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Companhia de Saneamento Basico do Estado de Sao Paulo-SABESP’s (SBS) Management on Q1 2016 Results – Earnings Call Transcript

Companhia de Saneamento Basico do Estado de Sao Paulo-SABESP (NYSE: SBS ) Q1 2016 Earnings Conference Call May 17, 2016 9:30 AM ET Executives Mário Arruda Sampaio – Head-Capital Market and Investor Relations Analysts Henrique Peretti – J.P. Morgan Operator Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to SABESP’s Conference Call to discuss its Results for the First Quarter of 2016. The audio for this conference is being broadcast simultaneously through the Internet on the website, www.sabesp.com.br. At that same address, you can also find the slideshow presentation available for download. We would like to inform you that all participants will be only able to listen to the conference during the company’s presentation. After the company’s remarks are over, there will be a Q&A period. At that time, further instructions will be given. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of SABESP’s Management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of SABESP and could cause results to differ materially from those expressed in such forward-looking statements. Today with us, we have Mr. Rui Affonso, Chief Financial Officer and Investor Relations Officer; Mr. Mário Arruda Sampaio, Head of Capital Market and Investor Relations; and Mr. Marcelo Miyagui, Head of Accounting. Now, I’ll turn the conference over to Mr. Arruda Sampaio. Sir, you may begin your conference. Mário Arruda Sampaio Okay, thank you and good morning everybody. This is one more first quarter here at 2016 conference call. We have nine slides in front of us and as usual afterwards we will have a question-and-answer session. So let’s get started on Slide 3, here we show the company’s billed volume and then sewage volume, which was up by 1.9% in the first quarter of 2016 with an increase of 1% in water and 3% in sewage compared to the first quarter of 2015. Thanks to a greater water availability, which has allowed us to increase the volume distributed to our consumers this was the first quarter since the beginning of the crisis in the early 2014 in which we have recorded an increase in billed volume. It is important to bear in mind that since January 2016 we have not been using water from the technical reserve and the water pressure reduction in the distribution network has been limited to nine time period as was the case before the crisis. The Company is producing more water to be distributed to consumers and we are authorized now to move up to 23 cubic meters per second from the Cantareira systems since February as opposed to the 13 to 15 cubic meters per second we were authorized to withdraw in most of the period the greatest periods in months of 2015. As a result of the increased water availability we also increased water production volume by 8.8%. Now moving to slide 4, quickly over the financial results net operating revenue increased 22.7% over the same period last year, it produced 15.2% tariff increase since June 2015. The lower granting of bonus with an impact of 153.8 million in the first quarter of 2016 versus 211.2 million in first quarter 2015. The application of contingency tariff in the amount of 160 million in the first quarter this year against 79.3 in first quarter 2015 and a 1.9% up turn in total build volume and 1% of which is water and 3% is sewage as mentioned in the previous slide. Municipalities commercial and constructions costs increased 76.3% in the period adjusted and that totaled 907 million against 1.35 billion recorded last quarter. While the adjusted EBITDA margin came to 30% this quarter against 55% last years the same first quarter. If we exclude the effects of construction revenue in cost the adjusted EBIDA margin was 37.2% this quarter against 71.6 in 2015 first quarter. Net income totaled 628.8 million against 318.2 million first quarter 2105. Let’s move on to Slide 5. Let’s go through quickly the main variations in costs in relation to the same period last year. In comparison with the first quarter of 2015, there was a 76.3% increase in construction costs and expenses. We exclude the construction costs, cost expenses climbed by 127.4%. However, if we exclude the effects of the non-recurring GESP, it’s our agreement with the state of São Paulo that we made last quarter, and the reimbursement of R$696 million, costs and expenses increased 16.7%. The main items that influenced this upturn were the increase of 312% in general expenses, 51% in electricity, 18.6% in the allowance for doubtful accounts, and 7.4% in payroll, benefits and social security obligations. Again for more detail in all these costs variations, please refer to our earnings and any doubt, as usual, call us. Let’s go to Slide 6. Here, we represent again quickly the main variations year-over-year in the items that affected our net income, which again totaled R$628.8 million. Net operating revenue increased R$559.2 million, or 22.7%. Costs and expenses, including construction costs, increased R$1.41 billion, or 76.3%. Other operating revenue and expenses had a negative variation of R$25.6 million. Net financial expenses monetary restatement and foreign exchange variations had a positive variation of 1.3 billion, mostly due in great – almost all due to the depreciation of the dollar and the Yen against the Real in first quarter that is the dollar reduced 8.9% and the Yen 2.4%. All this compared within the appreciation in the first quarter of 2015 [Audio Disturbance] 20.8% for the dollar and 20.3% for the Yen. Finally, income tax and social contribution increased R$507.7 million, due to the increase in taxable income recorded in the first quarter 2016, when compared with the tax loss recorded in first quarter last year. Now let’s move on to Slide 7 and Slide 8. Here we will go through a brief update on rainfall and water inflow in the Cantareira System. On Slide 7 we can observe that after rainfall and water inflow inline with expected average for the rain period in the Cantareira system which ended in March, it was a very dry with very low rainfall. Now let’s move to Slide 8 and here we can see that in April despite this lower rainfall the Cantareira system recorded an average water inflow again which is the water that flows into the reservoir that will be built reservoir capacity and this was a 24.1 cubic meters per second volume that is below the historical average was a period was higher than the one absorbed last year in the year before that during the big crisis period. Going overall to the talking about the reservoir conditions when we compared with 2015 and 2014, as we have already mentioned during the rainy period which began in October last year and then end at March this year rainfall and water inflow return to the expected average was a period allowing the recovery of the reservoirs. Remember that we have the collaboration of the population in saving water and that reacts to that measures we’ve taken to manage water supply and demand, it merges you were just carried out by the company the water network pressure management to reduce water losses and again the return to rainfall is expected to on average was a period has allowed us to end April with a start volume of 1.34 billion liters of water compared with 589 billion liters in April 2015 and in these both cases we included that clinical reserve and 556 billion liters in it compared to April 2014 but in this case we do not include the technical reserve. Now again due to the investments undertaking to extract water from the technical reserve in 2016 the company has 545 billion liters more than 2015 and 578 billion liters more than 2014 obviously this figure last its prior to the technical reserve, our ability to tap technical reserve. Now again just a beginning of the bonus program in February 2014 to the end of April there was a savings of 332 billion liters of water, this is the amount of the water we saved, to give you an idea of what this represents this is equivalent to almost two Guarapiranga reservoirs and the amounts saved is sufficient to supply to entire population for the São Paulo metro region for approximately 100 days. Now from April to September, as you probably know, first the dry period and it was period of expected lower and less bulky rainfall. Remember also that along with the dry period there was a reduction in temperature and hence a reduction in the volume of water used by people. This is very important to set expectations for the upcoming month. Well then in some reservoirs received water during the rainy period in excess of demand, and the actual amount is unused during the drought. Remember, it’s very important to remember that. And