CPFL Energia S.A. Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug.15.13 | About: CPFL Energia (CPL)

CPFL Energia S.A. (NYSE:CPL)

Q2 2013 Earnings Call

August 15, 2013 1:00 pm ET


Wilson Pinto Ferreira - Chief Executive Officer


Vinicius Canheu - Crédit Suisse AG, Research Division


Good afternoon, and thank you for waiting. Welcome to CPFL Energia Second Quarter 2013 Earnings Conference Call. Today with us, we have Mr. Wilson Ferreira Junior, CPFL Energia's CEO and other executives of the company. This conference call is broadcast live on the Internet at CPFL Energia Investor Relations website at www.cpfl.com.br/ir, where this presentation is available for download. [Operator Instructions] This call is being recorded.

Before proceeding, let us mention that forward-looking statements made during this conference call regarding CPFL Energia business prospectives, forecasts, operating and financial targets are based on the beliefs and the assumptions of the company's management, as well as on information currently available.

Forward-looking statements are not a guarantee of performance and involve risks, uncertainties and assumptions as they refer to future events that depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors can also affect the future performance of CPFL Energia and lead to results that may differ materially from those expressed in such forward-looking statements.

Now I'll give the floor to Mr. Wilson Ferreira Junior. You may begin.

Wilson Pinto Ferreira

Thank you. Good afternoon, everyone, analysts, investors, all of you with us in this second quarter results conference call. We have a presentation. Let me begin on Page #3 with the highlights of the second quarter. We still have growing energy sales outside the group. All in all, activities, generation, conventional generation, renewable energy, we are growing and we will be talking about this.

Energy sales were up 2.6% in the concession area. We've had some important events which have had an impact in the second quarter, and they correspond to the conclusion of the third cycle of tariff review of the group.

Let me remind you, the 2 largest distributors, the CPFL Leste Paulista and RGE, that have 5-year cycles of tariff review, they have concluded the cycle now in the second quarter, which has impacted our results. We've had the IPO of CPFL Renováveis of the last July 19. The acquisition, which was already disclosed during the IPO of Rosa dos Ventos wind farms 13.7 megawatts using part of the inflows from the IPO already.

Also disbursement from the sector fund, CDE, BRL 125 million, which was dispersed in the second quarter. We continue very strong in our investments. CapEx was BRL 498 million according to our growth plan, and because of the results we are reporting, we declared interim dividends related to the first half of 2013 in the amount of BRL 363 million.

Also we've maintained our rating AA+ on national scale, with a stable outlook by Standard & Poor's. This is for CPFL Energia. This is relevant information at this time. And also we have received a few awards. One was from Exame magazine, the Largest and Best Companies. Then also Abradee Awards, which recognizes the best companies in Brazil. And ISTOÉ Dinheiro magazine, where we were considered one of the 50 companies that do good in the Management category.

Now opening the call, I'd like to talk about energy sales first because it is something very relevant to evaluate the performance of our companies, beginning from sales in the concession area by our distributors. As you can see on the top left, we've grown 2.6%. This is the growth we are reporting. This is the stabilization of the captive market, but also great migration of consumers from the captive to the free market.

So if you look at this behavior measured by the energy consumption in the USD tariff, we've had a growth of 11.1%. It's also relevant to talk about sales by consumption segment. We will further elaborate on that during our presentation referring to the improvement in the evolution of the industrial segment. It was growing approximately 1% per quarter, but in the last quarter, it's grown 2.7%, so it's one of the highlights in terms of additional volume in our concession areas. Let me also remind you we've had important growth in the residential area, 4.2%.

Now in the lower left chart, total energy sales, not only captive which we've already reported, but also commercialization, conventional generation outside the group, growing 25.4% quarter-on-quarter and highlight to the behavior of CPFL Renováveis.

