CPFL Energia S.A. (CPL) CEO Gustavo Estrella on Q1 2022 Results - Earnings Call Transcript

May 13, 2022 1:58 PM ETCPFL Energia S.A. (CPL)
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CPFL Energia S.A. (NYSE:CPL)

Q1 2022 Earnings Conference Call

May 13, 2022, 10:00 AM ET

Company Participants

Gustavo Estrella – Chief Executive Officer

Yuehui Pan – Chief Financial Officer

Carlos Cyrino – Investor Relations Officer

Conference Call Participants

Rafael Nagano – Credit Suisse

Juan Carlos Alvarez de Soto – Santander Bank

Luiza de Vasconcellos – Itau BBA

Antonio Junqueira – Citibank

Carlos Cyrino

[Interpreted] Good morning to everyone. Welcome to one more presentation of our results. We did a talk about the first quarter of 2022. I'm Carlos Cyrino, Director of Investor Relations with CPFL. And today I will be monitoring all the dynamics of our event. We have today, Gustavo Estrella, our CEO, Mr. Pan, our CFO, and other executives of the company. The whole presentation will be carried out in Portuguese with interpretation for English. All you have to do is click on the interpretation button that shows up on the bottom part of the screen.

Those who want to see the presentation in English, the same presentation is available on the site of the CPFL Investor Relations website. I'd like to inform everyone that after the presentation of the company, we will start our session of questions and answers. All the questions will be asked live, and to do this, all you have to do is click on the button raise hands -- raise your hand -- and this you can find at the bottom part of the screen. Remember that this event is being recorded. I'm now going to give the floor to Gustavo Estrella for us to start the presentation of the results.

Gustavo Estrella

[Interpreted] Thank you very much. Welcome every one. Thank you for your participation here in our results for the first quarter of 2022. I'm going to move on to Slide 3 with some highlights here. First of all, what we are delivering is a very robust results with a growth of 34.4 results reaching R$2.643 million and a net income of 20.9 R$1.162 million. Net debt reach is R$21.2 billion. It's a growth -- is especially because of the transmission, but we maintain the leverage, which is 2.3 times the net debt EBITDA. The CapEx, I think this is another highlight, is a growth of 74.2%. In relation to 2021, we reached R$1.212 million of investment.

We had a concern especially in the beginning of this year due to the pandemic and the effects of Omicron but we were able -- be able to deliver a robust CapEx of 1.2, an aggressive result. It's an important year for our distributors that are going to have an exemption of tariffs. So this is an important delivery and already with the challenge of delivering and high CapEx until the end of the year. We also had excellent results with the conclusion of the MTO CPFL Transmission. We now control 99.26% of this company.

So it's an additional investments with the investment that we did in privatization. We practically consolidate the company with impacts that were not forecast, but positive impacts and the consolidation now almost a 100%. And last, we have the release of the sustainability Annual Report, reinforcing even more ESG practices and the evolution of our commitments, everything that the company has taken over during the last years. Now, let's move to the next slide, Slide 4.

We talk about sales of energy as you can see here, it's practically stable compared to 2021, a drop in the load of 0.02 and a drop in the concession area. Perhaps the main highlights here are in the residential area. We can see here in the bottom right part of the slide, the impact of 3% in residents. This was already expected that we would have a relevant impact of Distributed Generation in 2022. And this fact happened in the first quarter. And clearly the trend is that it will happen in the subsequent quarters.

Another one is the industrial area. We can see that we have a drop of 1.8%, in relation to 2021. When we see this in general, we have a positive growth, and this is the food area which has a growth of over 5%. This is an important segment for our market with 20% of market share. But when we go to other segments, rubber, vehicles, metallurgy, textiles, all of them with a drop in consumption of 5% to 7%. So I think this is a point of attention, the performance of the industry, not only for the quarter, but for the whole year, we saw a recovery last year in the consumption of the energy.

And this year, the market has gone negative, very much linked to the expectation of economical grow, the GDP and the expectation is a bit lower than 1%. Positive part comes from the commercial side with a growth of 4.5%. The commercial area directly linked to the improvement of the pandemic in 2022. So in the comparison with 2021, coming from a low base in 2021, but important growth and also with the trend of the commercial side, growing more up to the end of the year.

Now, let's move to Slide 5. This is another concern during the last quarter is the topic of delinquency. As you can see, we have a growth of delinquency, not only in the last quarter, but also in relation to 2021, a growth of almost 67%. This has a lot to do with two factors. The first one is the macro-economical scenario. We have relevant impact in the revenue of our clients, and the impact is much higher in those clients in the lower classes. This affects delinquency a lot in the debts of the families, the unemployment all the indicators that reflects the macro economy affect delinquency.