then considering that the reservoir levels at the end of March, the beginning of the dry period, even with a very low rainfall in April as previously commented, it does not alter the decision taken by the company so far, especially concerning dam of the contingency tariff on this program and they increase in production and supply of trees and water. Now let’s move to Slide 10. Here we can see the evolution of water production in the metro region of São Paulo from the beginning of the water crisis in February 14 all the way to April 16. The increase in production since October 15 until now is reported by the recovery of the reservoirs and very much driven by two factors. The first factor is the authorization to increase water withdraw from the Cantareira system, again, which went from close to 14 cubic meters to 19 cubic meters in January this year and now 23 cubic meters since February. Second is the completion of the interconnection of the building’s reservoir to the Alto Tietê system which we have been commenting, which enabled the transfer of 4 cubic meters per second from back to the reservoir. Note, there’s greater water availability in the Alto Tietê system, increases the water security of this system consequently for the entire metro region. And so though the necessary works carried out by the company in the years of 2014 and 2015 resulted in 6.5 cubic meters of more water available for treatment. Furthermore, as already mentioned in previous calls, the Sao Lourenço water system with 31.9% of the work already carried out, is scheduled for completion in late 2017. Remember that this system is totally new and increase of the bulk water availability and treatment capacity for the metro region São Paulo at 6 cubic meters per second. Again, also on the construction, the Jaguari and Atibainha reservoir interconnection project will add an average of 5.13 cubic meters per second of bulk water availability to the metro region of São Paulo through the Cantareira system. In this case the construction has begun. It’s already on work since February this year and should be ready by 2017. So, in total, in the period of 2015 to 2017, there will be an expansion in the water availability and security of close to 21 cubic meters per second and an increase in production of 7.4 cubic meters per second. Just to put in perspective prior to the crisis, we have an approximately 75 cubit meters of both water availability and close to 70 cubic meters of water production capacity. So this is a very big leap in a very short-term, increasing substantially our water security for the metro region. So, in summary, our active management of water supply and demand in the region, the greater availability and increased water security and the average and favorable rainy seasons 2015-16 are all very positive factors that allow us to say that we are today in a better conjuncture and structural situation than last year and with a greater certainty to face the balance of this year and next year. Let’s go to our last slide. We will comment here on the tariff adjustment and the cancellation of the bonus program and the contingency tariff. As you probably know, on March 31, ARSESP accepted our request for the cancelation of the bonus program and the contingency tariffs for the bills metered as of May 1. This progress was made in light of the improved water conditions combined with the conclusion and the advanced progress of works to increase water security, which allows us for greater predictability of water source conditions and water security levels in the metro regions of São Paulo. This inception in February 2015 until the end of March 2016 as well this program resulted in a reduction of revenues in the period of R$1.456 billion. This reduction was partially offset by an additional revenue of R$660 million obtained with the implementation of the contingency tariff. So in net terms, during the application period, the bonus program and the contingency tariffs had a negative effect on revenues of R$796 million. As we move forward, we will not see that. So considering this, the cancellation of these two measures, especially the bonus program and with its incentive to reduce consumption, the effects of this reduction in billed volume and average price given that a lower consumption leads to a lower tariff rate no longer will occur suggesting a recovery of revenue in the coming quarters. On April 11, in line with the regulatory agenda, so we are exactly on time and moving on the regulatory agenda assessed public resolution 643 which authorized us to apply a tariff increase of 8.4478% as of May 12. This index comes from the inflation index implementation of 9.3864 estimated based on the EPCA variation from March 15 to March 16 and it excludes the productivity factor of 0.9386%, considering our consumption of – our consumption reading cycles and the procedures we have to go through. Please take note that the full impact of this tariff adjustment and the bonus cancelation will be observed only fully in the second half of 2016 were precisely as of August. The full impact of this adjustment as you can see we will see a better as we move on. So finally these are our remarks, now we will open for questions. Question-and-Answer Session Operator [Operator Instructions] It appears there are no questions now I will turn the conference back over to SABESP for their final remarks. Pardon me, sir. We do have one question from Henrique Peretti with J.P. Morgan. Please go ahead. Henrique Peretti Hi, Arruda, thanks for the opportunity. I would like to understand why billed volumes increased only 1.9% if water production volumes increased 8.8% in the quarter, where is the gap here? Mário Arruda Sampaio Okay – Henrique, this is Mário. The reason they don’t match is that we have the take-or-pay range of zero to ten cubic meters. So if people consumed that we still tried the same thing. So that is the difference. So people are probably moving within that range, consuming more within that range, but not sufficient to trigger aggressively a change in category. So to the great extent the take-or-pay from zero to ten cubic meters is what causes this effect, okay. Henrique Peretti Okay thank you. Operator As there are no further this concludes our question-and-answer session. I’ll turn the conference back over to SABESP for their final remarks. Mário Arruda Sampaio Okay guys first let me just make a quick correction on my speech here. The bonus cancellation in the continuous direct cancellations will have immediate effect on revenues as of May 1. Okay different than I said it will be differed, if it’s not differed, it’s immediate, they only differ full effect if the tariff increase. So okay, made that correction thank you very much for your participation. So let’s comeback next quarter. Hopefully good news also. Thank you very much. Bye-bye. Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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Companhia Paranaense de Energia’s (ELP) CEO Luiz Fernando Leone Vianna on Q1 2016 Results – Earnings Call Transcript

Companhia Paranaense de Energia (NYSE: ELP ) Q1 2016 Earnings Conference Call May 13, 2016 2:30 PM ET Executives Luiz Fernando Leone Vianna – Chief Executive Officer Luiz Eduardo da Veiga Sebastiani – Chief Financial and Investor Relations Officer Adriano Fedalto – Accounting Superintendent Sergio Luiz Lamy – President of Copel GeT Antonio Sergio de Souza Guetter – President of Copel Distribuição Analysts Miguel Rodrigues – Morgan Stanley Operator Good afternoon and thank you for waiting. Welcome to Companhia Paranaense de Energia Copel conference call to discuss the first quarter of 2016 results. We would like to inform you that all participants will be in a listen-only mode during the company’s presentation. Afterwards, we will have a session for questions and answers, when further instructions will be given. [Operator Instructions] Before proceeding, we wish to clarify that forward-looking statements that might be made during the call related to Copel’s business perspectives, operating and financial targets, and projections are beliefs and assumptions of the company’s management as well as information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions as they refer to future events and therefore will depend on circumstances that may or may not occur. General economic conditions, industry conditions, and other operating factors may affect the future performance of Copel leading to results that differ materially from those expressed in such forward-looking statements. Participating in this call, we have Mr. Luiz Fernando Leone Vianna, CEO of the company; Mr. Luiz Eduardo da Veiga Sebastiani, CFO and Investor Relations Officer; Mr. Gilberto Mendes Fernandes, Business Management