Companhia Paranaense de Energia - COPEL (NYSE:ELP) Q1 2024 Earnings Call Transcript May 11, 2024

Companhia Paranaense de Energia - COPEL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome the video conference of Companhia Paranaense de Energia COPEL to discuss the results of the first quarter of 2024. The video conference is being recorded and the replay can be accessed at the company's website, ri.copel.com. The respective presentation is also available for download. [Operator Instructions] Before proceeding, we stress that forward-looking statements are based on beliefs and assumptions of Copel's management and on information currently available to the company. Forward-looking statements may involve risks and uncertainties as they relates to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts, and journalists consider that events related to the macroeconomic environment, industry conditions, and other factors may cause results to differ materially from those expressed in such forward-looking statements.

With us today for this video conference Mr. Daniel Slaviero, CEO of Copel, Mr. Adriano Rudek de Moura, CFO of Copel, as well as officers of the subsidiaries. They will also be available for the Q&A session. I now would like to turn the floor to Mr. Slaviero, who will start the presentation. Please, Mr. Slaviero, the floor is yours.

Daniel Slaviero: Good morning, everyone. I would like to thank you very much for being here with us in this videoconference. I would like to start this call in solidarity to the people of Rio Grande do Sul for the unprecedented tragedy that is a strike in the state. We acknowledge the restless work of our colleagues from the industry and also the whole population in the area to overcome this very difficult situation. Now talking about our quarter results, we did have another period of sound achievements, especially the best quarter in the history of our distributing company with 34.4% of efficiency in the last 12 months. Congratulations to Max and the colleagues. This is an amazing result for, this quarter, and Copel distribution and Copel consolidated results.

Adjusted EBITDA was BRL 1.4 billion net income, a little over BRL 500 million. Moura will go into the details on these results shortly. And I will be concentrating myself in the status of the changes that are happening in the company since we turned it into a corporation. You have seen, and you're following that up with us that the pillars of this new stage of the company are people, operating efficiency, and capital allocation. And this has been stressed since our roadshow and then Investor Day and I'm going to go into each one of these fronts and what we have been doing in each one of them. In shareholder's meeting of April 22, we have approved one of the most powerful tools to attract and retain talents, the long-term incentive plan. As the name itself says it, this is the best way of aligning the administration's interests, both the objects of value generation in the long-term and especially to foster meritocracy culture and a high-performance culture that is we want to foster that ownership feeling among the employees of the company.

This will also allow us to attracting new and needed competencies for the challenges in the industry. I would like to say also that in this meeting, we brought in 2 new members to our Board of Directors, Pedro Sales and Viviane Isabela de Oliveira Martins and also 2 new members for the fiscal Committee. And with time, this will flow to all the other levels of the organization. Operating efficiency, we have seen significant gains for supply, and we move on with our works on ZBB. In the second stage of the ZBB, we will be disclosing the full results also in our Copel Day in November of this year. Now about the energy trading strategy, we were able to see good prices with the market volatility that happened over the first quarter. And we are very much focused and paying attention to new opportunities that might arise in the next few months.

But we still have a positive expectation here with about the price recovery, especially starting in 2026 on -- what we saw in the first quarter is a clear and new reality that we'll be facing in this industry with a significant increase of price volatility, and it will be in the hands of companies to seize these moments to then execute their strategies. And we are going to be faithful and consistent to this strategy and the long-term plans for the company for value generation, of course. Now going into digitization. In March, we closed a deal with Google, and we'll be migrating our IT services to Google Cloud. This is a strategic measure to scale gains by the means of data analysis tools, AI, machine learning, allowing us to have more competitiveness and agility in developing our businesses.

