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Edited Transcript of CPFE3.SA earnings conference call or presentation 10-Mar-20 2:00pm GMT

Q4 2019 CPFL Energia SA Earnings Call

Campinas, São Paulo Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of CPFL Energia SA earnings conference call or presentation Tuesday, March 10, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gustavo Estrella

CPFL Energia S.A. - CEO, Chief Planning, Chief Bus. Dev & Mgmt. Officer, Member of Board of Exec. Officer and Director

* Luís Henrique Ferreira Pinto

CPFL Energia S.A. - Chief Regulated Operations Officer & Member of the Board of Executive Officers

* Yuehui Pan

CPFL Energia S.A. - Chief Financial & IR Officer and Member of Board of Executive Officers

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Conference Call Participants

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* Gustavo Miele

Banco Itau BBA SA, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning and thank you for waiting. Welcome to CPFL Energia's Fourth Quarter of 2019 Earnings Conference Call. Today with us, we have Mr. Gustavo Estrella, CEO of CPFL Energia; and Mr. Pan, CFO and Investor Relations Officer of the company as well as other officers of the company.

The presentation is available for download at the CPFL Energia Investor Relations website, which is www.cpfl.com.br/investorrelations. (Operator Instructions) We would like to remind you that this call is being recorded.

Before proceeding, we would like to clarify that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Such forward-looking statements are beliefs and assumptions of the company's management as well as information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or may not materialize.

Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future performance of CPFL Energia and may lead to results that differ materially from those expressed in such forward-looking statements.

Now we would like to turn the floor over to Mr. Gustavo Estrella. Mr. Estrella, you may proceed.

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Gustavo Estrella, CPFL Energia S.A. - CEO, Chief Planning, Chief Bus. Dev & Mgmt. Officer, Member of Board of Exec. Officer and Director [2]

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Thank you very much. Good morning. Thank you very much for participating in our call about the result of 2019. And now let's go straight to Page #3, in which we have the main highlights for 2019.

I would like to start by the increase in our load in the concession area amounted to 1.2%, and we will see this in detail. This growth has been very much pushed forward by growth in consumption of lower voltage, especially residential, record result, EBITDA reaching BRL 6.394 billion, growing by 13.4% year-on-year. Net income record BRL 2.748 billion, growing by 26.9% on a year-on-year basis. Net debt, total net debt, BRL 16.8 billion, and leverage, measured by the net debt-to-EBITDA ratio with the financial covenant, 2.52x, an important drop vis-à-vis the end of 2018, which was 3x.

Investment, another year with investments higher than BRL 2 billion. We closed the year with BRL 2.254 billion, growing by 9.3% year-on-year. Due to the growth -- the reduction of our indebtedness and growth in our results, the company proposes to pay a dividend payout of BRL 2.075 billion or BRL 1.8 per share -- BRL 2.075 million. And we had a very important tariff review in CPFL Piratininga in October 2019, with a negative adjustment of 7.8%, mostly due to the reduction of the charges of the CDE. And in spite of the reduction in tariffs, we had an important increase in our Parcel B amounting to 6.2%, mostly led by the transfer of the IGP-M to our tariffs.

Once again, the highlight of our IPO -- re-IPO, which happened in June 2019. And I would like to mention here, our average trading of BRL 94 billion, in the stock exchange with a very positive results vis-à-vis the participation in the main share indices in the Brazilian market, and we are getting close to 50 with an expectation, which is positive already in the BOVESPA in the next few months.

We integrated the process of BRL 4.1 billion in the CPFL Renováveis, BRL 16.85 per share. And we continue with the delisting of CPFL Renováveis over 2020.

We also had an important process of integration of CPFL Renováveis into CPFL Energia. Already announced to the market during our re-IPO process, and we concluded the process at the end of last year in December. And today, CPFL Renováveis is already fully integrated in our headquarters in Campinas. We started an important process in CPFL Renováveis of debt replacement. We already had BRL 838 million, and we expect to continue with this process over 2020 with a reduction in the cost and the extension of the terms in CPFL Renováveis.

