CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Transcript 2022-Q1

[Carlos Cyrino, executive]

Good morning to everyone. Welcome to one more presentation of our results. We're going to talk about the first quarter of 2022. I'm Carlos Cyrino, Director of Investor Relations with CPFL. And today I'll 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. [Operator Instructions] 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, executive]

Thank you very much. Welcome, everyone. 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 result with a growth of 34.4 -- results reaching BRL 2.643 million and a net income of 20.9 -- BRL 1,162 million. Net debt reached BRL 21.2 billion. Its growth is especially because of the transmission, but we maintain the leverage, which is 2.3x the net debt EBITDA.

The CapEx, I think this is another highlight, it's a growth of 74.2% in relation to 2021. We reached BRL 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 ready with a challenge of delivering a 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 investment 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 100%. And lastly, 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 year's.

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. And 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 and the consumption of the energy. And this year, the market has gone negative, very much linked to the expectation of economical growth, 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 quarters is the topic of delinquency. As you can see, we have a growth of delinquency not only the last quarter, but also in relation to 2021, a growth of almost 67%. This has a lot to do with 2 factors. The first one is the macroeconomical scenario. So 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 and the debts of the families, the unemployment, all the indicators that reflect the macro economy reflect 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 billing. We 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. This seems to be a trend that will go to the end of the year. And low growth of the economy, GDP 0.7, we will continue having challenges. This is a reflection perhaps of the delinquency that we have up to the end of the year.

Now let's go to the next slide, Slide 6. This is good news in relation to energy losses. What we can see here its stability with a trend to drop the level that we've closed at 8.79%. In the past, 9.11% a more positive signal losses is not a huge challenge, I would say, compared to other areas of Brazil. It always is a challenge but less than 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, an improvement of 9%. In the hydrolic, we can see in the [ UHAs ] a drop of 46% and this -- these are the ones that are located in the southern part of the country, the flow and the PCH is the inverse 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 than in 2021. And the availability, as we can see, is practically stable 95.7%. It's a positive result and the availability of the wind farms.

Now let's go to Slide 8 and then we're going to give the word to Mr. Pan.

[Yuehui Pan, executive]

Thank you, Gustavo. Good morning to everyone. Now we have Slide 8. In this quarter, we reached a higher EBITDA this year since our IPO in 2019, BRL 2.6 million, an increase of 34.4%. The distribution accounted an EBITDA of BRL 1.8 billion, an increase of 45.7%. The highest gain once more comes from the market and the tariffs, BRL 553 million, especially due to the IGP-M, the higher GPN financial assets. So the concession had an increase of BRL 53 million.

Another important effect demonstrated in this quarter is the value of other revenues that had a gain of BRL 26 million. One small basically from the rental of Post and also updated contracts by the IGP-M. As a negative effect, we had the PMSO with an increase of BRL 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, BRL 36 million as Gustavo has already demonstrated in Slide 5. Other effects all add to BRL 23 million. In generation, a very good EBITDA of BRL 673 million, an increase of 5.6%.

Without the consolidation of the 5 small transmission products, the main positive effect was the updating of the prices of the contracts, BRL 147 million. The lower GSF combined to the PLD -- the lower PLD during the period contributed with BRL 12 million. On the other hand, we had a negative impact of BRL 68 million referring to lower wind generation in the quarter according to what was explained by Gustavo on the previous slide. And higher OpEx affecting negatively in BRL 23 million. Other effects added to a loss of BRL 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

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with an EBITDA of BRL 138 million. According to expectations of the acquisition of the CEEE-T. And the effect was the consolidation of the transmission CPFL numbers with BRL 121 million. The other transmission projects had a positive impact of BRL 6 million. The trading services and other segments was impacted mainly by the margin with a variation -- a negative variation of BRL 70 million. It's partially compensated by services BRL 12 million.