And now to conclude, with a pillar of capital allocation, just yesterday we have communicated the market the beginning of the stage of non-binding proposals to -- for divestments of small-sized generation assets. We have 13 of them totaling 118 and 119 megawatts. The process is part of the value generation strategy of Copel, and it aims to improve operating efficiency of GET portfolio as well as the optimization of capital allocation and will also allow us to reuse qualified professionals, trained professionals that will be then reallocated to different challenges, considering also the ones that will be leaving the company in the voluntary severance program. And what is most important here in this initiative more than the money itself in terms of the disposal of these assets that shows the consistency of Copel's execution according to its commitments and its plans and the commitment with investors.

And this is what we have said in our Investors Day. And what we see that -- what's happening over the months prove that we have been very much consistent, focused and disciplined in the execution of value generation. And this initiative will allow Copel to dedicate itself to its major assets, major generating plants. I also want to provide you with an update about the divestment process for Compagas. We have handed the deadline to receive proposals. Now we are in the stage of analyzing a negotiation of these proposals. And obviously, for confidentiality issues, we cannot go into the details here. But we are really now in this stage of analyzing and negotiating these proposals. It's important to stress what we have already said in our prior call.

The priority is not the deadline or the time, but rather the maximization of value of a premium asset, a renewed concession up to 2054, and the fourth largest economy in the country, which is Parana. So we want to have the right value for this asset. As far as innovation is concerned, our corporate venture capital fund has done its second investment now in the start-up NextronEnergia, a marketplace with integration between distributed generation and consumers that simplifies the access to clean energy by using a digital platform and also connects consumers to the renewable energy project by a subscription program. We are very excited about the synergies that we can have between the trading company of Copel and Nextron. This is a partnership that Copel is really dedicated to.

And to conclude my presentation here, we are very excited about these first months of 2024. We know that we are in the right direction to deliver the promised results to all Copel's stakeholders. Now Moura will give you more details on the numbers for the first quarter, and then we'll be back in the Q&A session.

Adriano Rudek de Moura: Thank you, Daniel. Good morning, everyone. Thank you very much for participating here in this video conference. I also would like to show solidarity to the people of Rio Grande do Sul for the devastating impact of that tragedy that we are seeing there. Now talking about the quarterly results, we are very happy to deliver another quarter with sound financial results, robust cash generation and consistent improvements in operating efficiency in all our challenges despite of the challenges that the industry is facing with a typical climatic events, volatility in energy prices, restrictions and the wind farms dispatches, that is, all challenges that are being mitigated here at Copel with an efficient execution in our value generation plan, as Daniel has already mentioned.

Now the financial KPIs, in a consolidated fashion the adjusted EBITDA is in line with our expectations. Here, we had an exceptional result of Copel Dis, which hit a record of BRL 636 million in the quarter, 25% higher than the first quarter of '23 that ended up offsetting partially the reduction of GET's results, which was affected by lower energy prices and also the frustration of wind farms generation, including the dispatch restrictions by ONS. And despite of the EBITDA reduction, the net income in comparison to the prior quarter was also benefited by the improvement in the net financial result of over BRL 60 million because of the maintenance of -- we maintained resources in the primary offer of BRL 2 billion that are awaiting payment of concession -- renewal concession of plans submitted for the second half of the year and also a reduction of interest and inflation and there was also robust operating cash generation of over BRL 1.3 billion.

Excluding non-recurring payment, we would have done BRL 336 million of the first part of the arbitration agreement negotiated in January of this year. And part of this improvement, over BRL 300 million comes from the positive variation of sectoral balances of Copel Dis, thanks to the improvement in energy consumption in the first quarter of 2024.Next page, non-recurring items here. We do not have anything relevant about the first quarter. Remember that the results we show do not include discontinued operations of UEGA and Compagas, both in the results as well as in the balance sheet because they are posted as assets for sale once they are already discontinued. So EBITDA -- adjusted EBITDA per business here, we see the contribution of each one of the businesses in comparison to the first quarter of 2023.

