Companhia Paranaense de Energia - COPEL (CPLE3) Earnings Call Transcript

Welcome and thank you for waiting. Welcome to the conference call about Companhia Paranaense de Energia COPEL to present and clarify the proposal for bylaw alterations something new to dividend policy. [Operator Instructions] Before proceeding, you would like to mention that forward-looking statements that might be made during this call in relation to Copel's business perspectives, operating and financial projections and targets, our beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events, and therefore, they depend on circumstances that may or may not occur. General economic condition, industry conditions and other operating factors may affect the future performance of Copel and may lead to results that differ materially from those expressed in such forward-looking statements. Today with us, we have Mr. Daniel Pimentel Slaviero, CEO of the company; Mr. Adriano Rudek de Moura, CFO and Investor Relations Officer. The presentation to be made by Copel's management may be followed at ir.copel.com. Now I would like to turn the floor over to Mr. Daniel Slaviero, Copel's CEO.

Good afternoon. We wish you all a very good year. And we hope you are very well and very healthy. Before we start, we would like to recognize that our first material fact ended up generating some doubt and wrongful interpretations in the market, and which we need to respect the terms that were contained were seen by us as -- with naturality because we know and we understand the good intentions on the part of our controlling shareholder for the company as a whole. Nevertheless, the reaction of the market is sovereign. And I just want to clarify that the -- this episode brought about many lessons to all of us. Having said that, as my opening remarks, our agenda today deals with 2 very important things: the change in our bylaws; and the new policy approved by our Board coming from the joint efforts of all of us, and that ended up in the approval of these two points. These themes are being discussed by this management since June last year, at least. And if you remember, in our third quarter call on November 13, we had already committed ourselves with the market that we would be submitting these proposals between 30 and 60 days around the end of January. And I would like to thank especially our Board of Directors that has been very diligent and has been following step-by-step the process, and all that work was done with the highest technical rigor in an independent fashion, aiming at preserving the financial health and the sustainability of the company in the long run. Before getting into details of these 2 points, I would like to mention that this is part of a plan and of a bigger strategic vision that we have for our Copel. And it includes a permanent agenda for improvement of our corporate governance, efficiency gains. And if you remember, at the end of last year, we announced the 2 programs that led to the exit of over 480 people from the company. Meritocracy focused on our core business of energy and evidence of that was a sale of telecom, a major step in the direction and discipline in capital allocation. And I'm very happy to get into the subject because of the wonderful job that was done by everybody, that is to say, the executive, the Board, et cetera, and the advancement from the new bylaws bring our completion that they should be perpetuated beyond this administration and the guarantee of the tariff adjustments since 2015. This was already part of the Copel bylaws. And this is no longer an issue, although the recent memory of some -- many past episodes generated this. And as of this reform, it will no longer be an issue in Copel ever because no change or exclusion in the article may be done without the approval of the preferred shareholders. And I think this is really a milestone. And this will be perpetuated in the future of the company. Besides, also with the objective of increasing the presence of noncontrolling shareholders or minority shareholders, we are proposing an increase from 2 to 3 seats without increasing the total number of board members. And also we have studied many companies and top companies regarding the inclusion of an independent external member in the CAE. Besides the 3 committees that are being created in order to advise the Board of Directors. The first one, has to do with one of the biggest challenges for the company, which is the Investment committee -- Investment and Innovation Committee. In order to guarantee discipline and capital allocation with 3 board members, 1 representing minority shareholders. And the objective will be to follow very closely the management of company, making the investment analysis stronger and with opinions of external advisers, and that will help in the decision-making by the CAD. The second committee, sustainable development, aims at improving ESG and people teams in Copel. We already have the membership of the [indiscernible] and the ESG portfolio, and there is always room for improvement in the process -- of the ESG process. And one of the first objectives of this committee that will count with members of the Board and also external independent member is to align the ESG goals with the variable compensation of executives and the possibility of having access to new financial instruments such as green bonds and green infrastructure debt, et cetera. And lastly, regarding the increase in the presence of minority shareholders, we have the created of a specific minority shareholder committee. And in this model, we looked at the company that became a cooperation, as a good practice and it analyze and issue opinions between the company and the controlling shareholders. This is the objective of the Minority Committee. So -- and we were inspired by this company that became a corporation very recently. Next slide, please. In relation to level 2 of B3, as we said in the material information, migration is conditioned to a public offering of shares of Paraná state, the third point. And we understand that it is totally legitimate and reasonable for the controlling shareholder to place this prerequirement. And it is up to us to make the decisions and continue with the subject according to the technical opinion and the governance. And I would like -- as we are already broaching this theme, I would like to talk about a doubt that arose in the last few weeks. What happens if the government is not able to settle due to the minimum price that is part of the state law? The company will continue on Level 1, and all the other processes, including the exit of the BNDES, will continue business as usual in especially the implementation of units. And we are fully convinced that this will bring about a higher degree of liquidity and a better reinforcement for the company and that this will end up benefiting our shareholders since. Before concluding my part of the presentation, I would like -- and before I give the floor to Moura, I would like to mention our satisfaction with the announcement of our dividend policy. And as I said, it is part of a bigger strategic plan. And this is one further step for value creation for Copel's shareholders. This is a necessary step. Besides our technical teams, led by Jonel, we have many advisers such as [ BCG ] in the definition of metrics and looking for the best practice. As I said, BCG has helped us in strategic planning, together with other external advisers in the development of this team. And I would like to reinforce what I said at the beginning. This process was held in a very technically independent manner and with total autonomy on the part of this management. Fundamentally, what we seek is to improve return to our shareholders and to give additional predictability in the flow of payment of earnings, transparency and also optimizing the capital structure and strengthening the alignment among all the shareholders regardless. All that conciliating and together with discipline and capital allocation and preservation of our capacity to make sustainable investments. And this is a very important point. This is part of our strategic agenda, sustainable investment. This is the reason why, now, we have an investment committee that will bring capital discipline and return for shareholders. Moura?

