CPFL Energia SA

BOVESPA:CPFE3

Earnings Call Transcript 2021-Q3

[Carlos Cyrino, executive]

Good morning to everyone. Welcome to the presentation of the results of the first quarter of CPFL Energia. I'm Carlos Cyrino, Director of Investor Relations. And today, I will be conducting all the dynamics of our event. Today, we have Gustavo Estrella, President of CPFL Energia; Mr. Pan Director Vice President, Finance and Investor Relations, and the other executives of the company.

The whole presentation will be carried out in Portuguese with interpretation for English. For this, click on the button interpretation that you can see on the bottom part of your screen. If you want to see the presentation in English, this presentation is on the IR site of CPFL. After the presentation, we will start our session of questions and answers. [Operator Instructions]. This event is being recorded. I now give the floor to Gustavo Estrella for us to start the presentation of the results.

[Gustavo Estrella, executive]

Thank you, Cyrino. Good morning to everyone. Thank you for your presence here at the call. I am now going to first part. We're going to then highlight.

First of all, we've had an increase in the load of concession of 2%. We're going to talk about this, but I think it's very positive in the consumption of energy in the consumption area. We also have an EBITDA of BRL 2.596 million, a growth of 32.8%. The net income of BRL 1.436 million, a growth of 6.2%. Our net debt reached BRL 15.9 billion and a leverage of 1.77x net debt of EBITDA. We have investments in this quarter of BRL 932 million, a growth of 21%. Remembering that our estimate for the year of BRL 3.4 billion, and it's a big investment for the company. The regulatory asset has reached BRL 3.1 billion in September when we closed the quarter, the highest value of history.

We also had a tariff adjustment in CPFL Piratininga of 12.4% for the consumer now last October. We also concluded the commercial start-up of the Gameleira Wind Complex. We also concluded the on the 14th of October, the acquisition of the CEEE-T, CPFL transmission. So we started the process of integration of CEEE-T with CPFL Energia. Another important highlight is the IDIV Index, B3 as a payment of dividends. We also implemented the Audit Committee, which is a requirement of the Novo Mercado. So we started the implementation of the Audit Committee now in the month of November.

We also won the ABRADEE Award for CPFL Santa Cruz and CPFL Piratininga in social and environmental responsibility. CPFL Energia was also highlighted in reports by Santander as "Excellent" rating and by Credit Suisse, 1 of the 60 companies in the world that are good to invest. We also were recognized with Melhores da Dinheiro Award for the ISTOÉ Magazine.

So now let's move to the next slide. Well, when we talk about energy sales, we had a growth of 2%, and concession in 3.5% in the sales in the concession area. And if we look at the effect of the concessionaries, we would have a growth of sales of 4.4%, and growth of the load of 2.4%. And here, on the right side, you can see the residential less 0.4% basically the effect of 0.5 IGP temperature. This is more and more of effect in residential. The positive is the industry, which continues demonstrating recovery and strength with a growth of 9.1% compared to last month. And the good news of the performance of the commercial class with a growth of 8.2%.

In the segment of others, we have a drop of 5.4%. And this is basically the effect of migrations. And without this, we would have a growth aligned to the year of 2020.

Now let's move to the next slide. Here, we see the commercial segment. We can see the retail where we had the second largest decrease, a decrease of 7.2% compared to 2019 and 2020, a partial recovery, 2.8% and in the market in 2021.

The other class that has decreased on the right side of our slide, when we look here, we see a drop in 12%, and a recovery higher than the values of 2019, 30.9%. So the highlight here is that we see a recovery and also a sequence of growth especially in telecommunications and health.

Let's move to the next slide. Here, we do the same analysis in the industrial segment. we can see here an important growth in the accumulated of 2019, 2020, a growth of 6.1%. That means we've surpassed the growth of 2019. We have a situation which is of stability in the segment of vehicles. There was a drop of 7.7% and then recovery of 2.8%. And now we have the cumulated 18.1%. And the other classes, rubber, metallurgy, we see a growth, which is higher than the year 2019 which shows that we are in recovery.

The next slide, please. Here, we have delinquency and losses. We have a challenging scenario. With the delinquency, we have a growth, expressive growth, especially in the second quarter of 2021. We can start seeing a drop of the levels of delinquency dropping to [ 1.26% ] and the trend continues in the beginning of the fourth quarter. So it is still high, and we start seeing a response and all the actions at the company, collection actions, that the company is carrying out, we see.