And added to this, in this quarter we have the red flag of hydro scarcity with an impact in the tariffs and the bills of our clients, all of this together brings us a scenario which is very challenging in relation to delinquency. What we have done, all the actions that the company can do, perhaps the most relevant, are the billing we've have kept high cuts, more or less 200,000 cuts per month to try to control this delinquency, but the scenario really is very challenging. And based on the past experience, we know that we have to be able to control this better.

It depends on the economical scenario. And this seems to be a trend that will go to the end of the year. In the low growth of the economy, GDP 0.7, we will continue having challenges. This is a reflection perhaps of the delinquency that we'll have up to the end of the year. Now, let's go to the next slide its Slide 6. This is good news in relations to energy losses. What we can see here, it's stability with a trend to drop the level that we've closed at 8.79. In the past 9.11 or more positive signal losses is not a huge challenge I would say compared to other areas of Brazil. It’s always a challenge but less in other regions, but it's a positive trend compared to 2021.

Now, let's talk about generation at Slide 7. The first impact is the drop of PLD and here, clearly, this is a reflection of the better hydrology that we have in 2022, compared to 2021, positive also in the GSF and improvement of 9%. In the hydraulic, we can see in the -- you -- a chase of -- a drop of 46% and these are the ones that are located in the southern part of the country, the flow and the PCH is the invest because they are in the southeast where we have much better hydrology than in 2021. Wind, we have a drop of 19% in generation. Here, it's a fruit of the performance of the winds, less winds and in 2021 and the availability as we can see, it's practically stable, 95.7%. It's a positive result in the availability of the wind farms. Now, let's go to Slide 8 and then they're going to give the word to Mr. Pan.

Yuehui Pan

[Interpreted] Thank you, Gustavo. Good morning to everyone. Now, we have Slide 8. In this quarter, we reached the higher EBITDA this year since our IPO in 2019, R$2.6 million, an increase of 34.4%. The distribution of account in EBITDA $1.8 billion, an increase of 45.7%. The highest gain once more comes from the market and the tariffs R$553 million, especially due to the higher IGPM. Financial assets of the concession had an increase of R$53 million. Another important effect demonstrated in this quarter is the value of other revenues that had a gain of R$26 million, once more basically from the rental of person also updated contracts by the IGPM.

As a negative effect, we had the PMSO with an increase of R$43 million. The highest impact are the expenses linked to inflation, an increase of 7% below the IPCA, which was 11.3%. PDD was higher, R$36 million as Gustavo has already demonstrated in Slide 5. Other effects all add to R$23 million in generation of very good EBITDA of 673 million, an increase of 5.6%. Without the consolidation of the five smaller transmission products, the main positive effect was the updating of the prices of the contracts, a R$147 million.

The lower GSF combined to the PLD, the lower PLD, during the periods contributed with R$12 million. On the other hand, we had a negative impact of R$68 million, referring to lower wind generation in the quarter, according to what was explained by Gustavo in the previous slide. And a higher OpEx affecting negatively in R$23 million. Other effects add -- added to a loss of R$33 million. Now, let's move to the next slide. Let's talk about transmission, this was a highlight of the quarter with an EBITDA of one --

He had a connection problem, but he is now back, with an EBITDA of a $138 million according to expectations of the acquisition of the CEEE-T and the effect was the consolidation of the transmission CPFL numbers with a $121 million. The other transmission projects had a positive impact of $6 million. The trading services and other segments was impacted mainly by the margin with a variation -- negative variation of $70 million. Is partially compensated by services $12 million. Let's move to the next slide.

We now show the performance of the net profit, which was R$1.162 million an increase of 20.9% in relations to last year. In the results of financial year, we had R $ 311 million. This was because of expenses with the net debt with an increase of R$307 million. This has been playing by the increase of CDI, which was 0.48% in quarter of last year, and now 2.39% reduction in fines R$26 million after the adoption of the IPCI, and no longer the IGPM in the delayed bills. This has partially been compensated by a monetary update of the regulatory assets, its R$117 million due to the higher financial assets.

We close with R$3.2 billion. Other effects added to R$41 million negative. The depreciation increased to R$47 million and taxes R$119 million. The higher value of taxes is related to the better performance of the company. Let's now move to the next slide. Here we have the leverage and the conveyance criteria. The net debt is totaled R$21.2 billion and the EBITDA in the last 12 months reached R$10.4 billion. The leverage measured by the net debt and EBITDA was 2.03 times in relation to the dividends we approved in a Board meeting on the 29 of April, the payment of R$3.7 billion.