Thank you, Daniel. Good morning, everybody. Thank you for your presence. I would like to express my great satisfaction when I see the important step. In relation to things that Daniel has already mentioned. I would like to highlight, they are totally aligned with our guidelines, the guidelines of our strategy and more specifically regarding dividend. Daniel has already made a summary of the pillars of the new policy based on the best market practices, preserving the strategic direction of Copel. And I would like to make an additional emphasis on one of the pillars before I talk about the financial plan and structuring. It has to do with the capital structure. This was one of the most thoroughly discussed themes when we drive the new policy. And our first objective was to define a benchmark or reference for optimal capital. You know that we have a very low leverage. If you look at the figures of the last quarter, we are talking about 1.3x. This is not adequate. And this affects Copel's cost of capital. And our objective was to try and define a target so that we could carry out our strategic actions. And we had many discussions considering the regulatory capital structure, benchmarking companies in the sector, sensitivity analysis, the coverage of debt service and many other factors -- many combined factors had a weight in this decision. And today, we have a definition. And you have this in the material fact that was published yesterday. We will not go beyond 2.7x net debt to EBITDA. And at the same time, this is a cap, this is also one of the targets that we would like to reach with an optimal capital structure. And in this sense, we have a journey ahead of us. We have 1.3x today -- in September, and we have to get close to 2.7x. So the new dividend policy also took this into account. That is to say be a tool for us to be able to reach the adequate capital structure. So let's go to the next slide, please. On this slide, we show the financial parameters that take into account this new policy and basically combining the level of indebtedness, operating cash generation and investments. And I would like to mention that the dividend calculation will always be based on -- it will be the net income that was published. It will not be excluded from this as many other value. Depending on the leverage, the adjusted net income based on the legal requirements may vary between 25% mandatory, up to 65%. And any dividend will be considered as regular in this range. That is to say, over 65% is extraordinary according to the new policy. As I said before, the 2.7x limit is maximum and the minimum 1.5x, which is slightly higher than the close of the third quarter of 21.3%. And the concept of available cash is the difference between the cash generation from the operating activities and the CapEx of the period, not excluding any nonrecurring amount. And that was published in the FP, that is to say the standard financial statement of Copel. And there is one event that shows the figures of the evolution of 2018 and '19 and up to 2020, the figures published in September. On the next slide, we see the evolution of the main financial indicators and basically, they are the main components of the new policy. It adheres to the main financial indicators and future perspectives of Copel right now. And I would like to highlight the net income of the period. Once again, we are comparing '18, '19 and '20. '18 and '19 12 months, and '20, 9 months for the figure published in the third quarter of '20. Just as a reference, that it shows a significant improvement and there this will be a component of new policy. So 1.3X leverage, as I said before, investments going down, 1.1x practically up to the 9 months and the available cash flow concept, which is around BRL 3 billion. Year-to-date, that is to say, considering the first 9 months. And right now, considering the level of investment, this would not be a limiting factor right now. Before we talk about the unit, this is the information that we wanted to share with you in relation to the new policy. And it is another -- the interpreter has lost the sound. The sound was cut. Please stand by. We have lost the speaker. [Technical Difficulty] A reference or a benchmark trying not to exceed 2.7. And also aiming at sustainable investments becomes more and more important in our agenda. But with a very strong and very structured governance with the investment committee that was already mentioned and with a very strict discipline. And even more important, we have to continue to evaluate every single step quarter-by-quarter in order to gauge anything that might be necessary. So based on the future perspectives of the company, and this will be tested as of now in practice. And we believe that it will be part of the new strategy to improve our capital structure. Before going to the Q&A session, I would like to talk about the units and stock split, 2 major steps in the Board of Directors' meeting. The split 1:10 at the UNITs program. 5 shares, 1ON and 4PNB,n converting 1:1, ON and PNB and vice versa. So this is the summary, and this has already been made available to you. I just wanted to make this additional remark. And now it's very important for us to open for your questions.