And finally, we can see the impacts in the drop of delinquency. When we can see here the benchmark, we can see that in general, the delinquency pressure has being felt with the elevation of tariffs, and also high unemployment in the country. Therefore, this is important. This happens not only with CPFL, but the companies of the sector in general. The rates of loss, we see, a drop here in the [ Group CPFL ] of 9.06% to [ 8.62% ]. And this is a positive signal or positive sign. And this is -- shows a reduction.

Let's move now to the next slide. Here, in generation, we can see an expressive increase of PLD compared to 2020. And this reflects what we've been doing in the last months. Fortunately, we see this being reverted. And this reflects an expressive reduction in the beginning of the fourth quarter. But the third 1, third quarter, we had a lot of pressure. And here, you see the GSF in the same line which was higher than 2020. And this brought a GSF, which is negative in the third quarter.

The [ APPS ] and the SHPPs, was also a reflection of the situation. In the wind generation, we have an increase, not only the entry of Gameleira operation. And here, you can see the comparisons with 2020. And basically, this is aligned with the averages that we have seen in the last quarter.

Next slide, please. So now I'm going to give the floor to Mr. Pan, and he's going to talk a little bit about the results of the company.

[Yuehui Pan, executive]

Thank you, Gustavo. Good morning to everyone. The EBITDA in this quarter was BRL 2.6 billion, a hike of 32.8%. I highlight once again the good result of the segment of distribution with an increase of 43.2%. The largest variation was the market and the tariffs, especially due to the higher IGP-M. Another important effect was a higher gain on the financial assets of the concession, which had a hike of BRL 191 million due to the higher IPCA. In the third quarter last year, the IPCA had been 0.86%. And this year, it was plus 2.38%.

In this quarter, we had a gain of BRL 26 million, once more from other revenues. As I mentioned in the last quarter, this is basically from the rental of poles, reflecting the increase of the IGP-M during the period.

The PMSO had an increase of BRL 74 million, and it is the main impact with the expenses linked to inflation, an increase of 9.5%. But below the IPCA over 10% due to the salary readjustments, and other contracts with suppliers.

The PDD was higher than BRL 73 million. It was a similar level to the second quarter. in the pension plan, we had an increase of BRL 14 million. The other effects add up to BRL 10 million.

In generation, the EBITDA was of BRL 1.1 billion, a high increase of 31%. The main was effect again with the GSF solution in the regulated market of BRL 274 million. Another positive impact were the updates of the prices of the index contracts by [ IGP-M ] of -- in the amount of BRL 191 million. Besides this, we had a gain of BRL 27 million due to the higher generation of energy in our wind farms, added to the entry or the beginning of the operation of the Gameleira complex.

On the other hand, we had an impact, a negative impact of BRL 138 million referring to a higher CapEx due to the substitution of supplies. And this was negative in BRL 116 million due to the higher PLD and the lower level of the GSF. Other effects added a gain of BRL 21 million.

The segment of trading services, and others had a negative EBITDA of BRL 32 million, mainly impacted by the margin of commercialization, negative BRL 83 million. Other effects had a gain of BRL 3 million.

Let's move to the next slide. We show the performance of the net profit which was BRL 1.436 million during the period. An increase of 6.2% in relation to the same period last year.

In the financial results, we had an improvement of BRL 3 million due especially to the gain of MTM, BRL 34 million in new funding in the quarter.

Monetary updates of the regulatory BRL 30 million assets and monetary update on fiscal credit, BRL 18 million. And increases and fines, BRL 9 million. On the other hand, the expenses with net debt had an increase of BRL 143 million, explained due to the increase of the IPCA and the CDI during the period.

A higher payment of taxes is related to the better results in the period and the recognition of fiscal credits in the CPFL renewables. Last year, the amount is BRL 271 million.

Slide 11, we show you the results of the 9-months accumulated in 2021. The EBITDA grew 36.2%. We highlight here distribution, that grew 42.9%, favored by the good performance of the market and the tariffs.

Due to the IGP-M, and the financial assets of the concession. Another highlight is Generation with an increase of 29.3% and which is equivalent to EUR 560 million due to more wind generation. The readjustments of contracts and the GSF solution. The net profit increased 29.6% reaching BRL 3.5 billion. We also were impacted by the higher debt costs MTM, which were partially compensated by fines and increases.

Now let's talk about indebtedness. The net debt is a total of BRL 15.9 billion, and the EBITDA over the last 12 months reached BRL 9 billion. The leverage, which is measured by the net debt versus EBITDA was 1.77x. We highlight that we had still not paid the BRL 1.7 billion dividends, and the BRL 2.7 billion for the acquisition of CEEE-T.

And the chart on the right side, you can see the cash position at the end of the third quarter, BRL 4.9 billion, with a coverage rate 1.81x. The short-term amortizations and the medium-term amortizations is 3.27 years. Below, we have the cost of the debt that increased normally, especially due to the variation of the IPCA and the CDI during this period.

