Companhia Paranaense de Energia - COPEL
Q4 2012 Earnings Call Transcript

Published: 27 Mar 2013

[Operator:]

Thank you for waiting. Welcome to COPEL's Conference Call for the Results of 2012. [Operator Instructions] . Before proceeding, let me mention that forward-looking statements relative to COPEL's business, projections and operating and financial goals are based on the beliefs and assumptions of COPEL's management and on information currently available to the company. Forward-looking statements are not guarantees of success and involve risks, uncertainties and assumptions because as they relate to future events and therefore, it depends on the circumstances that may or may not occur in the future. Investors should understand the general economic conditions, the industry conditions and the other operating factors could also affect the future results of COPEL and could cause results to differ materially from those expressed in such forward-looking statements. This conference call is attended by Mr. Lindolfo Zimmer, CEO of COPEL; and Luiz da Veiga Sebastiani, CFO and IRO. The presentation will be made by COPEL's management and maybe forward through the company's website at www.copel.com/ri. We now turn the floor to Mr. Lindolfo Zimmer. Mr. Zimmer, you may go ahead.

[Lindolfo Zimmer:]

Good afternoon to all and welcome to COPEL's 2012 results conference call. Before anything, I am delighted to introduce our new CFO and IRO, Mr. Luiz Eduardo Sebastiani. Call is given a twofold dimension

[Luiz Eduardo da Veiga Sebastiani:]

I thank our CEO, the CEO of Companhia Paranaense de Energia, COPEL. Good afternoon, and I thank all of you who are participating in this conference call. To me, it is a great delight and honor to take over as Chief Financial Officer and Investor Relations Officer of COPEL, a company that I have always deeply admired. Given the [indiscernible] and the economics history of the State of Paraná, and being an important company for the development of our state and ultimately of Brazil. I now introduce the results of 2012. The challenges are many. I was attracted to take over this job position because of these challenges. I now take on the commitment to overcome these challenges, i.e., cost optimization, which is absolutely necessary for the company and for all companies in the industry. I have aligned strategies to cope with this need to reduce cost, absolutely a key to the company. So we will kick off a program that would guide very quickly and very consistently. Also, on our agenda is the challenge to review our dividends payout policy. So the dividend payout policy have always linked to the results of the company, and should reflect a positive result. Another challenge is to generate value for our shareholders. We're making prudent investments that will bring results to our shareholders. This is our focus. CRC negotiation with the State of Paraná, to leverage funds for new investment and to get consistency to our dividend payout policy. So we have very substantial challenges ahead of us, but we have a very devoted team at COPEL. And then we'll be working -- side by side with them to drive important results for our company. Thanks to the proficiency in the Brazilian electric sector. I'd like to move to Slide 4, where you can see our results. Here we can see the net operating revenue growing 10% year-on-year, reaching the mark of BRL 8.5 billion. This was driven by a number of factors, 12.6% increase in electricity sold to end customers. And [indiscernible] increased availability coming mainly from market expansion, the captive market growing 3.5% in 2012. And from the 2011 readjustment cycle, whose average increase was 3%, partially offset by 0.65% reduction related to the said tariff review cycle that COPEL went through in June of 2012. On the next slide, we have some comments to make. Electricity sold to distributors was up 12.8%, primarily due to cost increases and the power purchase agreement in the regulated market. This is a random increase in bilateral contracts and particularly between higher revenue and CCEE submarket, pushed by an increase in spot market prices or PLD. Thus, revenue coming from electricity sales considering electricity sold to end customers, electricity sold to distributors in greater availability grew 8.4% in the period. And our operating revenues grew 93.3%, mainly caused by higher revenues from the lease at the Araucária gas plant, as just mentioned, in fact, following contractual adjustments with Petrobras and its dispatch between March and December of 2012. It is important to highlight also the 72% increase in telecommunications revenue. Basically, with the new customers and the diversification in our product and solutions portfolio, the customer base of COPEL Telecomunicações has increased to 3,141 customer, 117% up compared to 2011. In COPEL Telecommunications, operating all 399 municipalities of Paraná state to become 100% of the State of Paraná, and another 2 municipalities in Santa Catarina state. Also, 18.6% revenue increase in distribution of pipe to gas, supplied by Compagas. It basically followed tariff adjustments, 8.5% as of August 2011, 4.5% as of March 2012 and 8% as of August 2012. Well, we would like to talk about the operating cost and expense. In 2012, operating cost and expense has increased by 16.5% year-on-year. Due to the following facts

[Operator:]

[Operator Instructions] Our first question comes from Ms. Lilyanna Yang from UBS.

[Lilyanna Yang:]

Thank you for the opportunity. I would like you to comment on the strategy to commercialize energy of COPEL Geração. I've been hearing the allocations were made in January, but for 2014, '15. I would like to know what is the level of contracting and how do you believe is the best way to commercialize this electricity? The second question, I would like you to explain the dividend payout policy. Do you understand that the company should be more leveraged than it is now or perhaps -- get down to 2x of net debt over EBITDA ratio?