Officer; Mr. Jonel Nazareno Iurk, Business Development Officer; Mr. Antonio Sergio de Souza Guetter, President of Copel Distribuição; Mr. Sergio Luiz Lamy, President of Copel GeT; Mr. Ricardo Goldani Dosso, President of Copel Renováveis; Mr. Franklin Kelly Miguel, President of Copel Comercialização; and Mr. Francisco Cesar Farah, CFO of Copel Telecom. The presentation will be made by Copel’s management and it can be followed at the company’s website, www.copel.com/invesor relations. Now, we would like to give the floor to Mr. Luiz Fernando Vianna, CEO of the company. Mr. Vianna, you have the floor. Luiz Fernando Leone Vianna [Interpreted] Good afternoon, everyone. My colleagues in the executive committee, all participants, welcome to our call to talk about the results of the first quarter of 2016. I would like to start by talking about important regulatory issues that bring or could bring relevant impact on Copel. The first point and it couldn’t be different, is the 4th Tariff Revision Cycle of Copel Distribuição. We certainly are a company to develop such as a process. As you have already had access to the documents available at the ANEEL website in the number #20 Public Hearing that shows a net remuneration base of R$4.8 billion with the new cycle. This increase means that our distribution company doubled in size in the last four years. However, it’s important to highlight the investment was not made only with extensions. We also invested quite a lot with the improvement in the quality of service that we deliver. And this led us to be recognized as one of the best distribution companies in the country. Now, with the beginning of the 4th cycle, all these investments will be remunerated. And for this reason, we are certain that we have adopted the adequate strategy for the business. The 4th cycle still brings about other important points such as the remuneration of special obligations and the trajectory of costs that will allow us to have a more adequate coverage for the PMSO expenditures within the cycle that starts in 2016. Nevertheless, the most interesting point is that the practices, [the clever strategy] [ph] by Copel Distribuição should suffer a reduction of approximately 10% with the beginning of the new cycle, which is targeted for consumers, because they will be spending less with energy and for the company as well, because it brings a substantial delinquency reduction and growth in consumption, factors that have been impacting our results in the last few quarters. However, it’s important to stress that the process hasn’t been concluded yet. The hearing is still open until May 19 and after this period the prices would be validated and rectified by the ANEEL administration. And conclusion is estimated for the end of June. According – continuing with the regulatory theme, as Resolution 706, coming from Public Hearing 04, will talk about an important advance into the issue of involuntary over-contracting of business. The new rule allowed us to consider part of the energy that we receive through the quota system as involuntary over-contracting, which was enough to mitigate Copel’s distribution risk [negative as seen] [ph]. In transmission, the Ministry of Mines and Energy got the news about the RBSE implementing, which are the transmission assets already existing in May 2000, by means of ordinance 120 of 2016 and ANEEL established the integration of RBSE to the regulatory asset base, the restatement of the value of the assets since 2012 and payments of indemnity by means of RAP since the tariff process of 2017. This is interesting to say that the cost of own capital to be considered in the restatement of the asset value is 10.4% in near-term, which allows us to have this adequate restatement of the amount to be indemnified. In the case of Copel, this amount has not been ratified by ANEEL yet. And I would like to mention that any effect on our results or conditions to the ratification of the final result of the evaluation report by the regulators, ANEEL. Just to remind you, in March 2015, we submitted to ANEEL the evaluation report to the amount of R$882 million referring to RBSE and the date of it was December 31, 2012. On slide number 4, I would like to highlight that we have important achievements related to the projects that we are building. Starting with Colíder, the Supreme Court of Justice in a decision supported by technical studies canceled the injunction that mandated Copel GeT to suppress 100% of the vegetation of the area to be flooded by the reservoir, and confirmed that the suppression of 70% of the area was environmentally adequate. With that, the work is then concentrated in the construction of the transmission line that will be linking the Colíder plants to the interconnected systems, and the electromechanic assembly of the equipment. Commercial operations should start in the first-half of 2017. We also had an important achievement related to the Baixo Iguaçu project in which we hold a 30% stake and we are building in partnership with Araucária [ph] in a recent decision. And they approved an additional 130 days for waiver of responsibility for the plant and the total number of days now is 756, which means at the beginning of the sale to other utilities was postponed to the end of 2018. And this is enough time for us to build the plant and start commercial operations. In the transmission segment, SPC Matrinchã concluded its construction work and over 1,000 kilometers of lines have already been planted and commissioned successfully. And now, we need a confirmation by the regulators in order to officially start operation of these projects. Besides Matrinchã other transmission projects are about to be concluded and start commercial operation. SPC Guaraciaba should start-up by the end of June, whereas SPC Paranaíba has already concluded construction of 346 kilometers of lines and should come on stream by the end of next month. Jointly, these three projects will bring about to Copel around R$158 million. Lastly, I would like to highlight that we have recently held two auctions for the sale of energy in the free market in which we have sold over 6 million megawatt hours in products, where delivery in two to five years, and starting delivery as of June 1, 2016 then January 1, 2017, and then January 1, 2018. Our strategy is to hold additional auctions in order to reduce the amount of energy, whose contracts have been terminated and allows a better predictability for the generation business. It’s important to highlight that the results already obtained allows us to make or give a significant step in order to reach this objective. Now, I give the floor to my colleague, Sebastiani, our CFO, who will talk in detail about the results for the period. Luiz Eduardo da Veiga Sebastiani [Interpreted] Thank you, Mr. Luiz Leone Vianna, our CEO. As he said, we have a participation of all these executives due to this important moment for the company. And thank you very much for participating in this call. As you will see on Slide #5, some events again impacted our results in the first quarter of 2016. We posted over R$120 million in provisions, of which R$84 million are related to labor litigation and R$32 million to civil loses. We posted R$38 million in allowance for doubtful accounts because of the economic crisis that we are going through in Brazil. And that has a direct impact on Copel Distribuição results. Economic crisis has been impacting energy consumption leading to a drop of 4.3% in the capital market of Copel Distribuição, in line with the drop in consumption that we see in the country. The decrease in Copel’s results is also explained by the lower results of Araucária TPP, which represented only [indiscernible] in the first quarter of 2016, accruing R$14 million loss in the period vis-à-vis earnings of over R$150 million in the first quarter of 2015, besides the drop in results which also impacted by the lower allocation of energy at Copel GeT to the short-term market aligned to the lower value of the spot price in the period. Slide #6 now, details of our operating revenue, with the reduction of 27% in the first quarter of 2016, being close to R$3 billion. The main reason for this decrease is the recognition of the result of sectorial assets and liabilities that was negative by R$527 million in the first quarter of 2016, when there was a positive result of R$561 million in the first quarter of 2015 due to the amortization of R$402 million in the period coming mainly from the recovery via tariff of the deferrals realized in 2013 and 2014, and the negative constitution of R$144 million coming from the reduction in the value of the CDE, the economic development account, and the lower cost with the purchase of energy vis-à-vis the current coverage. Revenue