However, the real cost is still negative. Now when we compose the gross debt, we can see that the higher exposure is indexed to the CDI 69%. 29% index to the IPCA, and 2% to the TJLP.

As for the dividends, we have maintained our plan of growth and payment of dividends where we had a payout of 80% in 2020, representing a total of BRL 2.08 billion. And in 2021, we announced the payment of BRL 3.46 billion, representing a payout of a 100%.

The CapEx of the quarter was of BRL 932 million, an increase of 21% in relation to the same period last year. If we look by segment, we have in distribution, a total invested of BRL 821 million, destined to modernization, maintenance, and widening of the network, and the equipment. In the segment of Generation, we invested BRL 71 million in the Gameleira and Cherobim projects. We invested another BRL 16 million in our Sul I and Sul II transmission projects, and also for the segment of trading services, we destined BRL 24 million to increase, modernize, and maintenance of equipment, vehicles, tools and IT.

In the accumulated vision for 9 months, we invested BRL 2.646 million, an increase of 37.2%. And I thank you very much. And now I'm giving the floor back to Mr. Gustavo Estrella. Thank you.

[Gustavo Estrella, executive]

Thank you. So finalizing our presentation. We have some social environmental actions, the Gameleira Wind Complex. This is a strategy totally aligned with our sustainability plan, and a series of actions, social, environmental, programs that are very relevant in the region and/or in the area of projects that we are working on.

So again, once again, growth of renewable energy, and sustainability, and all ESG plan of the company. So this is an important investment now in the month of September, a 100% aligned with our strategies.

Well. We end our presentation now. And we are available for questions.

[Carlos Cyrino, executive]

Thank you, Gustavo. Thank you, Mr. Pan, for your presentation.

[Operator Instructions] We can see that we have a question here. It comes from Carol from Credit Suisse.

Carol, thank you for your participation. You can ask your question.

[Carolina Carneiro, analyst]

I have 2 questions. The first 1 is about the agenda of bidding and capital allocation. For example, the [ CEEE-T ] generation sold, and I'd like to know what are you going to do in relation to the assets that you've already built this year? Or what you, what you're guaranteeing is within the ideal? And if you are going to look at these other assets that I mentioned.

And the second 1 is about regulation. We saw that ANEEL, what about the long-term strategies they had put to vote the public consultation of the losses, and the last response of the methodology of losses?

So I'd like to understand on your side the expectation about this loss discussion, which is very relevant for the sector, and what proposals you have, and what vision you have. And if there's any regulatory topic that you believe will be important this year?

[Gustavo Estrella, executive]

Thank you, Carol, for your questions. The first 1 is about the bidding process. We continue with our strategy of growth and the -- what the market offers us about the generation.

We have specific interest in the assets where we already participate. And we'll see in the future, if there is anything that inserts itself in the strategy of CPFL, then we'll participate, and evaluate these projects.

And what we have now as a challenge is the integration of [ CEEE-T ] integration. The company during the next 2 or 3 months, very much focused in the integration. It's a big challenge. It's a big company. So we are focusing on this, but we continue looking at opportunities the market will offer to grow.

I'll ask Rafael, please to continue responding.

[Unknown Executive]

Carol, thank you for your question. As for these losses, this is an important topic for our distributors. And we've been talking with ANEEL about this topic. And ANEEL took the cautious decision of discussing this matter with companies.

Yesterday, we had a very positive meeting with ANEEL, CPFL has a lot of know-how in this area of losses with implementation of technology, calculus methodology, evaluations that we have, given the work that we've been doing. Controlling our losses as we showed in stable numbers and also with the challenges that we have in the country. But we are discussing this with ANEEL, and we are evolving to have an adhering methodology to the situation the country, and the balance of companies.

[Carlos Cyrino, executive]

[Interpreted] We're moving on to the second question. Marcelo Sá from Itaú.

[Marcelo Sá, analyst]

Thank you for the opportunity. When you talk about growth strategies, I think it's clear that you see more opportunities in the transmission than renewable energy. And then we see a movement in direction of renewable energy with more optimistic vision of price, the demand of this type of source. What do you imagine during long term, do you think all this offer is going to decrease the price or the migration to the free market, is going to sustain the prices?

And of course, now we had good rains in October and November. I was talking to some specialists, and they think, We even have the PLD in December. If this confirms, we will have some impact in the price curve looking further forward.

So I'd like to see how you see this dynamic and these challenges of renewable energy. I'd like to know what your plans are.

