's customers base increased by 2.8%. The electricity power purchases increased 118% to ARS 5.5 billion in the first quarter of 2018 compared to ARS 2.5 billion for the same period in 2017, mainly due to an approximate 117% increase in the purchase average price resulting from the entry into effect, in February and December of 2017 and February 2018 of the new seasonal prices for electricity set forth by Resolutions No. 20 (sic) [20 -E] and No. 1,091 of the Secretariat of Electric Energy. However, it is important to note that the reference seasonal price is still subsidized for residential customers where such subsidy reaches approximately 23% of the system's average generation cost.

Additionally, even though the energy loss rate remained substantially unchanged, reaching 16.3% in the first quarter of 2018, against 16.2% for the same period last year, its associated cost increased by 147% following the application of the new seasonal price for its determination.

Meanwhile, operating expenses increased by 43%, reaching ARS 2.7 billion in the first quarter 2018 against ARS 1.9 billion in the same period last year. This is mainly accounted for 3 reasons -- or 3 main reasons. First, by ARS 327 million increase in penalties. In this case, when eliminating the March 2017 onetime adjustment on account of the change of the calculation methodology set by regulator in the amount of ARS 413 million, penalties decreased by ARS 86 million, even including the compensations in the amount of ARS 87 million provided by ENRE Resolution 118, I just mentioned before in the relevant events. In second place, we registered a ARS 213 million increase in fees for third-party services, mainly on account of high expenses in planning, changes of costs, the gathering of data on anomalies, street safety works and the repairs of sidewalks as well as high expenses associated with the distribution of bills. This increase in activity levels, this could result in a higher consumption of materials for preventative and corrective maintenance works for a total amount of ARS 50 million. And lastly, the ARS 129 million increase in the allowance for the impairment of trade and other receivables after evaluating certain doubtful receivables and estimates under delinquent balance.

Arriving to our net operating income, it had an increase of ARS 1.8 billion, recording profits for the ARS 2.6 billion in the first quarter 2018, against profits of ARS 0.8 billion for the same period in 2017. This increase was mainly due to a ARS 2.7 billion increase in the margin -- or in the gross margin as a result of the tariff increase granted by the compensatory tariff review as of February 2017 and the collection of the first 2 installments on account of the previously mentioned deferred income.

Regarding our financial results. We experienced a 231% increase in its loss, reaching a ARS 530 million loss in the first quarter of 2018 against ARS 160 million loss for the same period last year. This was mainly due to an acceleration in the domestic currency depreciation rate against the U.S. dollar, together with increase in dollar-denominated debt resulting from the $50 million loan granted by ICBC which cost a negative impact in the amount of ARS 336 million on account of foreign exchange rate variations. Other factors affecting this loss where the higher commercial interests from the CAMMESA in the amount of ARS 93 million and a ARS 45 million increase in interest and others, mainly on account of higher interest on penalties, which were partially offset by the higher capitalization of interest. These negative effects were partially offset by the positive impact of the increase in the fair value of financial assets in the amount of ARS 74 million.

Finally, net results showed about ARS 1 billion increase, recording profits for ARS 1.5 billion in the first quarter of 2018 against profit for ARS 0.4 billion for the same period in 2017, mainly due to improvement in the gross margin as a result of the tariff update granted under the comprehensive tariff review, which was partially offset by higher operating and financial expenses and a higher income tax charge.

Talking about Edenor's adjusted EBITDA. It reached to a gain of ARS 2.8 billion in the first quarter of 2018, ARS 2.2 billion higher than the same period in 2017. This increase reflects the reconstruction of economic and financial equation of the utility under concession and reflects the real business of the company today. Adjustments corresponds to the onetime effect resulting from the change in the calculation of the methodology pursuant to ENRE Resolution 125, 248 in the first quarter of last year and commercial interest.

Regarding Edenor's finance capital expenditures, during the first quarter 2018, our investments totalized ARS 928 million compared to ARS 760 million in the same quarter last year, from which a 66% corresponds to network infrastructure and expansion and the remaining 34% to network maintenance. The increase in investments results from the ambitious plan devised by Edenor for the 2017-2021 period, which focuses on investment optimizing service quality levels in accordance with the quality curves required in the comprehensive tariff review by the regulatory agency.

Taking into account our energy losses. They showed a slight decrease reaching 16.3% in the first quarter 2018 in comparison with 16.2% for the same period 2017. Energy price increases for 2017 and 2018, reached approximately 147% has generated an increase in energy losses measured in pesos even if there has not been an increase in physical units. Besides higher energy prices generated greater incentive to fraud by certain customers.