[Operator Instructions] Mrs. Carolina Carneiro from Crédit Suisse.

During your presentation, the details were very clear about the dividend policy. But could you please give us some more color about the reserves -- income reserve that you mentioned the -- in the communicate, that is to say, in the material information that any distribution has to do with the profit reserve. So I would like to know if there is a possibility of extraordinary dividend, of course, provide they meet the need for this level of leverage?

Thank you very much. And the question is excellent, and I will be very pragmatic in answering it. If there is a possibility of the extraordinary dividend by the new policy, yes, in exceptional cases. And provided, it is approved by -- it's not by the Board of Directors, it is by the shareholders' meeting, so the possibility does exist. We have lost the sound again. [Technical Difficulty] We have already declared in the material information that the dividend that will be proposed by the management, including referring to the profit reserves, according to your question, they will be limited to the [indiscernible] parameter in 5 because we see, currently in the company, when you have, in 2020, results that are outstanding up to the third quarter and also the perspective of the GSF, which is very well-known to all of you in the electric power sector and that our results in the balance sheet. However, they have no cash impact. And in 2021, we also have the closing of telecom, the divestment of the telecom and the Compagas subject. There are many other events that will bring about very good results for the company. As I said before, the new policy and the new parameters and the public statements that we have already made and that we consider as being the most adequate right now do not mean that, in the future, we might not review it. And they strengthened our medium and long-term view because they consolidated this dividend payout, leverage level and sustainable investments. So as I said before, we want to grow, but we want to grow with discipline and creating value for our shareholders, and this is the reason why we have the Investment Committee. And this is all based on a strategy and also on the intention to have stability. We want to have our investors with predictability, with a more long and medium-term view. It is useless to make a very big dividend payout now, and in the next couple of years, having a lot of instability. We want to have a stable company. We want to be predictable. We want to be transparent so that -- this is the reasons why we want to have a dividend payout at least twice a year so that this may bring a higher degree of predictability and visibility. And also having a style of investors and shareholders that agree with the team and that believe in the governance of the company and that believe in this management and that believe -- this is the medium and long-term development plan, as I said before.

Gabriel from XP.

Congratulations for the big events. I would like to ask a question about the sale of the state interest in the company, and the law regarding this subject and the value of each share. Does this refer to the whole reserve of accrued earnings and the negotiate, will it be below that? Or does it have to do only with the capital stock that was invested in the company in the past. And let's say, it does not reach the price level of the offering, the migration would occur anyway, and the state would continue to be a shareholder?

Thank you very much. Excellent question. And in this context of your question, I would like to talk about something else point by point. The total shareholders' equity is the reference account, considering the figure of the third quarter, correct me if I'm wrong, Moura, it is BRL 73. So the distribution will be adjusted, but it will be based on the figures of the third quarter, okay? The second point, the conditioning on the part of the majority shareholder in relation to [Technical Difficulty] And it is up to us to process the request and deal with it from the technical viewpoint and deal with it according to the limits of governance. Should it not occur, that is to say if this state is not successful or is only partially successful with the BNDES. The company does not lose anything because all the advancements that I mentioned, especially the units and the tariff and the committees and everything else, nothing is conditioned to anything. The only thing that is conditioned is the migration to Level 2 and refers to the point of the tagalong. But all the rest will continue business as usual because, of course, it will be nonsense. This brings about a lot of benefits for the company from our viewpoint and also from the viewpoint of the majority shareholders. I, myself, understand that it will be great for the company to be able to migrate to Level 2 because it is one additional step, it is another step in the direction of improvement of our governance and for future steps as well for the ongoing progress and parent of the company. And another point that you didn't ask about, but I want to include it here because it is also one of the factors that generated quite a lot of doubt. What is the percentage that the state government intends to sell from the surplus? We do not have this information. We have a statement from the Secretary of the Treasury, and it is our own recommendation to them that they will not sell all the surplus, or not even close to that. First, because they believe that the company will be appreciated and this is also our opinion. With the exit of the overhang and the governance products, and you have an appreciation of the assets, and this will allow us, in the future, to have the possibility of further assessing it. And also because it would be a limiting factor if or should the future, we intend to make a primary offering. If the state went to the limit, there would be just a very, very narrow room for us to make that or to do that. Based on what we understood from the interview given by the Secretary of the Treasury, he understands that the company has a lot of potential to be unleased and a lot of value to be created, and he wants to have the degree of protection, so to say, and this is our belief as well.