[Lindolfo Zimmer:]

To answer the first question, regarding the commercialization of electricity. In the future, I'll consider them. For 2013, we are fully contracted. The settlers [ph] that we had, 8% which was in reserve, was sold very early at a very attractive price. And now, given yesterday, recognized to our new management. That's a launch of real [ph] seasonality of energy, we'll have to be subjective. But the situation is quite good for 2014, '15, in terms of shortage of electricity and energy, I believe that the conditions will also be favorable. Not the same as 2013, but we know that the system has just enough to meet the demand, and even considering the best that you could see growth, we know that all PDCs will be dispatched during 2013, about 15,000 megawatts being dispatched by thermal power plants, including all of them. So that the costs are significant. That will make our energy -- wind power, which is cheap, will be an excellent opportunity to help us in this commercialization. We have not defined it as yet, what will be the right strategic mix. We have to know how the industry will behave. We have to know how the economy of the country will behave and the demand, and that will define the cost for contracted energy and for our own generated energy.

[Luiz Eduardo da Veiga Sebastiani:]

I will try to answer your question about dividend -- the dividend policy. This is indeed a challenge for the company. The main challenge is to our address the dividend payout policy. We're aware that it is necessary to align it with the average of the electric industry. The challenge is to link the financial capacity, to generate profits, to leverage new investments, so that we can have a higher dividend payout. This is an interesting and complex challenge. But for the [indiscernible], with a change in the company's agenda, as I mentioned during the presentation, we should have a more, let's say, firm policy for dividend payout. This is understood by our financial department, our CEO shares the same understanding. But the dividend payout policy needs to be firmer. So the message to our shareholders is that this is going to be tackled. This will be important for the growth of the company. It is one of the challenges.

[Lilyanna Yang:]

If I try to understand your leverage, your debt is too low. For example, your net debt over EBITDA ratio, it's around 2x, right? Do you think you need a more aggressive investment policy, more aggressive than what we've seen in the last 2 years?

[Luiz Eduardo da Veiga Sebastiani:]

Well actually, we see and I know there are people who follow the company will definitely see that the company has an impressive [ph] debt level. The same kind of alignment that we have to have in terms of dividend payout policy, we have to have in terms of the investments to be made by the company in the electric sector. We have to analyze the company condition to get more debt, but you'll see, Ms. Yang, we're following our guidelines, and we have to work together with the engineering department of the company, we [indiscernible] them to find the opportunity for investments in the market. Well, that kind of demand has to come from the engineering group. We will thoroughly consider these investments. This isn't just news for the company, for the pioneers of the company. Anyone finds out the dividend payout policy. So again, new investment. Have to get our full and total attention. We just have to look for new sources of revenues. This is absolutely key to contain expenses. So this is something that is also part of our work agenda. Thank you very much.

[Operator:]

[Operator Instructions] Our next question comes from Mr. Oswaldo Telles from Best Securities Company.

[Oswaldo Alcântara Telles Filho:]

Regarding 2 topics that you've mentioned. One is about that you are seeing negotiation. I would like you to elaborate a little bit more, I would like to understand where the negotiation stands. And the second question has to do with the personnel reduction, headcount reduction, this 10% reduction in payroll cost. Can we expect that effect to be seen in 2013? And the cost -- would the cost reduction be directly related to the amount of indemnification paid, or do all the indemnifications account for more than 10%?

[Luiz Eduardo da Veiga Sebastiani:]

Okay, your first question about CRC. You all know and the discussion between our company and government of the state. The state has a debt to COPEL, like BRL 1,340,000,000. That is the amount of the debt initially. The interest rate are being changed, [ph] so the fees will be GPM -- GPM actually, high GPM. So a certain percentage. And the profile of the debt is such that the State of Parana or the entire [indiscernible] renegotiation [ph] of the payment of the debt. Now with regards to COPEL. They are renegotiating other debts as well. And the debt that they have with us is a good debt, and once again [ph] these financial resources, but lower interest rate. Not based and not back to high GPM and where perhaps [indiscernible], if I'm not mistaken, this is an operation that is ongoing. Or it is up to us to analyze this proposition, because if we could have the funds anticipated to us. If the CRC negotiation comes about in a very transparent way and it couldn't be any different than that, the funds would be linked to an important investment to the company. And are leveraging new sources of revenue for the company. And it would be a guarantee that COPEL would not face a default. That's actually happened in the case of [indiscernible] State, where over the history, there was an accumulation of defaulted payments and that led to compulsory contract review, and it was a very complicated and unstable situation. So we are looking into this year, to negotiation very carefully from the standpoint of the company. It could be, it is an adequate work, but we have to take into account the interest of COPEL. Is it worth having this anticipation? This payment brought forward? Leads to strong program of business for the company in an investment for the company? That would be an important deliverable, if the negotiation comes about. But we're still halfway in the process. We'll still have some details to define, but fundamentally, COPEL has to conduct a study that will give us a subsidy to go on with this negotiation that we're bringing forward to the CRC payment. And as of the second question, it's the 10% will be focused in 2013 and the answer is no. We said in the presentation, and we work from here, but this benefit, a 10% reduction in payroll cost will be felt in 2014. In 2014, the effects will be, on average, 3% only. It is still an interesting result. We are preparing the headcount of the company, that we have people who are resigning from the company are very experienced people, and we are working to have them find another position elsewhere.