Now a few projects have already started their operations, we will further elaborate on that. We've had a growth of 63.4%. On the right-hand side, we have the performance in the concession area. CPFL is slightly below the growth of Brazil. Brazil is growing very fast in the northeast, but we can see that in the southeast where the regional growth was 1.2%. Our 7 distributors have grown 2.3%.

Actually, it is showing the -- how vibrant our company is. In the south, where we have a more industrialized region with exports to Argentina, right now a bit restricted, but still, we've had a growth of 4.4% at RGE compared to a growth of 5% in the GDP of the south of Brazil.

Now Slide #5 is quite important. As we usually do, we make a comparison between the IFRS reported value on the first column, and next, our management results. It makes it easier for our analysts to conduct their analysis. You can use this incorporating -- because it incorporates a few effects that I will now explain.

Well first, because of the new IFRS 11 as of January 2013, the proportional consolidation is no longer allowed when you have shared control. So of course, it affects our generators: Baesa, Enercan, Foz do Chapecó and EPASA because they're now being accounted for using the equity method. So we've had this adjustment and we still show the proportional consolidation. So the adjustment would be BRL 85 million in the second quarter.

Also, we have our regulatory assets and liabilities. They show the difference in time between the tariff paid by users and the items of consumption that compose this portion. They are passed on to the consumers on the right date, and they've represented a net value of BRL 26 million in EBITDA and BRL 19 million in net income for the second quarter.

We've also had an impact in the update of the concession financial assets now in the conclusion of the third cycle of tariff review. It impacted all of our distributors, so we've had an adjustment of BRL 130 million posted as finance expenses. It's related to the conclusion of Paulista and RGE.

Now this is only an accounting record. It is considered for dividends, and it is against the reserve, which has a balance of BRL 327 million. The impact of this posting and the net income was BRL 86 million, oh well.

In this quarter, we've also had a posting of BRL 230 million in legal judicial expenses and this is basically because of provisions, as we've assessed our risk of litigation. Now this was provisioned considering the recommendations of our legal counselors, and they're also based on our internal monitoring mechanisms. In this case, we're talking about provisions. So they do not actually affect our cash position.

Another important record here is Paulista and Piratininga as they adhered to the special program of special installment payment, tax payment program related to lubricants and other materials. In addition, Piratininga was discussing the ICMS calculation methodology in Santos.

These cases, the amounts that were being questioned as it -- to the fines and interest came up to BRL 231 million. So considering that we could have unfavorable court decisions, we decided in the quarter to accept this special installment tax payment program. So BRL 105 million was the total amount instead of BRL 231 million. That is, we've been able to reduce fines and interest rates by 75% and 60% so that we've had an overall reduction of almost 55% of the amounts discussed. The BRL 47 million, they affected the EBITDA for the group. And in terms of fines and interest rates, BRL 59 million, they affected our financial expenses. With that, the total impact on the net income was BRL 72 million.

Another record here was the provision for conventional generation in CPFL Renováveis that we share 50% of the cost of energy dispatch to thermal plants. There is not a final decision about this, but we decided to have the provisions. The impact is BRL 13 million in EBITDA and BRL 11 million in net income. We've also had assets maintenance at EPASA. EPASA has been dispatching full loads since November 2012. Now we've had a scheduled maintenance, and the maintenance amounted to BRL 9 million impact on EBITDA and BRL 6 million in net income.

We've also had other records here, exposure to MRS. These are accounting adjustments and depreciation of some assets, taxes, which actually affected the EBITDA and net income, as you can see here, BRL 20 million and BRL 41 million, respectively.

Now analyzing all of these impacts, we can see that the consolidated impact EBITDA was BRL 946 million, a reduction compared to the amount reported in the second quarter last year. BRL 253 million was the net income, which is again a reduction compared to the second quarter of 2012. As I said, the difference is approximately BRL 430 million in EBITDA and BRL 387 million if you look at net income. Very good.

