Leandro Montero - CFO.

Frank McGann - Bank of America Merrill Lynch Gustavo Fingeret - Bradesco BBI..

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Edenor's 2Q '18 Results Conference Call. We would like to inform you that this event is being recorded, and all participants will be in listen only mode during the presentation.

After the remarks are completed there will be a question and answer section, and that time further instructions will be given. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Edenor's management and on information currently available.

They involve risks, uncertainties and assumptions because 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 also affect the future results of Edenor and could cause the results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Leandro Montero, CFO of Edenor. Mr.

Montero, you may begin your conference..

First by ARS 277 million increase in payroll and social security charges on account of salary increases totaling 23% on a larger average staff.

Second, by ARS 235 million increase in fees for third-party services, mainly explained by a higher number of market discipline works associated with the losses reduction plan, higher expenses in pruning, changes of posts, the gathering of data on anomalies, street safety works and the repair of sidewalks as well as higher expenses associated with the distribution of bills and physical surveillance cost.

Third, by ARS 214 million increase in penalties of which ARS 130 million correspond to compensation and the Resolution 118 on accounts of extraordinary service disruptions to residential users through semester 43, as explained in the relevant events.

Fourth and lastly, by ARS 82 million increase in the allowance for the impairment of the trade and other receivables due to a change in accounting standards resulting from the application of IFRS 9 and higher bad debt. Regarding our financial results.

We experienced a 254% increase in its loss reaching ARS 1.5 billion loss in the second quarter of 2018 against ARS 427 million loss for the same period last year. This was mainly due to an acceleration in the peso depreciation rate against our U.S.

dollar appreciation, which caused a total negative impact in the amount of ARS 987 million on account of foreign exchange rate variation. Other factors affecting this loss were higher interest from the resolved debt with CAMMESA in the amount of ARS 154 million and ARS 39 million increase in interest, also as a result of increasing exchange rates.

This negative effect has been partially offset by the positive impact of ARS 58 million increase on account of higher commercial and financial interest and ARS 44 million increase in the fair value of financial assets.

Finally, net results showed ARS 145 million decrease recording losses of ARS 198 million in the second quarter of 2018 against losses for ARS 53 million for the same period in 2017, mainly due to increased losses in financial results as a consequence of the higher devaluation of the peso, which were partially offset by an increase in the gross margin resulting from the tariff update under the tariff review.

Talking about Edenor's adjusted EBITDA. It reached to a gain of ARS 1.6 billion in the second quarter of 2018, ARS 1.2 billion higher than the same period in 2017. This 370% increase reflects the reconstruction of the economic and financial equation of the utility under concession.

Adjustments made to EBITDA correspond to penalties under ENRE Resolution 118, applicable to the periods of September 2017 to February 2018, and April to June 2017, both applicable to the quarter and commercial interest. Regarding Edenor's capital expenditures.

During the second quarter 2018, our investments totalized ARS 1.4 billion compared to ARS 975 million in the same quarter last year, from which a 62% corresponds to networking infrastructure and expansion, and the remaining 38% to network maintenance.

The increase in investment results from the ambitious plan devised by Edenor for the 2017-2021 period, which focuses on investment optimizing service policy level in accordance with the quality curves required in the tariff review by the regulatory agency. Taking into account our energy losses.

They showed an increase reaching 18.6% in the second quarter 2018 in comparison with 17.2% for the same period 2017. Energy price increases for 2017 and 2018 reached approximately 74% has generated a greater incentive to frauds by certain customers.

This effect added to the impact of average temperatures that were 2.5 Celsius degree lower in June this year generating a 116 terawatt increase in the level of losses in physical units. Likewise, the rise in the average energy purchases price increases the value in pesos of these losses.

Furthermore, in the second quarter 2018, we continued taking actions to reduce energy losses on two fronts. On the one hand, market discipline actions were intensified aiming to detect a normalized regular connections and electricity thefts 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, while net debt amounts to $18 million.