This amount will be divided into three installments. The first one will be due on the 11th of May 2022, and the value R$1.1 billion, 0.94 Rials per share. The second installment up to the 30th of June of '22, the value of R$0.80 billion R$0.67 per share. And the last installment up to the 30th of December. And the amount is R$1.91 billion or R$1.62 per share. Next slide. Here we have the profile of the gross debt. A higher exposure is in CDI with 69% followed by IPCA 27%, Pre -fix 2%, TJLP in the chart. On the right side, we have the debt costs, which has increased especially to the -- due to the variation of the CDI during the period that went from 8.76% at the end of last year, and now 11.15% in the first quarter this year.

Finalizing the end of the [Indiscernible], the cash was R$4.1 billion with an index of coverage 0.89 times the short-term amortization. The average time of amortization is three years. Now, let's go to Slide 13. The CapEx of the quarter was R$1.2 million, an increase of 74.2% in relation to last year. In division per segment, we have in distribution, a total invested of R$975 million destined to the increase, the modernization and the maintenance of the network and equipments.

In the generation segment, we invested 62 million and building [Indiscernible] and in the maintenance of the projects in operational. We invested also, a $170 million and the building of our transmission projects, and reinforcements and improvements in CPFL transmission. Finally, the trading and service segment we destined $5 million. Thank you very much, and now I'll give the floor back to Mr. Gustavo Estrella, thank you very much.

Gustavo Estrella

[Interpreted] Thank you. Mr. Pan. Well, our ending presentation, we're going to stop, we're going to end with diversity and inclusion, uh, our gender is very much consolidated with these topics of ESG social actions, CPFL, a lot of different actions that we have been carrying out in a very positive way, not only internally for our collaborators, but also with all our stakeholders specifically in relations to diversity and inclusion. I think this journey might be longer, but we are all engaged. It has started. Today, we have a very robust plan with -- ambitious target for the next few years.

We have three pillars of commitment and governance, inclusive culture, and representation. A series of actions -- more than a 100 actions that have been planned for this year. We have an area -- a 100% dedicated to this area, so over a 100 actions that will be planned in 2022. I brought here an example that we're very proud of. It's initiative -- a school for women. And in 2020, we had five women electricians in the company. Today we already have 29, and the expectation is that in '22, we train another a 100 women electrician.

So the idea is to continue growing and bringing the women among our electricians. I think another piece of good news also linked to this topic, yesterday in our meeting of the Administration board, we approved the [Indiscernible], so it is a woman participating on our board. And I think this also brings the topic forward of diverse and inclusion for our agenda and our governance. I think these are important actions we're advancing. We're evolving with a lot of clarity and it's a challenge to advance with this topic. Its a long term journey, but we started this journey. Once more, I thank you all for your participation. We are now going to end our presentation and we're going to open the session for questions and answers.

Question-and-Answer Session

Carlos Cyrino

[Interpreted] Thank you, Gustavo. Thank you, Mr. Pan, for your presentation. So now we're going to start a session of questions and answers and remember that all the questions are live, just reinforcing that to ask a question you should use the button or raise hands. You can see the button on the menu at the bottom of the screen. So the first question is coming from Rafael Nagano. Rafael, good morning. Rafael is from Credit Suisse. You can move forward with your question.

Rafael Nagano

[Interpreted] Well, good morning. Hello, everyone. My question -- I have two questions in fact. One is about the transmission assets. I'd like to know in your vision if you have any interest, any specific block in the option that's going to happen in June and what kind of returns if these returns compare with assets in the M&A market. And my second question is about dividends. If there's any conversation or any expectation of increasing the frequency of the payment of dividends or will it continue month -- annually?

Gustavo Estrella

[Interpreted] Well, we are interested. We are evaluating this auction in June, and the same strategy that if it works together with our new strategy with the transmission assets. I think that the concern for this auction is very similar to the previous ones. What we've seen is scenario with a lot of competition. And obviously, the competition pressures the prices. We have a large change in the scenario. If you look at the last 12 of 18 months, we have a scenario today of commodity prices that are higher, scarcity of equipment, pressure in relation to labor. So the building cost of these projects and vision, going through now, what we saw in the last [Indiscernible] of December, these two challenges we're not contemplated.