Now Slide 6. You can see these EBITDA variations in more detail. As we usually do, on the outside, we've had the management EBITDA because some analysts prefer to use that for their analysis. And right in the middle of the chart, we've had the variation of EBITDA from 2012 to 2013 but already incorporating so that you have a fair comparison, already incorporating the proportion or consolidation portion related to generation assets.

Let us now explain this variation, the BRL 921 million compared to BRL 601 million, which is the EBITDA reported after the effects of consolidation in the second quarter 2013. Now the first important event is a 5.6% increase in net revenues, approximately BRL 180 million, basically because of higher revenue from commercialization and services, BRL 165 million; conventional generation, BRL 42 million; large generators and renewable energy, BRL 34 million. Now this is the first effect on the distribution, a drop of BRL 7 million.

And you can see in the lower line that we've had an increase in the cost of energy. So this is the net effect after the tariff review, especially Paulista, which is our largest distributor. With that, we've had a BRL 77 million captive market drop as we've shown. And in addition of BRL 70 million, the free market

Now we've had the special installment tax payment program. The amount is BRL 32 million. It's nonrecurring. Remember that it was BRL 47 million, BRL 32 million plus BRL 15 million, which was posted as expense. And a few other effects, BRL 6 million.

Now next, the second bullet, BRL 150 million additional in terms of an increase of energy cost and charges. That is already including the disbursement of CDE, BRL 64 million, and BRL 243 million would be net of the BRL 64 million that has already been disbursed. We've had a net decrease in sector charges of 37.1% because of the tariff reduction program we had early this year. For that, we've had a resources of BRL 61 million, so the tariff review totals BRL 128 million.

Now next, we talk about expenses: personnel, materials, services and other of BRL 384 million. Now the provisions for that, they add up to BRL 245 million, but it's BRL 150 million plus BRL 15 million, that's what's posted as expense.

Next still in July this quarter, we've had the thermal dispatch from EPASA, BRL 63 million. It was -- we stopped dispatching at the end of the month, then we've had the effect of the growth in activities of Renováveis and services, BRL 15 million and write-off of distribution assets, BRL 15 million.

And we also highlight increase of expenses with private pension funds, BRL 12 million according to the new regulation of the Brazilian Securities and Exchange Commission. This is compared to the last year's second quarter, BRL 12 million. And as we've said before, maintenance of EPASA's assets totaling BRL 9 million.

It's important to highlight here just to give you some color on this more difficult scenario in the energy industry, we've had a variation of PLD. Average second quarter was BRL 250 million and also the foreign exchange variation last year to reals per U.S. dollar this year, BRL 2.22 in this second quarter.

Now on Slide 7. It's important to talk about operating expenses. On the left-hand side, we have the nominal PMSO net of thermal dispatch and also net of our growth so only in the activities on a comparable basis, nominal MPSO (sic) [PMSO] had a reduction in the first half of 2011 compared to the first half of 2013 from BRL 660 million down to BRL 644 million. That is, BRL 16 million was the reduction.

Part of our cost of materials services, it has a different inflation effect. So as we compare these values on the same basis, we would be reporting a reduction of BRL 93 million or 13% comparing the first half of 2011 to the first half of 2013 when we started the program to reduce expenses and increase productivity, which has not been concluded yet.

But in these 2 years, we've had a reduction of 415 headcount, and we've been able to reduce the cost of personnel by 7%. And on the other hand, because of our 0-based budget, we've had a 17% decrease in material, services and other or BRL 70 million. That is, the program has actually produced important effects on the results. And this is very important now after we've concluded the tariff review, our revenues -- the level of revenues have changed and so costs also had to be reduced.

Now on Page 8, BRL 134 million is a loss compared to the profit we've had in the same period last year, BRL 246 million. And then we've had BRL 356 million, the recurring second quarter 2012 net income coming now to BRL 253 million as a recurring net income for the second quarter 2013.