from delivery to end customers grew by 19% due to the adjustments of the tariffs to the Copel Distribuição tariff over last year. Nevertheless, these adjustments were affected negatively by the charges and by the slowdown in the captive markets of Copel Distribuição and the free markets of Copel GeT. Revenue from sales to other utility, that means the many of the sales of Copel GeT and all the sales of Araucária TPP had a 47% reduction in the first quarter of 2016, resulting in the lower dispatch of TPP, the lower volume of energy allocated [indiscernible] by Copel GeT, and lower spot price as we mentioned. Revenue from the use of the power grid grew by 44% due to the tariff adjustment applied by Copel Distribuição in June 2015 and also the increase of revenue of the transmission segment coming from the RAP adjustments and the startup of new Copel assets. Other operating revenues items made up by telco revenue, gas distribution and others grew by 6% and reflect mainly the 31% increase in the telco revenue which comes from the increase in the client base. On the next slide, Slide #7, we show the operating costs and expenses that were below R$2.8 billion in 1Q 2016, 23% less than the one that we had in the same period 2015. This can be attributed mostly to the 33% decrease in the cost with the purchase of energy because of the end of existing energy contracts that were replaced by energy contracts coming from the quota system, much cheaper and the reduction of the Itaipu tariff. Regarding the other costs, it’s important to say, that we had higher expenditures with charges for the use of the grid, due to the dispatch of TPP’s results by the order of merit. Manageable costs went up 12% in the first quarter this year due to higher personnel cost and third-party services due to inflation that reached 10% in the period. The provisions and reserves line, as I said before on Slide 5, represented R$121 million was impacted by labor and doubtful accounts provisions. But when compared to the same period in 2015, we see a 45% decrease in the period. But it’s important to highlight that in the first quarter of 2015 we posted R$73 million in allowance for doubtful accounts related to the difference between the contract of Colíder plants and the spot price, which means a higher amount of provisions at the beginning of last year. On Slide 8, we show the EBITDA that was 37% lower year on year, totally R$528 million in the first quarter this year with 17% margin over the operating revenues. The Copel GeT cash generation accounted for 86% of the consolidated EBITDA and Copel Telecom 5%, the other companies in the group accounted for 9% and the main contribution came from Elejor. Copel Distribuição closed the first quarter of 2016 with a negative EBITDA of R$29 million vis-à-vis a positive result of R$49 million in the beginning of 2015. But we have the effect we consider non-recurring, because of that we show on Slide 9, the comparison between the adjusted EBITDA of Copel Distribuição. As we know, the tariff for Copel Distribuição compensate for coverage for delinquency that for the current tariff cycle is of about R$13 million per quarter. However, the tariff increases and the economic stagnation have been contributing to an increase in the level of delinquency that is higher than the tariff coverage and ended up having a negative impact of R$22 million. The results of the distribution company in this sector decide in a non-recurrent fashion, we posted R$38 million in legal claims, provision for legal claims. And in February, we had some organizational adjustments that caused the transfer of part of our fuel cost from the holding company to subsidiaries with higher impact on Copel Distribuição. Considering these adjustments the adjusted EBITDA of the first quarter of 2016, which has been positive in R$38 million, 58% lower than the adjusted EBITDA of the first quarter of 2015, reflecting very clearly the impact from the market downturn, therefore the economic scenario that we have in the country now. On Slide 10, we show the consolidated net income of Copel, which reached R$136 million in the first quarter of 2016, 71% lower than year-on-year. Analyzing the results of the subsidiaries, you can see that Copel Distribuição posted R$39 million of losses in the first quarter of 2016, vis-à-vis a positive result of R$29 million in the first quarter of 2015. Copel GeT ended the period with R$165 million net income, 60% lower on a year-on-year basis, whereas Copel Telecom reached R$11 million net income, dropping 23% year on year. Specifically about Telecom, it’s important to say that the drop that we saw in the quarterly income is directly related to the increase in the financial expense that came from the increase in the debt that’s necessary to support the subsidiary’s expansion of services. Before opening for questions, I would like to talk about the leverage of the company. As you can see on Slide #11, the indebtedness of Copel measured by the net debt to EBITDA ratio grew in the last few years, then closed March at 3.3 times. It’s important to highlight that this ratio is as planned is below the limit imposed by the covenants that also lower than what we see in similar companies. This increase in the leverage was expected, but it has to do with the significant expansion [indiscernible] the company has been going through and will be reduced with the beginning of the cash flows from the different projects that we are building, many of them starting up in the next few months. So these were now our highlights. We are available to you now to answer any questions that you might have. Question-and-Answer Session Operator Thank you. Now, the floor is open for questions. [Operator Instructions] Mr. [Kaikobet Gonzales] [ph] from Citibank. Unidentified Analyst [Interpreted] Good afternoon, everyone. Thank you for the call. Now, talking about provisions, R$84 million related labor claims, could we go more in-depth, what was exactly that? And do you expect this to continue for the remainder of this year? Thank you. Luiz Fernando Leone Vianna [Interpreted] Thank you. I will give the floor to the accounting person of Copel. Unidentified Company Representative [Interpreted] Good afternoon, Kaikobet. Referring our provisions for contingencies in the first quarter of 2016, in fact we had a very [non-recurring thing] [ph] that was collected to – from the existing labor union, so very prudently we applied a conservative approach and this event represents about R$45 million in our provision. And with here our allowance for doubtful accounts is coming up because of delinquency represented R$30 million of this R$112 million. And the others are the ones that you are familiar with, R$45 million should be non-recurrent for the next few quarters. And we are monitoring very closely the issue of delinquency in order to maintain or to move down as much as we can this amount of provision for that specific end. Thank you. Operator Mr. [Jimmy Saskenia] [ph] from Credit Suisse. Unidentified Analyst [Interpreted] Good afternoon. I have two questions. The first one about provisions, you explained about the provision regarding expenses that there was a big reversal as well. Maybe you could mention what it was all about, could you point any commitment? And the second question has to do with what Sebastiani shared about the covenants. When we look at Slide #11, I understand that there are many projects that will be coming on-stream in the next few quarters. But when we look at the average for the last 12 months, we see deterioration in generation. And the situation has a negative impact may on the third quarter of last year. As we look ahead, okay, you have new projects coming on stream, but as we look at the average of the 12 months, generations and distribution worsened, because of Araucaria maybe. So do you believe there will be any break of covenant? Are you negotiating any of the covenants that you still have? Adriano Fedalto [Interpreted] Good afternoon, one again. This is Adriano from accounting making brief remarks about contingencies. Regarding this reduction, if I understood correctly vis-à-vis last year in 2015 the provision of R$75 million referring to the difference of price for the Colíder plant. And then, we had complied to the contract fully, but there was still a doubt about the price. We only took the full amount and we provisioned the difference of R$75 million prudently. As soon as this is judged, we will be able to reverse this provision in the future quarter as soon as we have a legal decision about that. Unidentified Analyst [Interpreted] Just to clarify, the reversal of R$15 million, you’re saying that we had provision R$75 million for Colíder, and you reverted R$50.8 million of this amount? Adriano