So practically, the level of competition was the same as the previous years. And this makes the environment very complex when we talk about the competition. So we are going to participate, but maintaining, as we always have, our financial discipline return metrics unaltered. So if we're not able to be competitive and if we lose, we understand it's part of the game. But we're not going to flexibilize considering the complexity of the execution of these projects today in the current context, which perhaps will be the scenario for the next months. So we have a challenge, and the big question is our competition ability in the next -- in the future. Now, as for dividends, our strategy of balance between dividends and growth continues, so we evaluate according to growth, and we balance with the payment of dividends.

So I believe that after this evaluation, effective payment of dividends has a lot to do with our availability of cash flow. Today, we have a cash flow which is relatively volatile due to the CVA variation that we have now, especially in our distributors. So we have to match the availability of cash with the payment of dividends. We will continue doing this. This is very difficult to forecast the exact dates of payments, given that it depends from the availability of cash. But the expectation is to maintain our strategy of balancing the dividends and the growth. Thank you.

Carlos Cyrino

[Interpreted]Thank you. [Indiscernible] for your question. Now, we're going to move to the second question. The second question comes from Juan from Santander Bank. Good morning [Indiscernible] thank you for your participation. Please ask your question.

Juan Carlos Alvarez de Soto

[Interpreted] Good morning. [Indiscernible] congratulations for the results. Well, I understand [Indiscernible] the standing all this about the tariffs and now [Indiscernible] if they talked about this question of [Indiscernible] things to amortize, how do you see this with the regulators?

Gustavo Estrella

[Interpreted] Well, I think in relation to tariffs specifically related to this topic of [Indiscernible] that is something that we have already been doing. So I believe that the interest of all the agents of the sector, or the regulatory, the government, clients, and also companies, I think is to get this tariff amortization in a challenging time through. I showed you the level of delinquency so I think everyone has to try to amortize the tariffs. This what we've done with the readjustments. We -- this impact is something that we're already doing, this compensation, and it makes sense that we incorporate this for the tariff readjustment.

So I would say that this is natural tendency. I think there's an expectation of the government and regulatory so I think this will take place. This discussion of tariffs, I think our expectation always goes through dialogue. In the first place the chamber, the government, the agency, the ministry, we hear the companies but we -- the main pillar is regulatory. I think we have a mature regulation. It's already 20 years ever since 2004 so I think it's already mature, understood by the market, and that has brought a lot of investment or the expansion that the sector goes through private investments. So ideas to preserve, this is a center pillar to have alternatives, which is less structural.

I think it's what we will have to do. I think the big example -- good example of these solutions is a sectorial loans. This defers the readjustments to the consumer for over a year. I think this is an example. It preserves all the contracts. It preserves the payment capacity of our clients. And I think these are the types of solutions that we have to work on with all the agents with dialogue and reaching this solution convergence.

Carlos Cyrino

[Interpreted] Thank you Juan for your question. We are now going to move forward to the third question. The question comes from, from Itau BBA. Good morning, Luiza. Thank you for your participation, and you can ask the question.

Gustavo Estrella

[Interpreted] Luiza, I believe you're on mute.

Luiza De Vasconcellos

[Interpreted] Can you hear me now?

Gustavo Estrella

[Interpreted] Yes, we can hear you.

Luiza De Vasconcellos

[Interpreted] Thank you very much. I have a doubt here of delinquency. We see a pressure of above historic levels. I understand that you have had the macro effect. But I'd like to know, what do you expect for the next month related to PMSO delinquency, have you seen any sort of normalization? And if you could also comment the expectation of volumes. When we look forward. Thank you.

Gustavo Estrella

[Interpreted] Thank you for the question. In relation to delinquency, we are monitoring this periodically. And the trend is to stabilize. We have a very specific brand drug distributors to have higher selective cuts. And also -- this brings a relief in the tariff, and this will -- benefiting. We notice a small decline this month, and we hope that this will remain stable and with a recovery of these higher cut volumes, we hope to stabilize. So that's the expectation, stabilization of the delinquency and then, medium-term a reduction. So we also have plans for installments to make the life of consumers easier and giving opportunity for the clients to make their payments and avoid the increase of delinquency. [Indiscernible] I -- you ask for volume.

Talking about volume, we can see that the volume is very stable when we compare to last year. If we look at the expectations for 2022, we see residential a bit low as Gustavo mentioned, this residential has to do with the habit of people coming back to work at offices, we should see this happen during the next months, a little bit of positive effect of temperature. So we can have volatility. The effect can be a bit negative and we also have the DG, we have the impact of 3% in this domestic compared to the domestic of the quarter last year.