I will now give you details about this drop in net income. So the main effect was a 34.8% decrease in EBITDA, BRL 320 million. We have just given you details about that. We've had an increase in negative net financial results not only because of the update in the distribution financial assets. It had to be deducted for us to calculate dividends.

Also the fine, it's a nonrecurring fine corresponding to ICMS. It was posted as financial expense, BRL 59 million. Then the consolidation of CPFL Renováveis, another BRL 27 million and other effects, BRL 3 million. Then we had a small decrease in depreciation and amortization because of the new depreciation rate of our distribution assets after the conclusion of the third cycle of tariff review.

Also smaller depreciation in generation projects, but we've had the start of operations of new assets belonging to CPFL Renováveis so we've had more depreciation as we've included these new operations. The tax base was reduced so in this comparison to the same period last year, we've had BRL 188 million less in tax.

Same thing, we make a comparison of interest rates, 7.3% this year compared to 8.6% last year and long-term interest rates, 5% a year compared to 6% a year last year.

And now Slide 9. This is just an update about our CapEx investments. I will give you further details about CPFL Renováveis, but we've retained 40% of the investment planned in distribution. We wanted to actually conclude Paulista and RGE, closing this third cycle of tariff review. Regarding generation we're slightly above our plan, 53%.

So far, most of the investment was in renewables generation with the conclusion of a few projects and investments in CPFL Renováveis projects and in commercialization and services, or C&S, because of lower economic activity and less operations in the free market because of the discussions with CNPE 3, we've had 11% of the investment planned. So overall, we've invested BRL 1,030,000,000, 44% of the plan of an overall BRL 2,325,000,000 planned for the year.

Now on the following page, final phase of conclusion of our cost generators for biomass, Coopcana and Alvorada. Coopcana is under commissioning right now. It will have its start up at the end of August, most probably 95% of Coopcana at the end of June, 92% for Alvorada. And then the wind farms, Campo dos Ventos II, Atlântica in the south of Brazil and the Macacos wind farm -- especially Campo dos Ventos and Atlântica wind farms, they are on their final phase. We will possibly have these 2 large wind farms, 150 megawatts, coming in until the end of the third quarter, and the Macacos I wind farm will start operations in the fourth quarter, 61% has already been concluded. It's important to talk about that because as these projects begin to operate, only the revenue that has already been contracted represents BRL 180 million; that is, we already have the funding but we still have not been able to obtain a return from these activities. But this will begin to happen as soon as they start operations.

Now talking about leverage, let us now go on to Page 11 where we have our net debt. It remains at the same level. We had a slight increase from BRL 12.5 billion to BRL 12.6 billion, but this is because of the EBITDA reduction because of tariff review and the extraordinary postings. Our adjusted EBITDA, BRL 3.7 million, almost BRL 3.7 million, an increase of 3.42x our index.

Now we've had an improvement in our financial capacity and also our funding strategy. They have led to the lowest cost of debt of all time, 1.2% or 8% in nominal terms, full hedged to foreign exchange risk. 65% of the debt is pegged to the CDI and 26% long-term interest rate, also fixed rate, 6%, with the PSI programs and the remaining 3% IGP. These are the contracts with our own foundations.

So it's important to highlight on the following page, on Page 12, that we have our net cash very robust. We've closed this half year with BRL 5.4 billion as cash. This cash is 2x the short-term amortization we need. Our debt today has an average of 4 years or an average tenor of 4 years and short-term represent 16% of the total debt. That is, our cash position is very comfortable.

Now on Page 13, I'd like to talk about the specific results. I want investors and analysts to understand a few prospects in terms of productivity growth, and also we have a discussion about our capital structure.

First of all, productivity growth. As I've mentioned, it's important to highlight that the 328 megawatts that will begin operation this year, this will expand our generation capacity at CPFL Renováveis. That is compared to its current capacity. Let me remind you that of the 328, 250 will happen already next month. And so it will incorporate BRL 180 million in terms of new revenue. And since we're talking about generation companies, our EBITDA margin is quite significant.