Furthermore, in the first quarter 2018, we continued taking actions to reduce the energy losses on 2 fronts: on the one hand, Market Discipline actions were intensified aiming to detect and normalize irregular connections and electricity theft and frauds; and on the other hand, there was an increase in the installation of Inclusion Meters to foster consumption self-management and the integration of user having a nonregular income, at the same time, encouraging the reduction and prevention of irregular connections. We expect to intensify these actions until reaching expected levels with the purpose of meeting the outlined loss reduction goals.

Finally, as far as financial debt is concerned, the outstanding principal of our dollar-denominated financial debt amounts to $226 million, of which $176 million correspond to our senior note 2022, and $50 million to the bank loan taken out with the ICBC Bank, the Dubai branch, for a term of 36 months and a 6-month LIBOR rate plus a spread of 2.76 -- 2.75% semiannual incremental.

On April 12 this year, Edenor entered into a hedge transaction with Citibank London with a purpose of fixing the financial cost of the loan granted by ICBC, which is subject to a variable rate during October 2018, October 2020, interest payment period. Thus, all the company's financial liabilities are disclosed at a fixed rate.

So this concludes my review on Edenor, and now we are open for any questions you might have.

(Operator Instructions) Our first question comes from Frank McGann of Bank of America Merrill Lynch.

Yes, if I could, maybe just 2 questions. One in terms of demand trends that you're seeing post the February increase, I was wondering if you noticed any additional slowdown, particularly in residential demand, as you went through the quarter and/or at the beginning of the second quarter in April or early May. And then secondly, in terms of salaries and impressed you commented on this, but the salary cost in pesos actually went down year-over-year. And I was just wondering what drove that because I would have expected it to go up.

Hello Frank, well, regarding -- I would start with your second question. Yes, you can see a slight decrease in salaries. This was mainly because during the first quarter 2017, we cut certain adjustment to provisions related to the salaries line, and that's why you can see that this reduction in salaries and wages. But the real thing is that we have had the increases during this year related to those adjustments we agreed with the union in order to comply with usual negotiations with the union. And regarding your second question, I think that we -- well, first, we have been seeing certain decrease in the demand from residential customers. But to be honest, it has not been as higher in comparison to the increase in bills and regarding -- or eliminating the effects of the (inaudible) and the business day which affects the demand, especially in residential customers, we haven't seen a real high decrease in the demand. It has remained stable during the last -- during this quarter and during the month of April too.

(Operator Instructions) Our next question comes from Gustavo Fingeret of Bradesco.

One quick question, which is regarding CapEx. If I am not wrong, you have been guiding in the past that in 2018, CapEx was going to be increasing relative to 2017. And what we saw in the first quarter in dollar terms is that CapEx remained pretty stable. And even in 2017, CapEx was below what you were expecting and also what we were expecting. Can you give us some guidance of what to expect in the next 3 quarters from one side? And what is going on that you're not able to fulfill all the CapEx that you were expecting to do?

Hello, yes. As we have mentioned during the first quarter this year, CapEx has run slightly above the level of CapEx in 2017, including inflation. And for sure, we have a CapEx for this year that is much higher, and we need to increase it during the rest of the year. This is the -- because of -- especially because we have to adjust our CapEx plans to certain restrictions we have had in hiring people to work on the CapEx plan. You know that this -- our investments are mainly focused on grid improvements, but this doesn't mean a single investment, it means lot of different investments on the way. So we need to comply with our CapEx plan, lot of contractors -- third-party contractors. The raw material necessary to develop those grids and permissions from the governmental or from the City Halls in the areas we work or we provide the service. So we are working with our contractors and our suppliers in order to improve the quantity of people working with us and to improve the compliance in the delivery of the raw materials we bought -- we buy. And in order to comply with a higher CapEx plan expected to be reached this year. But we expect to increase in dollar terms the CapEx in the following 3 quarters.

So what is the guidance for 2018 in terms of CapEx now?

The estimated CapEx plan for 2000 -- the total CapEx plan for 2018 is approximately ARS 6 billion.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Leandro Montero for any closing remarks.

Okay. Thank you for joining our conference call. As you know, this quarter, we have started to deliver the earnings conference call separate with Pampa. So I hope that you -- it's useful for you to -- this separation between the 2 companies in order to focus on Edenor's folks. So thank you very much, and have a nice day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.