Fedalto [Interpreted] No, no. I’m sorry, I’m sorry. There is some misunderstanding. The comparison that I am making is between 2015 to 2016. This is what represents the variation of minus R$47 million in our results. Unidentified Analyst [Interpreted] No. My question was about Slide #5. When you talk about the breakdown of provisions et cetera, there are reversals. On Slide #5, was it something specific that was reverted? Adriano Fedalto [Interpreted] Okay, I understand. So in 2015, we had two events that represent the R$50 million, R$24 million in benefits to employees regarding the Copel Foundation and we were able to revert R$24 million. And another one, which is trivial as well, difference of the context of almost R$28 million, almost R$29 million also is something non-recurring and that was reverted during this period. So if you add up these two events, we have this difference of R$50 million… Unidentified Analyst [Interpreted] Okay, very clear. And the other point is about the covenants. Sergio Luiz Lamy [Interpreted] The President of Copel GeT, good afternoon. Before Mr. Sebastiani make specific remarks about covenants, I would like to make one remark about the result of Copel Generation and Transmission, in the first quarter and the expectation for the second quarter, and of course it is linked to the issue of covenants. As we’ve said before, I would say that three factors came into play that was very relevant in this regard impacting the results of the first quarter. The first one was that last year, we have made an allocation of free energy, which was much stronger in the first quarter, and then this year we made a more linear allocation over the year and this tends to show better results as we evolve over the year. And the second answer was very much impacted also, and this has to do with the spot price with a sensitive recovery and a trend. We believe that the trend would continue to be there for the next few quarters. And we believe there will be more positive impact on our results coming from the increase in the stock price. And then, Araucaria also was a driver as we believe that, at least the second quarter or part of the third quarter. By the end of the second quarter and part of the third quarter, it will come back online due to the Olympics, so we have a positive outlook for better trend. Operator Now, Mr. Sebastiani. Luiz Eduardo da Veiga Sebastiani [Interpreted] One of the most important things that have already been mentioned by Lamy, and the worst moment that we see, which is the beginning of the first quarter and that was already mentioned, because of the economic scenario and the specific reality of this [last year] [ph], and what regards for instance to the non-residential [ph] GDP and the positive outlook that was mentioned by Lamy, so all that leads us to have a positive scenario for the future. The covenants are analyzed on a daily basis, all of the time, we track our covenants, and it was still below the average of the factors, and below the average of the covenants that we see, and that are only posted at the end of the period. So I understand we are concerned which is legitimate, also it is important also to clarify to you and to everybody that we have a permanent monitoring of the covenant, and observing a better scenario from now on for the next few quarters. We’ve driven high degree of comfort with the risk indicator. Unidentified Analyst [Interpreted] So you expect an improvement in the 12-month EBITDA, offsetting the deterioration of distribution and generation compared to last year, so you believe the situation will not worsen? Luiz Eduardo da Veiga Sebastiani [Interpreted] No. Our outlook as far as that is not negative. We have already established our covenants below the limit and below the average of the sector, and because of all the factors that I mentioned, our outlook is positive as we said. Unidentified Analyst [Interpreted] One last question. The issue of exceeding it, is it only for one quarter or two quarters? Did you have any type of debate? Luiz Eduardo da Veiga Sebastiani [Interpreted] It’s at the end of the year – the fiscal year. That will conclude the merger of the covenants with the contracts that we have in place. Unidentified Analyst [Interpreted] Thank you. Operator [Mr. Lacio Lusali] [ph] from UBS. Unidentified Analyst [Interpreted] Regarding to volume of energy that you sold, 300 megawatts sold in each year and the comparison with the price cut. So the price cut over time. It becomes more and more difficult to predict the EBITDA for distribution. What will be the record level of EBITDA? Can you have the visibility? And do you expect an improvement because of the next tariff revision? So how much do you believe the EBITDA will be going up? Unidentified Company Representative [Interpreted] This is [Lamy Matialon] [ph] In relation to the sale to commercialization company in 2016, while the generation company should 2017, 2018, 2019 and 2020. And the amount that we showed, I don’t have the exact figures here with me, but we were rather successful with a sense of selling all the energy that we are making available for this auction. So besides having been able to create all our available energy, we were able to reach average prices that are very satisfactory around R$128 per megawatt hour. I can send you the exact figures for each year later after this conference about the result of the auction, okay. I’ll give them to you later. Unidentified Analyst [Interpreted] Just to the order of magnitude, is there anything – it was reasonably significant, but always within a negotiation strategy? Luiz Fernando Leone Vianna [Interpreted] We’re going to the energy during – over several different auctions during the year. It’s an amount that will exceed the annual value as of 2017 of R$200 million, R$250 million just to give you an order of magnitude, okay. Unidentified Analyst [Interpreted] Okay. Operator [Rodrigo Guchelin from Gusachi] [ph]. Unidentified Analyst [Interpreted] Good afternoon. Thank you for the call. My questions were about the covenants, in your [indiscernible] volume of energy sold. It was not so clear to me, I mean, the volume of energy sold, it seems to me that at the beginning you’re having a more aggressive effort around 125 to 130, they’re also megawatt hour. Am I interpreting correctly, what you said? Luiz Fernando Leone Vianna [Interpreted] What’s your name please? Could you repeat your name? Unidentified Analyst Vudilu [ph]. Luiz Fernando Leone Vianna [Interpreted] Vudilu, good afternoon. The sound is very bad. So I would like to ask you to repeat the question. Unidentified Analyst [Interpreted] I had two questions, one about the covenant that you have already answered. And the other one, I need some more color about the order of magnitude of your energy sales of the Comitaligadura [ph] company. Is it according to the prices that are acceptable between R$130 and R$125 per megawatt hour, could you clarify this, please? Luiz Fernando Leone Vianna [Interpreted] We had a few auctions in place, in which we sold energy from the generation company, in one modality and the Comitaligadura in another modality. So, you are asking about the Comitaligadura company and because of that, I am going to give the floor to the president of this company. Unidentified Company Representative [Interpreted] Good evening. The [indiscernible] it was very concentrated and incentivized and the expectation that we have is attempting around R$165 as of 2017. For 2016, the amount is slightly lower, and with the purchase is more feasible. Within conventional, R$30, R$35 is slightly below this amount. Unidentified Analyst [Interpreted] Thank you. Operator Also Lusali from UBS. Unidentified Analyst [Interpreted] I had a question about distribution and the recurring EBITDA. How much it will increase with the implementation of the tariff revision? And since the move there R$200, R$250 average megawatts that’s already sold by the generation company is very high volume. So, it slightly better than between R$150 and R$200, that’s all I have just checked, okay. Luiz Eduardo da Veiga Sebastiani [Interpreted] Now, I’ll turn it Antonio Guetter, President of Copel Distribuição who will answer your other question. Antonio Sergio de Souza Guetter [Interpreted] Hello, [Murino. No, Marcelli] [ph], sorry, okay, and everybody, about the reduction in our EBITDA as we have said before, it tends mainly from distributions and also by the problems that we have the distribution company regarding the allowance for doubtful account. Because at the moment that the country is dealing with recession and reduction in consumption, and at the same time here in Paraná as another state, we have an increase in cost of energy, and this results a reduction in the size of our