Now a recovery signal can already be seen in the Brazilian manufacturing industry. This has already been made clear in terms of energy consumption. Actually, we could see that on the newspapers today. We have the BNDES announcement, so this is a moment where we are increasing the country's industrial capacity. And this will bring impact because manufacturing industry accounts for 45% of our distributor sales.

Let me also make a point about productivity gains. First, because this is our focus after the tariff review, ideally, we had to -- I mean, all of our options for cost reduction had to be implemented immediately in our activities, and so we remain focusing on the reduction and cost optimization. We still have some more to do in the 0-based budget.

Also the shared service center or corporate service center, and we have the Tauron project, which is an automation project or smart grid so that we will gain more productivity. And not only that, we will be able to lower cost and provide more quality to consumers.

[indiscernible] either on the 0 [ph] Tauron, as we have shared with some of you, it has an additional value beyond the BRL 100 million that we already achieved in reduction of recurring costs. So it's another BRL 100 million. We would have great focus on the second half of the year on these activities.

Another relative point that I hadn't mentioned but I will mention today is that the fact that we expanded our productivity with fewer employees in the distribution and generation activities, that opened room for us to optimize our facilities, especially the administrative facilities. And with that, we will, in the second half of the year, this is ongoing work with public bids, to sell a size of furniture that is now too big for the company and are now being sold. We imagine that with real estate, with the sale of these, we will expect to achieve around BRL 100 million.

There is another important discussion on the other hand. The industry was affected this year in terms of leverage. Many companies had to negotiate. It's not CPFL's case but it's important to point that the company has a strategy since 2010. It has had and we're analyzing and evaluating the macroeconomic scenario. And we have a strategy to prolong our debt or lengthening of the debt and quick funding with excellent results.

First, just a comparison. I'm giving you a reference of the fourth quarter of '09, to say that this strategy was implemented in 2010. But with this reference, we're comparing that the debt lengthening that at the time was at 3.2 years, now it's 4. But especially with an extraordinary result in terms of the real cost of the debt, that went down from 4.9 to 1.2. So it's a reduction of more than 70% in the nominal cost of debt.

On the other side, the recognition of this strategy in the maintenance of our ratings with the brAA from Standard & Poor's since the second quarter of '08 or in the case of Fitch since the third quarter of '10, this refers -- this maintenance is greatly related to the robust cash that the company has, the liquidity policy that we seek to maintain minimum cash, at least twice as our short-term commitments.

And on the other hand, of course, because the company has a stable operational cash generation, we have the average here for the last 3 years of around BRL 2.3 billion, noting that over the last 12 months, it's around BRL 2.6 billion. So of course, it is a profitable cash situation and the stable cash generation and the growth as we are entering with a set of developments in renewable generation, that gives us this comfort of the rating we achieved. That doesn't mean that we're not trying to maximize the benefits of the optimum capital structure.

So it's important to note that considering our covenants with the base, the group's base, we work within this strategy in a range of 3 to 3.5, but tending more towards 3. And that brings advantages in terms of costs, reduction of the average rate cost reduction. And this can be seen in the reduction of our debt costs. But it's also a result of the deductible financial expenses. And this optimum capital structure creates value to shareholders with a greater -- the stability of the debt for tax effects. So I thought it was important to bring your attention to this perspective that continues our activities, the increasing productivity, we can expect good results in the second half. And on the other hand, we are completely focused and attentive to the capital structure. We've been harvesting good result from the strategy we've implemented.

I would now like to bring some examples or very clear signals that we have of the improvement in the industrial power consumption, taking an industry that has been especially successful, which is the construction industry. So we have that on Slide 14.

First, with a report of approvals and disbursements of BNDES for this activity until May of this year. We have more than BRL 3 billion, but let's be clear of the importance of the construction industry. First, that responds to almost 1/4 of the Brazilian industrial GDP responding to 45% of the investment, which is the government's objective at this point.