Let's move to the next slide. We now show the performance of the net profit, which was BRL 1.162 million increase of 20.9% in relation to last year in the result, financial here, we had BRL 311 million. This was because of expenses with the net debt with an increase of BRL 307 million. This has been explained by the increase of the CDI, which was -- 0.48% in the quarter of last year and now 2.39%. Reduction in fines, BRL 26 million after the adoption of the IPCI, no longer the IGP-M and the delay bills. This has partially been compensated by a monetary update of the regulatory assets, BRL 117 million due to the higher financial assets. We closed with BRL 3.2 million. Other effects added to BRL 41 million negative. The depreciation increase to BRL 47 million and taxes BRL 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 covenants criteria. The net debt is totaled BRL 21.2 billion and EBITDA in the last 12 months reached BRL 10.4 billion. The leverage measured by the net debt and EBITDA was 2.03x. In relation to the dividends, we approved in Board meeting on the 29th of April, the payment of BRL 3.7 billion. This amount will be divided into 3 installments. The first one will be due on the 11th of May 2022 and the value of BRL 1.1 billion, BRL 0.94 per share. The second installment up to the 30th of June of '22, the value, BRL 0.8 billion, BRL 0.67 per share. And the last installment up to the 30th of December and the amount is BRL 1.9 billion, BRL 1.62 per share.

Next slide. Here, we have the profile of the gross debt, higher exposure is in CDI with 69%; followed by IPCA, 27%; prefixed 2% TJLP. And the chart on the right side, we have the debt cost which has increased, especially 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 -- the cash was BRL 4.1 billion with an index of coverage, 0.89x the short-term amortizations. The average time of amortization is 3 years.

Now let's go to Slide 13. The CapEx of the quarter was BRL 1.2 million, an increase of BRL 74.2 million in relation to last year. In the vision per segment, we have in distribution a total invested of BRL 975 million, destined to the increase, the modernization and the maintenance of the network and equipments. In the generation segment, we invested BRL 62 million in building Cherobim -- and in the maintenance of the projects in operation. We invested also BRL 170 million in the building of our transmission projects and reinforcements and improvements in CPFL transmission. Finally, the Trading & Services segment, we destined BRL 5 million,

Thank you very much. And now I'll give the floor back to Mr. Gustavo Estrella. Thank you very much.

[Gustavo Estrella, executive]

Thank you, Mr. Pan. Well, ending our presentation, we are going to stop -- we're going to end, sorry, with diversity and inclusion, 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 relation 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 targets for the next few years. We have 3 pillars of commitment and governance, inclusive culture and representation, a series of actions, more than 100 actions that have been planned for this year. We have an area 100% dedicated to this area. So over 100 actions that will be planned in 2022.

I put here an example that we're very proud of. Its initiative of our school for women. And in 2020, we had 5 women electricians in the company. Today, we already have 29. And the expectation is that in '22, we train another 100 women electricians. 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 diversity 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. It's a long-term journey, but we've started this journey.

So once more, I thank you all for your participation. We are now going to end our presentation, and we are going to open the session for questions and answers.

[Carlos Cyrino, executive]

Thank you, Gustavo. Thank you, Mr. Pan, for your presentation. So now we're going to start our session of questions and answers. And we remember that all the questions are live, [Operator Instructions]

So the first question is coming from Rafael Nagano. Rafael is from Credit Suisse.

[Rafael Nagano, analyst]

Well -- my question -- I have 2 questions, in fact. One is about the transmission assets. I'd like to know in your vision, if you have any interest, any specific blog in the auction 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 -- annually?

[Gustavo Estrella, executive]

Well, we are interested. We are evaluating this auction in June and the same strategy that if it works together with our niche 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 a 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 or 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 in our vision, they have a different level, not only the cost, but the execution complexity due to the moment that we're going through now. What we saw in the last auction of December, these 2 challenges were 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've always have a 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 dividend, our strategy of balance between dividends and growth continues. So we evaluate according to growth and we balance this with the payment of dividends. So I believe that after this evaluation, the 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 for the payment of dividends. We will continue doing this. It's very difficult to forecast the exact dates of payments given that it depends from -- over the availability of cash. But the expectation is to maintain our strategy of balancing the dividends and the growth.