[Operator:]

[Operator Instructions] Our next question comes from [indiscernible] from NSF[ph] .

[Unknown Analyst:]

When the new governor took over in Parana a few years ago, the hope was that the quality environment in your state would be very conducive to investing. And yet, your stock has -- COPEL stock been quite core relative, down almost 30%, just even -- over the past year. And that should have had absolutely no confidence with the capital allocation strategy of your former management team, and that's why I'm assuming I'm talking to a new management team. The stock trades at 60% of book value, 6x consensus 14 estimates, which tells you that investors have absolutely no faith in the outlook for this company. And so as you think about formulating this strategy, specifically on a capital allocation strategy, I just wanted to ask a couple of specific questions for those of us who actually are investors in your company and frankly, a lot investors in your company. The dividend payout policy has been pathetic, beyond pathetic and frankly, if you just raised your payout ratio from 38% to 50%, and cost of incremental 100 -- around approximately BRL 160 million, shareholders would kiss the ground that the company actually responded to shareholders. You have many extraneous assets, like your [indiscernible] assets that could have been sold at a very high price. If I wanted to go invest in a telecom company, there are many good companies in Brazil. No one buys COPEL stocks for its telecom assets. And so, could you actually help me understand what sort of investment criteria will be used in terms of your expected returns above company's cost of capital going forward? And that this capital allocation strategy can be put in place, so that some value can be finally realized in COPEL stocks?

[Lindolfo Zimmer:]

I would like to thank you for your question. Unfortunately, you were cutting off, and we'd like to apologize if you don't answer your question in full, but I believe you asked about the dividend payout policy of the company. If we were to conclude that, though, there was a slight growth this year, especially compared to 2011, it was 38% of our reported net income, in 2011, around 35%. And that same issue related to the investment policy of the company. And that's where the secret lies again, the main issue. These things are not disconnected to us. On the contrary, we want to have these 2 policies linked, a more important dividend payout policy, will be able to give the company new investments, some for new investments. And new investments that will give us a profit or return above the cost of capital. We are being very diligent in pursuing this. The electric sector is growing. We're identifying new energy sources, new frontiers, new geographic frontiers in our country. We are no longer limited to Parana for quite a while. Now we, are diversifying now. Diversifying projects, projects that are operational, that have insured revenue or assured revenue, and we have to identify opportunities to have the return on capital. Given the efficiency of the company, the current efficiency of the company, and we intend to increase our efficiency, given our engineering team. We intend to have the return on profit after cost of capital. And if you could see here, where I would like to add, since the beginning of our management 2 years ago, we committed that our investments will be healthy and solid, since we have embedded to this company, to generate, is to create and [indiscernible], and this is how we have been operating. And so as the investments we've made, all of them have a better return than other investments made in the past. And we want to maintain this policy. It could not be different. We were not in the position to make investments that would not bring the result to shareholders. This is the reason of our existence. It doesn't make any sense to change that. The controlling shareholder, the State of Parana, wishes to have that relentlessly. The government of Parana also needs the resources to invest in the social program and to supply the needs of State of Parana and all of the other shareholders. They also want to have their investments growing healthily. So this policy can and will be definitely maintained and incremented, if possible. Obviously, it depends a little bit on the speed of the growth in the electric sector. Sometimes, they move from -- the economy and that the growth of the sectors doesn't happen as fast as we would like. But we want to have investments, always, that will bring us healthy results.

[Operator:]

[Operator Instructions] Well, there are no more questions and we would like to give the floor to Mr. Lindolfo Zimmer to say your [indiscernible] final remarks.

[Lindolfo Zimmer:]

Before ending, I would like to emphasize what was said by our CFO, Sebastiani. 2012 is a year of adjustments, and I am sure that 2013 will be a year when we will turn the page. We will have a totally different year, a better year in all of our lines of business. Once again, I would like to thank you for joining us, for participating. We remain available. Our Investor Relations department remains available if you want -- if you need any further clarifications. Thank you very much.

[Operator:]

Ladies and gentlemen, COPEL's 2012 results conference call is now finished. We thank you for participating and wish you a good afternoon.