A sign of this mentality is the increase in the number of companies over the past 5 years, around 75%. There's also the forecast for the production in the construction industry for 2013, which would be a growth of 3%. And with the stimuli, the most well-known is the Minha Casa Minha Vida program, that is 75% contracted, approximately BRL 178 billion, but we have to remember the side of sporting events that have already started with the Confederations company -- the Cup, the super World Cup next year and the Olympics Games in 2016. So the construction industry is big and is especially important, so it's important to follow this industry.

Well, we consider that this industry is also similar to trade because of the development of employment and revenue. We have 2.8 million employees in construction industry, so that's about 1/3 of the total industry. And adding to the Minha Casa Minha Vida program, there's the Minha Casa Melhor program where we have BRL 19 billion in credit for the purchase of appliances, furniture, et cetera, for all people who own houses that were acquired or purchased through the Minha Casa Minha Vida.

The forecast for retail sales for the beginning of this year was at 4.5%. And there's also an impact in the residential segment, as an important expansion, especially in the interior of the stage of the country, the expansion of these housing developments. In our case, there are 632 new developments in the state of São Paulo alone to meet a big housing deficit. There's 3.4 million residences in Brazil of around 5%, a smaller percentage in Brazil, 2.8%, around 400,000 houses, and the state of Rio Grande do Sul, approximately 151,000.

Note that in the next page, Page 15, we show this dynamic. In the state of São Paulo, we have residential growth of around 4%. CPFL Energia in São Paolo is 6.3%, and in the regions that we call as far, or further from major centers, as those we're highlighting here in the Northwest area in the municipalities of Aracatuba, Bauru or in the northeast of Paulista, there's a number of developments. They talk about 603 new developments in all these cities. We see this growth in the number of housing developments with a much better quality of life for the population.

On Slide 16, I also bring for the first time, the breakdown of the industrial consumption in the concession area. We have the values accumulated until June, where we see the importance of the food industry and the chemicals, the steel works, rubber and plastic, and pulp and paper, the 3 green ones in the Brazilian production. We can see how these sectors have evolved over this year.

Last year, these 3 segments were paused with a decrease of around 4%. And you can see that this year, we're talking about the steel works industry increasing 2.9%, 2.5% and 5.3% for vehicles. And the total of the whole picture, noting this charge on the right side, we see that the industrial production in Brazil, which is green, and the state of São Paulo in blue over the last 12 months. São Paulo is bigger than Brazil. And in this year, it's the same behavior, the same performance. So this gives us a perspective or makes us believe on a better perspective of industry recovery.

On Page 17, just to have another look of the automobile industry, which reaches 25% of the overall industry. From vehicles and automakers, we see metal products, rubber and plastic, electric material, electronic materials, steelworks machinery and equipment. We have a growing, an increasing vehicle production over the last 12 months. So this is a very clear consequence.

The thermometer that we use to measure the inventory level, and then we see the load of large consumers within the distributors in São Paulo, where we have Hyundai, Honda, Toyota. We have General Motors in Rio Grande do Sul. So we see in the blue curve is last year and the green curve is this year. And we can see an increase of consumption in terms of load of 6.6%.

Also beginning the conclusion of our presentation, let's go to Page 18. I know that the energetic conditions was a topic of concern to investors in the electrical sector but this is just to provide follow-up. We've closed the month of July with 60.6% of our capacity in the reservoirs, already mentioning the typical curves of past years.

And as we can see on the right, that has allowed us to have a reduction of thermal dispatch, the more expensive costly thermal dispatch. And wind farms are also sold, a reduction of 2,500 megawatts but it has a high associated cost so it's good for the system, causes less stress. And of course, we have the responsibility with the industry to manage this storage.