[Carlos Cyrino, executive]

Now we're going to move to the second question. The second question comes from [indiscernible] from the Santander Bank.

[Unknown Analyst]

Congratulations for the result. Well, understanding all this about tariffs and now [indiscernible].

If we talked about this question of PIS/Cofins -- to amortize. How do you see this with the regulators?

[Yuehui Pan, executive]

Well, I think in relation to tariffs is specifically related to this topic of PIS/Cofins -- 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, is at what we've done without readjustments. We -- this impact is something that we're already doing in this compensation, and it makes sense that we incorporate this to 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 have 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, all the inspect -- expansion that the sector goes through, goes through private investment. So our idea is to preserve this is a center pillar to have alternatives which is less structural. I think is what we all have to do. I think the big example or a good example of these solutions is the sectorial loans, is 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 -- the types of solutions that we have to work on with all the agents with dialogue and reaching this solution convergence.

[Carlos Cyrino, executive]

We're now going to move forward to the third question. The question comes from Itau [indiscernible]

[Unknown Analyst]

I have a doubt here. Delinquency, we see a pressure 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 months 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?

[Gustavo Estrella, executive]

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 plan for our distributors to have higher selective cuts and also with the room. This brings a relief in the tariff. And this will benefiting. We noticed a small decline this month, and we hope that this will remain stable. And with the recovery of these higher cut volumes, we hope to stabilize. So that's the expectation. Stabilization of the delinquency and then medium-term reduction. So we also have plans for installment to make the life of consumers easier. And giving opportunity for the clients to make their payments and avoid the increase of delinquency.

[Yuehui Pan, executive]

You asked 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 month, 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. There's a lack of components and 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 macroeconomical scenario, but we see an industry. Some segments are strong like machinery and food. This is strong, and we see a positive industry growing in this part of machinery and food. The pandemic just remain positive. This continues, and this is our highest market share when we look at the state of Sao Paulo and also the state of Rio Grande do Sul.

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 the inflation of the year. So we have a target, we are moving below this target. There's a PMSO below inflation. Last year, we closed 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 in interest rates, but our 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, executive]

Let's move to the next question. I have a question from Pedro from BTG. I think Pedro ended up by leaving. Well, I'm going to move forward to Junqueira from Citibank.

[Antonio Rodrigues Dos Santos Junqueira, analyst]

My question is simple. What is the diagnosis of the company referring to Goias, if you could share with us. What's the big challenge? If there's an institutional solution? 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 Brazil, it's another type of operation. I don't know if you have any diagnosis that you could share with us.

[Gustavo Estrella, executive]

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 5 years, the challenge is similar, perhaps in a different position. So I think what NL did is what should have been done. When we look at the CapEx, it's in fact high, but the fact is that there are 2 challenges there, perhaps 3 challenges. The first one is the discussion of Furnace that fund legal issues. We had -- this is a risk that already existed way back. 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 level. 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, our concessions, and we understand the importance of having a line, 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 are basically the same challenges of the privatization way back in 2017-'18.

[Carlos Cyrino, executive]

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 if 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 for the final considerations and for the closure. Thank you.

[Gustavo Estrella, executive]

Well, once more, I thank you all for your participation in the webcast results of the first quarter. I think I would like to highlight 2 or 3 points. The first thing is one more quarter. We have a challenging scenario, delinquencies, recovery, et cetera. 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 quarter. 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 [indiscernible] effect and the company 100% controlled by CPFL Energy. We trust a lot the agenda. I think it's very important with all the changes in transformation of the electrical sector, not only in Brazil, but the whole world for us to trust 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.