market and the increased delinquency. As a consequence, our allowance for doubtful accounts, we have been working very strongly, and our allowance for doubtful account even increasing our cost to – and also work with a client in order to revert this delinquency cost and we believe that this decision with tariff that we have a trend of change in 10% over June, we would be seeing a reversal in this current – of the EBITDA that was negative this quarter. I believe that the market will continue to be weak, and looking at the scenario that we have for this year, we believe we will not even have R$100 million EBITDA do you agree or may be a little bit more than that? [Indiscernible] as our CFO said, we have already reached the worst point of the year, and now we expect EBITDA – we already see that in terms of delinquency because we see already a reversal in our curve, because we put in place many actions in this regard. And we believe that the level that we will have by the end of this year will depend a lot on what a new administration the new government does, but we believe there will be a positive trend in the market reduction in delinquency whether actions regarding allowance for doubtful accounts, we will start to have the effects. Unidentified Analyst [Interpreted] How much of your EBITDA would increase because of the carrying provision, how much should we expect? Luiz Fernando Leone Vianna [Interpreted] I think you are following that, we expect to be doubled our asset. As a consequence, we believe that we will approximately double our EBITDA. Unidentified Analyst [Interpreted] Thank you very much. Thank you for the answer. Operator Miguel Rodrigues from Morgan Stanley. Miguel Rodrigues [Interpreted] Good afternoon. Two things. First, leverage. Net debt to EBITDA that you delivered it is already addressed by the CDE and what is the exact balance today? Going back to the energy portfolio, what about contracts will now come back on, are you going to accelerate expecting prices to pick up or do you tend to have new auctions and what is your intention regarding this? Luiz Fernando Leone Vianna [Interpreted] New covenants, net debt and EBITDA is not part of that calculation, okay. Sergio Luiz Lamy [Interpreted] Good afternoon. This is generation and transmission. Although we have an expectation trend and that’s a trend in the prices of energy from now up until the end of the year. Our strategy, a strategy based on the average price. So we are going to hold many auctions starting next month. So we do have many different auctions during the year not just for us to have an average selling price for the year, okay? Miguel Rodrigues [Interpreted] Let’s say the market conditions worsen, are you expecting R$125 to R$130, and do you expect market price is different from that, are you going to hold back on your auctions? Sergio Luiz Lamy [Interpreted] Our expectation is positive in the phase of having more favorable market prices. Of course, if this does not materialize, then we do have to address the amounts of energy to be sold due to the market prices with the decrease of rate, or increase of rate regarding the market prices and how they develop. Miguel Rodrigues [Interpreted] Thank you. Operator [Operator Instructions] There are no more questions, I would like to give the floor back to the company for the closing remarks. Luiz Fernando Leone Vianna [Interpreted] This is the CEO of Copel speaking. As we have said before, we had not only at Copel, but in the sector as a whole and in the country, we had a very unfavorable first quarter. We understand that the power sector was even better than the average for the country and our outlook, and we are very much convinced when we say we will be back in the second quarter. We will have better results than the first and place our bets on this new moment that the company’s starting to look and expecting a recovery, because of exchange and we are rather hopeful. We believe there would be improvements to the country and we will be able to close 2016 with a much better perspective than we have in the first quarter. Thank you. Operator Copel’s conference call about the results of the first quarter of 2016 is closed. 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CPFL Energia’s (CPL) CEO Wilson Ferreira Jr on Q1 2016 Results – Earnings Call Transcript

CPFL Energia S.A. (NYSE: CPL ) Q1 2016 Results Earnings Conference Call May 12, 2016, 10:00 am ET Executives Wilson Ferreira Jr – Chief Executive Officer and Member of the Executive Board Leandro Cappa – ‎Investor Relations Director Gustavo Estrella – Vice President of Finance, Member of the Executive Board, Investor Relations Officer Luiza Mariko – Market Planning Analysts Kaique Vasconcellos – Citigroup Vinicius Canheu – Credit Suisse Miguel Rodrigues – Morgan Stanley Marcelo Sa – UBS Sergio Tamashiro – Haitong Carolina Carneiro – Santander Operator Good morning and thank you for waiting. Welcome to CPFL Energia’s First Q16 earnings results conference call. Today, we have here with us Executive Mr. Wilson Ferreira Jr, CEO of CPFL Energia as well as other officers of the company. This call is being broadcast simultaneously via Internet on the website www.cpfl.com.br/ir, where you will find the respective presentation for download. We inform that all participants will be in listen-only mode during the company’s presentation. After that, there will be a Q&A session when further instructions will be given. [Operator Instructions]. I would like to mention that this conference call is being recorded. Before proceeding, we would like to mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CPFL Energia’s management and on information currently available to the company. Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to the future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of CPFL Energia and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the floor to Mr. Wilson Ferreira Jr. Please, Mr. Wilson, the floor is yours. Wilson Ferreira Jr Good morning everyone. Good morning investors and analysts that are here with us for the earnings call for the first quarter of 2016. Let’s start on page three or the highlights of the quarter. Here we have a negative highlight. Unfortunately sales dropped in the concession area. Now segment we are going to into details. On the other hand, in the industrial area, the contracted demand is still positive. On the other hand, we excellent yields, which was the reduction on the CVA balance. As you know, we had at the end of last year BRL1.7 billion rows received and we were able to reduce that to BRL0.7 billion. So we have much more positive position here. The problem had been solved. After that we have processes for tariff adjustments where our difficult and we will talk more about that during the presentation. Another good news is that Mata Velha is started early start-up. We had initial operations of wind farms for the free market. We will talk more about that as well. We have the renegotiation also of the hydrological risk of Baesa. This was one of the only major plant where we needed to do the renegotiation. It is completed now. You will see also a drop in our GSF expenses. We will talk about my succession as well. There was also an approval of capital increase through stock dividend that was approved in our shareholders assembly and new shares will be distributed to shareholders from May 5 on an investment of BRL0.5 billion in this quarter and also we disclosed our annual reports on March 31. It electronically available in our homepage. So now turn to page four. We have a breakdown of energy sales. You can see that in the first quarter in fact we had an important drop in energy sales of 6.4%. Here we have 5.2% in the captive market and the free market of almost 10%. And the breakdown for consumption segment shows that we had no segments important drop vis-à-vis the first quarter of last year. So the economic downturn is strong both in residential as well as commercial segment of around 5%, industrial segment of over 10%. That does not change our market profile. And in the bottom part of the slide you can see two important observations. We are in a leap year. So that comparison of drop is a little different too. We will go into details, both on bill volume as well as energy loss. But when we analyze the load in the concession area which gives us a wide view of what is happening, we see that we have numbers a little bit lower. Therefore we believe in the next quarters, we should bring those figures up. As I had said, the contracted demand is still positive, so we see a movement of a positive expectation of entrepreneurs and the industry. And obviously we see new companies coming in the concession area. That’s why we have lowered values to contracted