Important evidence of this favorable situation is the fact that we have the spot prices already at BRL 182, so that's a more tolerable price range. And the measurements that we follow, the rationing risk that is measured by PSI for this year is 0, naturally as we started the year with a very high [indiscernible] for the year is 0, and for next year, the forecast is 2.5%. The savings we have in this by not dispatching with a more expensive thermal plant is BRL 1.4 billion per month.

Moving on to Page 19. We heard the highlights of these points in the beginning of the presentation. So we're declaring here BRL 363 million in dividends for this first half, over BRL 0.38 per share. Noting that the company's a great distributor of dividends, it has paid more than BRL 10 billion since the company's IPO.

Finally, on Page 20, we have a comparison of the shared performance that the industry has suffered since last year. And we've been noting, in the case of CPFL, a behavior of better generation than IEE. It went down 1% this first half. IEE went down around 11.8%, and IBOVESPA around 22.2%. And we read this in comparison in the United States, Dow Jones went up 13.8%, then of course, not only because of the electrical segment but also with the exchange rate segment, and then we have a decrease of nearly 10% of our ADR and almost 17% of the top 20 ADRs. There's an increase in our trading volume. There's a slight accretion in the daily average number of around 40 million, and the company is present in the main indexes of this sector in IBOVESPA's sustainability and governance.

I would like to close the presentation highlighting the awards we've received, CPFL Brasil as the best companies at the Exame Guide for the Best and Largest. Reminding you that the company exceeded generators, distributors, transmitters and other players in the electric sector throughout Brazil. It's the first time we received this recognition from that publication. We also received the Abradee Award as the Best Electric Energy Distribution Company under 500,000 customers and above 500,000 customers with RGE and CPFL Leste Paulista, and complementary prizes such as clients appraisal, social responsibility and operational management.

Finally, the publication of ISTOÉ Dinheiro magazine, where CPFL Energia was recognized as one of the best 50 companies to work at.

I have my team here and we will now be answering your questions.

Question-and-Answer Session


[Operator Instructions] Your first question is from Mr. Vinicius Canheu from Crédit Suisse.

Vinicius Canheu - Crédit Suisse AG, Research Division

I have a question. I think, the most important one is to try and understand the results, especially the EBITDA, of the commercialization of services. You mentioned the main impact. If you could detail the ones that have impacted these results the most because it was negative EBITDA? And if you could give us an idea about normalized situation, what is the EBITDA level that we can ask in the half year, annual, so that we can have an idea that it was not recurrent in this quarter but what is the effect of that?

Wilson Pinto Ferreira

Thank you, Vinicius, for your question. I will share the answer between myself and Fabio [ph], the new President of CPFL Brasil. And I'd first say that this first half, we have some important effects. We already had in our portfolio self-dealing operations that are decreasing, and they will be finalized next year so there's a reduction of 25%. There's a value with a margin, a prefixed margin of 10% that we're losing. We've changed our strategy for the consumer markets. Fabio [ph] will be able to give you more details of this performance, very positive. But this is a segment that, because of competition, has lower margins. So we're competing there. It's a transition period from a moment where the company had possibilities to operate at larger margins, with an operation where we have to compete with a number of players working with smaller margins. The other topic is the fact that the company in this growth process has also been focusing the special customers market, especially in the thermal biomasses, which is an important portfolio for the group. This is practically 25%, 30% of the volume of cogeneration of Brazilian biomass. These volumes are traded as of the second half. And of course, it's hard to give you a perspective, a stable perspective in terms of values for the company. We've been working values of around BRL 200 million to BRL 250 million for EBITDA. But in terms of services, I would say that the recurrent value of this market and commercialization especially was around BRL 200 million. So maybe due to this competition process it will go down to about half of that or slightly above that. It was apparent at the time, these prices that will be introduced to you after this reformulation of the PLD. I'll give the floor to Fabio [ph] so he can add to what I said.