[Ricardo Motoyama, executive]

I'm Ricardo, I'm responsible for this area. Thank you for the question. When we talk about prices, we've been seeing a short improvement with favorable weather and rains. We have a relevant drop of prices in the fourth quarter. So when we talk about medium, long term, we see the entry of new plants, especially renewable [ front ] plants, and we still have discount.

We've had an excess of plants operating in 3, 5 years. This can pressure the price down. And long term, this depends on consumption, but we see more stable prices. When we look long term, I think this is a bit of the dynamic of the prices in relation to all this.

It will depend on the free market evolution, but this is the way we are going, what I just mentioned.

[Carlos Cyrino, executive]

Let's move to the next question. The next question is. Andre Sampaio from Santander.

[Andre Sampaio, analyst]

I'd like to ask 2 questions. The first 1 is a follow-up in Carol's questions about the discussion of the losses. The technical note presented in the conclusion of the technical area, it develops the rule in relation to the risk areas where Piratininga, CPFL, ends up by going over 10% in this discussion. I would like to hear from you what is your opinion in relation to this? If this really should generate a benefit for you?

And my second question in truth is about renewables as well. I'd like to hear from you after all these M&As, and with the pipeline interest, how would you, as a company, unlock the potential value of this business from now on?

You see the, what the market is doing with discount. So I'd like to understand what is your plan to unlock this value? And if it wouldn't make sense to do something specific in renewables?

[Gustavo Estrella, executive]

In relation to this issue, risk areas in the proportion, the Piratininga has a benefit that shows a bit the improvement of the Piratininga situation, especially in the area of the of Santa, and its environment. So this brings Piratininga to a more realistic situation. This is positive.

And yesterday, as I said, we had a very interesting meeting, presenting alternatives to consider certain situations of some companies, even if they don't have, if they're not the same as Piratininga, which also reflects the reality. And this was, as I said, discussed with ANEEL.

[Vítor de Souza, executive]

I'm Vitor Fagali, Vice President of Business Development. I'm going to try to respond about renewables.

We have a pipeline here to develop over 4 gigs. And we have these projects alive and analysis. And the topic here is as of the moment that we understand these projects generate value. They have a risk versus suggested return, which is compatible to the company. The goal is to continue developing and continue, but this necessarily comes from the premise of feasibility.

So we always analyze this, evaluating renewable park if we grow, and how we should advance from now on. But I think to do direct. We have our greenfield here, and that's how we understand the opportunity on the financial point of view, we're going to evolve with all of this.

[Ricardo Motoyama, executive]

We're going now to the last question. And the question comes from Flavia from Goldman Sachs.

[Flavia Andreatta Araujo Sounis, analyst]

Thank you for the call. I have a quick question about regulatory issues. What do you see? Do you see the changes can come any deterioration, an increase of the spreads? How do you see this moving forward?

[Gustavo Estrella, executive]

The methodology of ANEEL already takes into account this annually with the scenario that we are living through. So we hope that the -- these next definitions in the next year, reflects what we're going through now.

[Carlos Cyrino, executive]

We have no more questions. We're going to end a session of Q&A. If there's any question, the Investor Relations group is available to clarify anything you need later.

I would like to communicate now in the middle of December, we're going to have a CPFL Investor Day. It will still be virtually, and we hope all of you will participate. You will receive the official invitation soon.

I'm going to give the floor back to Gustavo Estrella, for his final considerations.

[Gustavo Estrella, executive]

Thank you all for the participation. I think we have an important improvement to alleviate the situation. But I think what clearly is here is a precious scenario, high prices, and this brings us a challenge, especially with the tariff readjustments of the distributors.

So I think the readjustment of the cash situation and the size, but we have to deal with this in a scenario, which becomes improbable with high prices. So we have to deal with this topic, the sectoral topic. It's not only specific to CPFL, but it's something that we will have to work on in the next few months.

We, as I said, we have a big challenge of integration of the CEEE-T integration. The first 100 days will be decisive for this process. But we are very confident that we made an excellent investment in an asset that, for sure, will have the standards of CPFL Energia soon.

Sectorially, I think we have an expected positive expectation of the recovery of the economy, increase of consumption and the evolving of the regulatory agenda. We have topics that are very important that being discussed on the table [ 414, 19, 17 ].

So the expectation is that short term, we will be able to deal with all these topics so that we have and we evolve and the sector developments in the direction of opening with an organized and planned process, so that we'll be able to have a long-term vision. That is our vision.

I thank you all for being present. Thank you.

[Carlos Cyrino, executive]

Well, we then end the call for the third quarter 2021. Once more, we thank you all for participating. Have a great afternoon, a great weekend, a good holiday on Monday, and good bye.

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