Now going to Slide #4. We have the highlight of energy sales in the fourth quarter of '19. This quarter was positive in terms of our sales with a growth of 2.4% in our sales in the concession area. Load in sales, 4.2%. Per class of consumption, we see an important highlight in residential and commercial. This is a very important highlight in the fourth quarter of 2019 vis-à-vis 2018. And Industrial, still a slower recovery compared to the others.

Slide #5. Where we have the energy sales for the full year of 2019, growing by 1.2% in load and 1.3% in the sales of the concession area. And I would like to highlight that over 2019, CPFL had the migration of some client -- customers from our market to a direct connection to the national grid. And -- but no effect on the margins of the company, but it really hinders when you compare to the market performance of 2019 vis-à-vis '18. So net of the effect of the migration of these customers, this 1.2%, in fact, is a 1.9% growth.

In consumption in our concession area, once again, we see the highlight that comes from the low-voltage residential and commercial, basically, the effect of temperatures that affect consumption in a positive fashion in the residential and commercial sectors. And also effect on the industry with a drop of 1.4%. And net of the effect of migrations, in fact, industry was practically stable vis-à-vis 2018, with a drop of 0.1%.

On Page #6, we see delinquency energy losses. A very important point monitored last year in the Distribution segment. Delinquency with an important drop from the third to the fourth quarter, going from 0.87% to 0.49%. And I would like to mention that we carried out some renegotiations with some customers over the fourth quarter of '19. Therefore, we see a one-off effect. Net of this effect of these negotiations, we would get to a delinquency level on the same comparison basis of 0.7% but still lower than the third quarter and practically in line with the end of 2018. We see a slow drop, but there is a downward trend in delinquency, and we continue to be very strong in our actions. Regarding collection, especially the cut, energy cuts, in the fourth quarter, 591,000 cuts, the highest volume of cuts in one single quarter, and we expect to maintain the same number or at very high level, so that we may control and further reduce delinquency over 2020.

Now talking about energy losses, practically stable with a very slight reduction in energy losses vis-à-vis 2018. We closed last year with 8.89% of losses. In spite of the reduction, we are still higher than the regulatory caps. And this is a major challenge. Over 600,000 inspections over 2019, so that we may identify and fight this in our concession areas.

Slide #7. We have a whole set of information that affect directly or indirectly our Generation segment. We see a drop in the spot price vis-à-vis 2018, a 21% drop. The average spot price in '20, BRL 27 per megawatt hour. Then at the beginning of this year, with an expectation of an even lower spot price than 2019 due to the high rainfall that we had, especially in the Northeast. And at the beginning of this year, GSF, 8.3% increase, reaching 91% GSF in 2019. SHPPs, a reduction in the flow of water from our projects in our SHPPs, a 3% reduction vis-à-vis 2018. And this also affects our production of energy over the year.

Wind generation, a drop of 4.6% vis-à-vis 2018. And we can see here that it is directly connected to the wind performance in our wind farms with a drop of 4.9%. When you compare to the curve of P50, we reached 85% of P50, slightly lower than the volumes of 2018, and this has a direct impact on our total energy generation. Wind availability, we see a growth of almost 2%. And the good news here comes especially from the CRR wind farms. With the social machines and after our in-sourcing at the end of last year, we can see an improvement, a significant improvement in the performance and the availability of our machines and our wind farms after this in-sourcing.

Now I would like to give the floor to Pan, so that he may talk about the details of the results of the company.

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Yuehui Pan, CPFL Energia S.A. - Chief Financial & IR Officer and Member of Board of Executive Officers [3]

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Good morning, everyone. Now turning to Slide #8. The EBITDA in this quarter was of BRL 1.7 billion, 28.6% higher. The Distribution segment was up 37.3%. The main effect came from market and tariff gains. A total of BRL 238 million, especially thanks to load increase in our concession areas, and Gustavo already talked about that. And also we had additional effects such as increase in other revenues, reduction in our ADA after several quarters higher.

In Commercialization, Services & Others, there was a significant increase of 108.4%. In services, I stress the good performance of the CPFL Serviços with excellent results in 2019, BRL 16 million higher in this fourth quarter. In Commercialization, the volume -- so drop was offset by higher prices, increasing our margin in BRL 8 million.

In the next slide, we have Conventional Generation, which posted an EBITDA 6.1% higher. And the main effects were the inflation rate transfer to contracts, BRL 25 million, partially offset by the GSF of our -- small share of GSF of our energy in the free market, which was negative BRL 7 million, and others, minus BRL 1 million.