demand, both for peak and off-peak as positive areas. As I said, we have the recovery of traffic in the renewable area. Therefore, our installed capacity now is reaching 3,128 conventional installed megawatts and that happens specifically in Renovaveis. On page 5, we have our outlook. We have reported a drop in the residential segment and what we try to show you with this chart and we possibly have reached the drop in 5%. It has been stable for a few months and obviously that is because of several situations and circumstances that caused it to become stable. First, last year there was an adjustment in the tariff that was unprecedented over 50% in the electric segment and now we also have negative tariff adjustment in the second half of the year. So we had to reduce both tariff side since the beginning of the year. So that pressure on the economy in fact has dropped. It is important to say that probably people and there is a great increase and they reacted and so we can see in our sales of LED lamp sales in 2014, the amount was 27 million and last year it amounted 81 million, tripled in number. So I would say that the consumption reduction is largely due to rationalization and exchange of equipment such as LED lamp ales that propose more advantages than conventional lamp. So considering future outlook, there is drop in inflation and because of that negative adjustments, we probably won’t have higher drops in the residential area, so that consumption per client should be stable along the year. And now that we the income of new consumers, we will believe that we will have a stable volume for the second, third and fourth quarters of this year. What is of our concern here is on page six and it is also a concern of the analysts, is delinquency. Arguably, we also are comparing ourselves to other companies and now our figures have been lower PDA or the ADA gross revenue is still lower event though Renovaveis have increased, we have an increase in tariffs compared to quarters that is higher than 50%, but we have here on the fourth quarter to the first quarter also an increase from 0.5% to 0.7%, 40% higher volume in terms of our allowance for doubtful accounts. This is something we pay attention to. There is a set of questions that we have listed in the bottom right part of the slide. So the company is working on it. We have been working on conventional energy cuts over 150%. This is the most effective measure right now. You are following delinquency in the different segments in the different industries, especially in the finance sector. So that’s why we also have the blacklisting and we have lower efficacy but we are also using the electronic protest and tele collection. We have tripled e-mails. We have the collection agencies almost 44% of electronic protest actually, the new initiative and it is important to highlight that this peak has in the background our economic scenario and this is something that we needed to acknowledge in the agency itself because the agency’s barriers are lower and in general all segments of the economy are going by this problem. Now on page seven. I will go back to one of our highlights. The total losses that have an increase in our area in March, but if we analyze the moving average of 12 months, it’s not different from the figures that we have seen since March of last year. But in March, especially or in the first quarter, we have that higher figure 8.63% first that reflects the higher unbilled invoices because here we have a leap year that has an extra day and the load which is not reflected in the billing schedule. And that is the main reason why we have that difference in the billed invoices and the drop in the load. So this should reflect in our billing schedule later on. And also we have higher temperatures in this last quarter that also impacts the figures for the unbilled voices. We expect impact the slight increase shall be offset in the following quarters. So there is nothing structurally that is responsible for this increase in losses except those two topics I mentioned that are related to the billing schedule. Now turning to page eight, we have the results of the first quarter. On the first line, we have the IFRS results and on the second line, it’s what we call the adjusted base. So you can have a more perennial outlook of our company. We can see that growth for net revenues, the drops of 20% and 19% in the two different bases. They are due to the integration of regulatory assets and tariffs, but explained that major drop that we had in our PDA obviously that also is related to the market. I will talk about that in the distribution area, they are lower and also we had the tariff lags that changed and the important news is that EBITDA has an IFRS result of BRL25 million negative and also we have BRL232 million in the net income that is positive. In the recurring base, we have 5.3% negative or BRL53 million, most of that refers to wins in the renewable area. There is less wind in this quarter and as it was said yesterday by the President of the company, that has been recovered in April. So this is an important significant effect now in the first quarter, but there is a recovery of half of that difference in April in our renewable activities. And because of that and the adjusted page, we have an increase of 6.7% or BRL70 million reaching to BRL167 million in the first quarter. The amount that determine these variations are in the bottom part of the slide, the proportionate consolidation of generation also Itaipu foreign currency variation that by fact as a new accounting that go into the EBITDA amount on the net income. So it’s important to have a recurring comparison of this reconciliations and also we have the nonrecurring effects, the extraordinary ones last year we had GSF and the Energy Purchase in two generation operations, generations and renewable, the adjustment of this emphasis and track record also have a specific adjustments is now on this year and also on typically Renovaveis has now adopted the hydrological agreement and we won’t have that impact anymore. So for recurring effect comparison we think it’s important to separate it. Therefore, I believe we have an EBITDA that has a stable impact as I have mentioned by this effect we will go into details and our net income is positive. On page nine, we that assessment of the company’s EBITDA. So to the outside we have the IFRS base and in the inside area that we are going to go into details, we help a drop of 5.3%. Basically, we can see that there is a drop in the distribution area, renewable generation as well. And distribution, we have a drop BRL37 million or 6.9% and it is related to the increase in manageable PMSO lower than the IGPM of the period. We have legal and judicial expenses BRL28 million. The allowance for doubtful accounts of BRL26 million and a drop of 6.4% in sales in the concession area BRL24 million. This way we have here a negative effect in distribution. So we did have gains, both in and the reviews and tariff adjustment that added BRL66 million and our company offer different groups and also that specific treatment of the PIS and COFINS as I have mentioned. So renewable generation, there is a drop of BRL26 million or 23.3% and basically half of that is explained by less wind in windfarms and that corresponds to BRL13 million. So we have SHPPs seasonality BRL10 million. We have that last year and this year as well. So we will recover that amount in the future structures and we have a PMSO of BRL6 million and also the renegotiation premium. On the other hand, we have conventional generations with a gain of BRL9 million with positive better performance of our thermal operations and others of BRL12 million in expenses with the GSF and commercialization services and holding is rather stable with a gain of BRL1 million. So the results are negatively driven because of the renewable impact, especially wind and also a drop in volumes in addition to the allowance for doubtful account and distribution. Now on page 10, just to give you an idea for the future. Somehow we started working with ZBB methodology, BRL320 million we reached BRL369 million. You have the chart showing it and obviously our future challenge is related to the subject which is productivity here. The company is deploying two important projects, one related to using technology to increase productivity in the distribution segment. We have a whole set of indicators developed by the company, the analysis of teams and unavailability and management of our workforce. So today we have more tools to monitor and obviously to integrate technology and automation and to increase productivity. This is something with a great potential and in the near future we will be sharing with you what this work is like. And we