Unknown Executive

So Vinicius, just adding, aside from the structural issues that you mentioned, we also have the year of 2013 atypical as it follows about -- in terms of rainfall. But that made this year slightly more challenging and the regulatory aspects as well have also impacted the operations on the short term with the delta PLT (sic) [PLD] and PSS. So aside from the structural aspects, we have an atypical year and this really has caused an impact in the second and third quarter for CPFL Brasil. Our expectation for the second half is that it will be better than what has been presented, especially due to the operations with incentive sources, which is one of the main focuses of CPFL Brasil, which is to grow in this type of marketing.

Vinicius Canheu - Crédit Suisse AG, Research Division

Okay. So just trying to put numbers on top of what you said. What we could expect is that instead of BRL 200 million, BRL 250 million we saw before, maybe we'll be around BRL 100 million, BRL 150 million from now on per year?

Wilson Pinto Ferreira

Yes. I would say so, but again, subject to this competition process. The services activity has had some impact, a slight impact of this decrease in this first quarter of the year in the industrial activity. And we imagine that this will recover, and the whole potential for new connections and consumers, special consumers to become free in the free market that opens. I would say that I don't like guidance in terms of value, but we know that the volumes we used to have of self-dealing will no longer occur. They will decrease over time so we'll have an impact of a BRL 50 million to BRL 100 million reduction, and that will be something that we will experience but we are very consistent. We've increased the number of consumers this quarter to approximately 280 of free market consumers, so that opens a very positive perspective for the second quarter -- the second half.


[Operator Instructions] The question-and-answer session period is now concluded. I would like to invite Mr. Wilson Ferreira for his final remarks.

Wilson Pinto Ferreira

Okay. One more time, I would like to thank you all for participating in CPFL Energia's Second Quarter Earnings Conference Call. Let me, one more time, emphasize our belief in the resumption of economic activities, especially industrial operations, which will positively affect our distribution companies.

It is important to highlight, it is always difficult when we conclude another cycle of tariff review but we have overcome this moment. 70% of our distribution result comes from Paulista and RGE. So now, we will only have tariff reviews in 2018 for these 2 companies, which will allow for us to have enough time to build an efficient strategy to gain productivity and reduce costs. Now with the Tauron program ongoing, this automation program, we have a very favorable outlook in the distribution activities now that we have concluded the tariff review process.

One more time, let me talk about our commitment to expand the shared service center, which also helps us gain productivity together with the 0-based budget.

At this time, we are building our 0-based budget for next year. It will be discussed by the board in October. And let me also remind you about the possibility, and this is public information, where we will open up a process to sell real estate already this year because we've had a headcount reduction and more efficient office layout. This is actually very much in line with this new phase of management in Brazil. Brazil has to evolve, Brazil has to advance in management. CPFL is a good example for the market. We want our associates to be innovative, to be collaborative so that we have a meritocracy in the company to attract and retain the best talent. This month, we are about to conclude our program to accept new trainees in the company. This is something that has proven to be very important for us to be prepared for the future.

Now back to CPFL Renováveis, and the topic of concern for investors, which is leverage, I think it is relevant to say that CPFL Renováveis, which is our great growth driver, in addition to the distributors that accounts for 20% of our net adjusted debt. However, right now, because of the new investments, CPFL Renováveis has contributed with 9.8% of the adjusted EBITDA. So we are growing and we will have important growth in the next quarter, with additional 250 megawatts, and up until year end, 328, adding BRL 180 million more in terms of revenue.

That is, we have very bright prospects. We continue with our focus to work for the end of tariff review so that we have a different way of working. In generation, especially in renewable generation, where we have lots of players and the process is very competitive, we expect to see a consolidation process. Our company is prepared for that and we are highly disciplined. So we want to grow but we want to grow by adding value and distributing value to our shareholders and to all of our stakeholders. This is our commitment and we're very optimistic for the second half of the year.

Thank you very much for participating in this call.


Today's conference call, CPFL Energia, is now concluded. Thank you for participating. Have a good afternoon.

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