In CPFL Renováveis, EBITDA was up 26.1%, thanks to assets write-off in the fourth quarter of -- and which was BRL 60 million, a higher wind farms generation, plus BRL 28 million. And that was partially offset by the integration of CPFL Renováveis and CPFL Energia, minus BRL 4 million. In the end of the grace period, in O&M payments, increasing expenses in BRL 3 million, and others, minus BRL 3 million.

Turning to Slide 10. We have our net income performance, which was BRL 857 million in the quarter, 27.8% higher vis-à-vis 2018. In addition to the variation of BRL 387 million variation in the EBITDA, other effects include, in the financial results, a drop of BRL 108 million because of lower interest rates and reduction of the net debt, allowing a gain of BRL 98 million. Depreciation has varied BRL 48 million, and there was a tax increase of BRL 260 million because of better results and posting of tax credits, which were higher in 2018 than in 2019.

In the next slide, the results for 2019. An all-time high for CPFL. The EBITDA was up 13.4%, an increase of BRL 757 million. Net income was up BRL 582 million, and that represents an increase of 26.9%. As for EBITDA, Distribution was higher, thanks to load and tariff increases, partially offset by PMSO and ADA.

Another highlight is renewable generation, which was in the same level of 2018, and despite of the poor wind performance. About net income, in addition to our EBITDA positive effect, we also had a better financial result of BRL 376 million, thanks to lower indebtedness and lower debt cost.

Now turning to the next slide, the company's indebtedness. On the top chart, net debt totaled BRL 16.8 billion and the EBITDA of the last 12 months was BRL 6.7 billion. Leverage, which is measured by net debt over EBITDA was of 2.52x. On the gross debt breakdown, we can see that 63% are CDI indexed. And that has helped bringing down the debt cost. Compared to 2018, main changes in 2019 were the reduction indexed by long-term interest rates and increase of IPCA-indexed debt.

On the next chart, the debt cost over the past few years, both real and nominal. The drop from 2018 to 2019 was mainly because of the interest rate reduction, the Selic rate. Cash position by the end of 4Q '19 had a coverage of 0.62x of the amortization of next year, which is enough to pay for 2020's maturities. The average amortization term, which is calculated based on the schedule is of 3.18 years.

On the next slide, our CapEx. This year, we have invested BRL 2.2 billion, over 9% higher vis-à-vis 2018 and very much in line to our plans. Considering each segment, we had, for Distribution, a total of BRL 2 billion invested in expansion and improvements in the system. For Generation and transmission, BRL 126 million were invested in Renewable, BRL 21 million in transmission, and BRL 12 million in Conventional Generation. For the transmission segment, we invested Maracanaú, Sul I and Sul II projects, which were acquired in 2018's auctions. Finally, Services. There we have invested a total of BRL 62 million.

On the next slide, our estimated CapEx for the next 5 years. Considering a total investment of BRL 13.5 billion, of those BRL 11.6 billion for Distribution, BRL 1.2 billion for Generation with focus on Renewable, BRL 233 million in Commercialization and Services, and BRL 564 million in transmission.

So now I turn the floor back to Mr. Gustavo Estrella.

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Gustavo Estrella, CPFL Energia S.A. - CEO, Chief Planning, Chief Bus. Dev & Mgmt. Officer, Member of Board of Exec. Officer and Director [4]

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Thank you very much, Pan. Now let's turn to Slide #15, in which we have our strategic plan from 2020 to '24. It's important for us to split it into markets. Our plan follows the line and we -- CPFL act regarding safety and growth and new businesses and operational efficiency, maybe with 2 important highlights here. First, the digitization of the company, and that has been the focus of the company in guiding our investment and the way we mold, not only our current business as the company, but prospective future businesses. So automation and digital operation is very -- are very relevant for our strategic plan from '20 to '24, besides customer focus. And we are going through a very big transformation in our customers in the power market, and we must focus on service client -- customer service in our regular business, and also in other businesses that might -- we might participate in the future. This is fundamental, these 2 pillars are fundamental, and they will be the guidelines for our future as a backdrop. As a backdrop for the plan, we have our sustainability plan, and we always say that results are very important, but the way we achieve them and how we achieve them is as important as. This is why our sustainability plan is the basis for our bottom line.