DIS grew 25%, BRL 120 million higher, reaching BRL 636 million, GET going down to BRL 129 million, 23% reduction, both in the first quarter with BRL 770 million. And the main highlight here of -- starting by Dis, the regulatory efficiency was of over 34%. The grid market grew over 10%, not including MMGD, which gets close to 8%. Also, there was a tariff adjustment of June of last year with an average effect and the Parcel B revenue of approximately 4%. ADA went back to the normal levels of 0.6%, 0.7% over total revenue. Remember, in the first quarter of last year, there was a reverse of BRL 15 million in the total ADA because of the DIS connections resuming in the post-pandemic period, which were restricted by state law. And this was extended only at the end of 2022.And the electric system maintenance cost are -- is still being impacted by atypical climatic events.

RR level has increased more than 20% compared to 1Q '23. We have almost BRL 15 million more, but we are able to maintain the right level of DEC and FEC, and here, we are following that up, up and closely and checking how we can mitigate that impact. At GET, as I said, we have a performance reduction that was already expected, especially because of the contracting level. And also, these are the main highlights here, the average price reduction and energy sale of over 20% in the free market and the end of some regulated environment contracts, specifically over the energy. And the comparison of the quarters, the remuneration on assets and the transmission contracts were negatively impacted by the IPCA reduction, which affects the comparison of assets that are in the GET and also assets that are in our equity.

The wind farm frustration of BRL 50 million, especially because of the provisioning are coming from greater operative restriction of transmission. And also, we have fully integrated operations of acquisitions of wind farms Aventura and Santa Rosa and Novo Mundo. For PMSO, I already mentioned some components as costs of electric system maintenance at DIS, which increased 20%, ADA with a reversal of BRL 15 million in the first quarter. Here, we see a variation quarter-on-quarter of BRL 56 million and part of this increase of BRL 97 million is posted as a provision and reversal. In comparison of PMSO that was reported, there was a slight reduction of 1.6%, including indemnity that was paid of BRL 138 million. That is non-recurring because of the additional 1/3 for vacation paid in January of 2023.

And therefore, this benefit has been excluded from the salary base starting last year, and we start to see a reduction during this year. But if we do not consider these non-recurring items and provisions and reversals, there was an increase in PMSO of approximately 4% in line [indiscernible] excluding this indemnity impact, there was a salary adjustment in the ACT starting in October of 4.5%, which was partially offset by the reduction of 160 people that left since the first quarter of '23. Out of those 67 are already our voluntary severance program anticipated, which is counting on more than 1,400 people leaving up to August 14. Now in terms of cost reductions -- reduction plan, we are already at full speed at our ZBB second stage and we had the kickoff in February of this year.

The company is fully engaged in this work. We estimate its conclusion in October of this year and eventual efficiency improvements might happen, and they should be approved and integrated to 2025 budget and obviously informed to the market in the next Copel Day. Now about the initiatives to cost reduction and also improvements and efficiency in the first stage of ZBB, which we disclosed at Copel Day last year, they're already part of the individual targets of ICP, and they are being monitored. Now moving on the investments program. We have a total amount forecasted of BRL 2.4 billion with total folks and revealing RAB for Copel Dis starting in June of 2026. Both the physical and the financial plans are moving forward. And this projection for 2024, we are not including the concession bonus for the beginning of the second half, which is of approximately BRL 3.7 billion.

And this to be updated by Selic since January '24 up to payment date. Now turning to the end of my presentation. We maintain the leverage at the level of 2x, especially the funds of BRL 2 billion and the primary offering that are available in cash for the concession bonus payment, as we mentioned. Naturally, the concession payment and the CapEx level that have been approved for 2024 as well as the investment expectation for 2025, we focus in reviewing our RAB at DIS at the level of leverage should increase to 2.5 and 3. And now concluding, I would like to remind you that in the last shareholders' meeting, we have approved the dividends distribution in line with our policies and the payment of a remaining balance of BRL 632 million, which will be paid off in June.

Thank you very much for your participation, and we can now start the Q&A session.

See also

18 Countries with the Largest Tropical Forest Areas in the World and

20 Biggest Real Estate and Property Companies in Australia, 2024.

To continue reading the Q&A session, please click here.