And this impact can grow a bit more during the next quarters up to the end of the year. This is a bit of the expectation here for the residential. When we look at the industrial side, we see some segments with some demand. This demand can happen during this year. I think it depends a lot on the rearrangement of the supply chain all over the year. We see segments such as vehicles as a lack of components of parts, so you have a weak industry in this first quarter, and it can continue until the raw materials are not received and that these segments strengthen themselves.

Once this happens, we have the expectation of growth of this industry for the second quarter. End of the year, of course, it will depend a lot on the macro-economical scenario, but we see an industry some segments as strong like machinery and food. This is strong. And we see a positive industry growing in this part of machinery and food, all the pandemic, this remained positive. If this continues this -- and this is our highest market share whenever we look at the state of Sao Paulo and also the state of [Indiscernible].

When we talk about PMSO, we, obviously, we are having an increase of inflation, interest rates. So when we compare the PMSO with last year, for sure, we'll see it and we have to look for the inflation of the -- so we have a target, we are moving below this target. There's a PMSO below inflation the last year we close and now in the first quarter below the inflation of the period I think this is our goal when we look up to the end of 2022. It will be a bit higher than last year due to the inflation and interest rates, but the idea is to continue below the inflation of the period. So nothing too relevant that -- or extraordinary that will affect this from what we can see up to now.

Carlos Cyrino

[Interpreted] Let's move to the next question. I have a question from Pedro from BTG. Good morning, Pedro. I think Pedro ended up by leaving. Well, I'm going to move forward to Junqueira from Citibank. Please ask your question and thank you for your participation.

Antonio Junqueira

[Interpreted] Thank you. Can you hear me? My question is simple. What is the diagnosis of the company referring to [Indiscernible] If you could share with us what's the big challenge. If there's an institutional solution for -- I'd like to know what your opinion is. I understand that in the past, you didn't propose in the auction, but you did in Brasilia, it's another type of operation. I don't know if you have any diagnosis that you could share with us.

Gustavo Estrella

[Interpreted] Hey, Junqueira. How are you? Thank you for the question, Let's move on. I think it's an asset with some challenges as you mentioned. At the time of the privatization, we were unable to format a proposal to put in the process. So I think after five years, the challenge is similar perhaps in a different positions. So I think what [Indiscernible] did is what should have been done. When we look at the CapEx, it's in fact high, but the fact is perhaps three challenges.

The first one is a discussion of [Indiscernible] that fund for legal issues. We had -- this is a risk that already existed way back. And I think now the risk is even higher related to privatization. The risk of the indicators, in spite of all the investments. The company still does not deliver some operational indicators, and these are a base for one to reach the concession levels. So there is a negotiation that will have to be carried out. So that the company has more time, and the institutional relationship as you said, concessions. And we understand the importance of having a live -- it's a partnership with the government of states. This has to be built. So these are big challenges and we have a potential of growth. We have all the rural areas, but some challenges, basically, the same challenges of the privatization way back in 2008 -- '17, '18.

Antonio Junqueira

[Interpreted] Wonderful. Thank you, Estrella.

Gustavo Estrella

[Interpreted] Thank you, Junqueira.

Carlos Cyrino

[Interpreted] Well, folks, I think we have ended the questions. We don't see any other questions, so I'm now going to end the questions and answers. If there's any question, of anyone needs any clarification, if you need anything to do with Investor Relations, we are available to talk to you. So I'm going to give the floor back to Gustavo Estrella to -- for the final considerations and for the closure. Thank you.

Gustavo Estrella

[Interpreted] Once more, I thank you all for your participation in the webcast of results of the first quarter. I think I would like to highlight two or three points. The first thing is one more quarter. We have a challenging scenario, delinquencies, recovery, etc., but I think we've closed with good results. I think the first quarter we have the impact of CPFL transmission with the consolidation. Of course, I think it's just the beginning. We have a series of improvements in the process of integration that we've been doing, and I think it is a contribution with relevant results in the next quarters.

Now with the OPA effect and the company a 100% controlled by CPFL energy, we trust a lot the agenda. I think it's very important with all the changes and transformation of the electrical sector, not only in Brazil, but the whole world for us to address this modernization agenda, and also very important, the maturity and the stability of the regulation. As I said, that we've built during the next years, 20 years, it's a central pillar so that we can continue advancing in the sector with new investments, bringing new technologies and a service with more and more quality. So once more, I thank you all for your participation. And I wish you all a good afternoon. Thank you very much.

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