When we look at our results, we have to look at sustainability, environmental, social aspects. So these are the guidelines, and these are the foundations of our growth plan, our investment plan for the next 5 years.

Very well, this is what we wanted to share with you. And now we would like to turn to our Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Gustavo Miele, Itau BBA.

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Gustavo Miele, Banco Itau BBA SA, Research Division - Research Analyst [2]

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I would like to ask a question about Distribution. Besides the very strong volume that you reported in this quarter, the main highlight, as far as we are concerned, was the fact that you were able to achieve a very good, very acceptable number of losses without having a big stress on the OpEx.

So I would like to know what is your expectation from now on regarding this dynamic ADA, hand-in-hand with [OpEx]? You talked about the number of inspections, and is this the idea for your fight against losses from now on still? Or do you intend to reduce -- further reduce losses with this controlled OpEx? And maybe the time has come for you to cut losses more slowly, I would say, preserving the healthy OpEx that you have been delivering. So could you talk about this dynamic, please?

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Luís Henrique Ferreira Pinto, CPFL Energia S.A. - Chief Regulated Operations Officer & Member of the Board of Executive Officers [3]

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Gustavo, this is Luís Henrique from [Disco]. To answer your question, we are more selective. On one hand, we are controlling costs and on the other hand, we are fighting delinquency and losses both and in order to be more selective by means of analysis. We put artificial intelligence here in the program for a better selection of the inspection points or even the cut points. So that we may have the best possible margin with these cuts and also with inspections, bringing about better results with a lower number of inspections and cuts with a much, much better average ticket from this viewpoint, we have a lot of discipline.

In the next few months, we are going to seek this discipline, looking for a good average ticket and doing inspections and the selection of cost -- cuts in an intelligent fashion with a lower cost. And regarding what we expect, of course, we had the calendar effect of the results. But we need to keep this stable or even further reducing, and we are investing and we are about to end the installment of the intelligent meters in RGE Sul. And this will bring about a better monitoring of Group A, which has a major amount of energy, so that we may track this in a better fashion and a more selective cut, and a more selective inspection tracking the load of this area.

So it's really a summation of all these factors. But the question of intelligence that we put in the commercial area, we intend to roll this out to the next few years.

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Unidentified Company Representative, [4]

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Gustavo, just adding to what Luis asked. By means of technology and analytics, we can be more assertive in our fight against losses. Just to remind you, the effect that he talked about, the calendar effect, and this has an impact on the calculation of losses when we look at shorter periods such as 1 quarter. So we have to look at 1 quarter as being a trend, and we have this downward trend in terms of losses. But when we look at longer periods like 1 year, it's slightly higher. So this is one way to analyze the data, and we show the quarter as a trend and a higher assertiveness when we do this on an annual basis.

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Operator [5]

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(Operator Instructions) We end now the Q&A session. I would like to turn the floor back to Mr. Gustavo Estrella for his final remarks.

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Gustavo Estrella, CPFL Energia S.A. - CEO, Chief Planning, Chief Bus. Dev & Mgmt. Officer, Member of Board of Exec. Officer and Director [6]

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Well, once again, thank you very much for being with us in this call. CPFL had a very important year of wonderful results. All-time highs for the company in terms of EBITDA, net income, consistent production and consistent improvement in our leverage. And this was a year where we had -- we are, again, a listed company with the relevance in the stock market. So this year was a year where we prepared ourselves to face the upcoming challenges. So as we see the market for 2020, we have a continuous expectation to have lower interest rates, recovery in our economy. And so we do expect it to maintain the results just as we had them in 2019. We are also preparing ourselves for investments plan. Pan has showed us that the company's expectation is to have investments in BRL 3 billion -- of BRL 3 billion.

So our planning cycle is up 5 years, of that's -- corresponds to investments of over BRL 13 billion. So we are also working on distribution, we are going to increase our grid, improve quality, expand growth. This is the idea, and that's how we expect it to be working over 2020. Once again, thank you very much, and have a good afternoon.

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Operator [7]

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The conference call for CPFL Energia has ended. Thank you very much for your participation, and have a nice afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]