Financial debt consists of $176 million from our senior notes 2022 and $50 million from the bank loan taken with ICBC Dubai branch for a term of 36 months and a six month LIBOR rate plus a spread of 2.75% semiannual incremental.

On April 12, 2018, the company 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 viable rate during the 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. We are now open for questions..

[Operator Instructions] Our first question comes from Frank McGann with Bank of America Merrill Lynch..

Two questions, if I could. One, just in terms of demand trends that you're seeing so far in the third quarter.

I know we're not even halfway through the quarter yet, but if you have any indications of the types of trends you're seeing on the different customer segments? And then secondly, the negotiations with CAMMESA, the government to resolve the CAMMESA liability.

I was just wondering what is the actual status of that and what sort of timetable should we assume in terms of negotiations and a final resolution..

Frank, regarding your first question, demand on July, which is the month we have closed recently, shows a significant increase in demand, approximately 8.8% increase, overall. The channel increase in the whole month in comparison to the previous -- or the same month in 2017.

You should take into account, in this case, the same that is applicable for [Indiscernible] that the comparatives in 2017 were much higher than this year. In average, this year has been colder winter, and that's why the demand, despite the tariff increase, has grown significantly in comparison to the previous month.

This is regarding the residential customers. When you take industrial end customers, we have seen a decrease in the demand for this month in comparison to the previous month.

And in connection with the second question you made, well, in the agreement we signed with the government, they set a limited period in order to start working to address solution. They defined a 60-day period, but it's a guideline. We cannot say that all the issues were resolved at that time.

But we expect the -- now with agreement -- or with commitment of the Ministry of Energy, we can get to a solution during this year..

Our next question comes from Gustavo Fingeret with Bradesco BBI..

I have one question or probably two, which one relates to the other, regarding losses in CapEx. At the beginning of the year, you were mentioning that losses were going -- were expecting to go down year-over-year to levels below 17% and also CapEx to go up to levels close to $300 million for 2018.

When you see to the first half of year results, you will see that losses, they are going up and CapEx is well below what we were expecting, basically $100 million of the $300 million.

Can you give us some guidance on what we should expect for the second half of the year? And if CapEx will pick up also in the second half of 2018?.

Gustavo, well, yes, they are connected, but not necessarily the same. In terms of losses, yes, as you mentioned, we were expecting -- we should say that the -- during 2017, we were expecting that energy losses should have increased because of the increase in tariffs.

But because of the weather, as we mentioned during the conference call, it remained stable during the whole 2017. This year, we see an increase because the weather was colder despite the increase in actions we have been making in order to reach the level we want to have in order to reduce financial losses.

For sure, we are a bit underperformance because the main problem we have is to get the contractors to make the job. And because of the tariff increase, the -- certain customers have been making fraud even after they are cut by the company. So we are working hard in order to reach the levels of financial losses we were expecting.

And we think that during the second half of the quarter, we want to increase activities, but we depend on the contractors' offers in order to reach that level. And maybe a similar situation happens with the CapEx.

During this first half, we have had an increase in CapEx higher than inflation -- slightly higher than inflation in comparison to the previous year. We expect to increase the CapEx during the second half of the year in order to reach the annual CapEx we have estimated.

For sure, the dollar -- the peso devaluation is impacting the final figure that we will reach in terms of U.S. dollars. So we -- now we are expecting to reach $250 million for the full year. So for that, we should increase our capacity and our performance during the second half of this year..

Can you give us some guidance on losses? What are you expecting now for 2018?.

For the full year? Well, we have as a goal to reach 16.7% for the full year, the annualized rates, okay, at the end of the year. But that's our goal and -- but we need to increase the activity during the second half in order to reach that goal..

This concludes the question-and-answer section. At this time, I would like to turn the floor back over to Mr. Montero for any closing remarks..

Well, thank you very much for attending this conference call. Have a nice day. Bye-bye..

This concludes today's presentation. You may now disconnect your line at this time, and have a nice day..