are also working with consulting services in a news stage for corporate companies. We started doing that now and we believe that in the near future we will be able to share with you and let you know what we are doing in these two areas. So this is something we have to do to add productivity to our group. Now turning to page 11, we come to net income. In the recurring reduction, it was almost 7% and in the IFRS base it’s 63%. Here as a negative aspect, we have a drop in EBITDA of 5%, we already mentioned it. We had an improvement of the negative net financial results. It is thanks to that adjustment of sectoral financial assets and liabilities, also a variation of discos’ concession financial assets, additions and late payments fines and installments debt. We will also have here BRL30 million for that and the mark-to-market effect, the operations 4,131, these are non-cash operations and also we have the PIS/COFINS over financial revenues effect because of new taxes and that is BRL21 million net and also we had a reduction of 3.3% in depreciation and amortization with the driver coming from the reduction in the amortization of the concessions intangible assets. And here we have an increase in depreciation and amortization also an increase in income tax related to financial operations of the company. So I would say that here we have a positive outlook because we have our stable EBITDA and we are working in that environment that we mentioned. Now turning to page 12. These are the tariff events. There were several ones in this quarter, starting in what we call the tariff reviews of our five concessions that have been renewed. So we have reported here the increases in Parcel A and Parcel B, looked at industry view they already integrated the increase in the net base, increase in the CACC and the remuneration of the regulatory assets base and also the addition of special obligations remuneration, we have a parcel B in a positive variation. The effect of these gains are up around BRL15 million and we have a pass through of BRL80 million. We have also the annual tariff adjustment for CPFL Paulista increasing in little over 10% parcel B and the average effect for consumers 7.55%, lower than inflation and we have the transfer off BRL951 million financial component. As we have said, we had an important drop of our CVA in the quarter of almost BRL1 billion and now with this last adjustment Paulista then, at the end of this semester will be very close to turning this key now to the positive side for the concession. In terms of cash of the company that will fall definitely because of these adjustment, especially for Paulista. Now on page 13, we have our indebtedness. And here we have adjusted net debt over adjusted EBITDA of BRL12 million and we 3.42 and remember that with the CVA coming in, we will be running at 3.22 and be adjusted by CVA cash in balance in here. We will be able to have the benefit of the leverage in creating value for the company. This is the good news and the bad news is the increase of the nominal cost of our debt, amounting 13.7%. Obviously, that is driven by the increase of the CDI. 70% of the gross that of the company is indexed by the CDI. So obviously we reach 13.7% and inflation is at 4% of real cost of that debt. Turning to page 14. We can see that we are at a comfortable situation in terms of cash coverage. Over BRL4 billion, over two times the cover the short-term amortizations. The debt has a net average term of 3.5 years and in the short-term only 11% of it. So this is a , comfortable situation in terms of management of our debt. On page 15, another subject that concerns which is that over contracted position and the good news here is that with this PH 04, the exposure that we had that exposure was eliminated. We had 180 average megawatts before PH 04 and six of our age concessions and the public hearing of ANEEL solving on 100% of the problems. We have some residual in one of the companies and here we are talking about very little figure, maybe less than 10% of those 180. So we are telling you that obviously PH 04 mitigated 4% and we have our distributors totally aligned for 2016. It is very important because considering the macroeconomic scenario for the future, we should do some reinforcement there. So here we have also the approval in April of PH 012 that simplifies the process for postponement of new energy contracts. Here is the potential of our variation, which is 2.5% that has to be dealt with. There is some potential for mitigation, but I believe this is more important especially for future perspectives and we have to work on that. And now so it is under discussion right now the impact of what is called the customers migration to the free market. And this is a huge debate here between the agents and ANEEL. And let me remind you that what I have mentioned about exposure of 180 average megawatts, that residual very amount is after that 1.8% going out. So it will be almost 100% if we do not have such an important migration of consumers 1.8% is a high figure. So now just to report some new points here. The Mata Velha, one-and-a-half years before the contracted period, a very important part CPFL Renovaveis, 13 average megawatts and the auction is May 16, 2016 and value was BRL155 per megawatt hour and we, in these last few months, already have a sale on the free market viable and things have already been released. On page 17, just to talk about plans still in the free market. The Campo des Ventos and Sao Benedito Wind Farms will come in this year, but also with this new regulation of the agency, we have allowed to have the commercial startup of certain generators. And so we have already had up to the state the entry of four wind turbines. And we have 110 towers which will be added. So we have a reporting scheduled for the coming into operation over the next few months of this farm and this is the first financed for the free market approved by the BNDES and we have the prospect of adding revenue to EBITDA of CPFL Renovaveis which is very important to other projects, which are under construction. The Pedra Cheirosa 48.3 megawatts and the Boa Vista also under construction and so what is really important is coming of the capacity at the very short-term, both for the Mata Velha and for these two new wind farms in the Northeast Brazil. And here CPFL Efficiencia and this is very important for us. CPFL coming in here in the solar distribution and generation through CPFL Efficiencia. Here we have the Algar plant in Campinas with all the solar panels. This has involved the change of 15,000 volts using the LED efficiency or bulbs technology and also the air-conditioning has been changed and replaced much of the fluids and the construction of two solar power plants in Campinas, 200 kilowatts at the peak and another 400 in Uderlandia, savings of 27% with energy efficiency during to photovoltaic generation. An initial investments of BRL6 million and this was inaugurated in March. So in Algar, we have savings of 3,500 megawatts a year and also postponement of the construction of a substation and also with this operation we can enter the free market and also CPFL Energia participates in gains with the solar generation for the next 10 years. And we have a BOT agreement for asset remuneration in six years and it is still the supply of free energy for the next 10 years. In fact, it is a win-win operation which is very important for the CPFL Efficiencia it is very significant. I am almost finishing, but on page 19, we have the performance of shares. The share had a better performance than IEE in Bovespa appreciating almost 30%. The same with ADR, 47%. So the exchange rates effect and with the CPFL coming back in January and recovered efficiency rate. This has had its effects on the volume of business. And on the left hand side here, the lower left-hand chart, we can see this and this is very important for the future. I conclude on page 20, showing you some facts about my succession. In April, we have amounts the succession plan. It is part of a planned process the company within the best governance practices I have been here with the group for more than 18 years. So I will finish the second quarter and I will be replaced by Andre Dorf who was the President or CEO of CPFL Renovaveis and has been with us now for about three years in the company and has done outstanding work in the Renovaveis. And he will come with all his youth to manage this new phase of CPFL and we are delighted with this and in this quarter, we have carried out an integration program with the team and Andre has taken part in many activities with us so that he comes in on July 1 playing to win. So ladies and gentlemen, this is what we had to say about our results and my team and I are now at your disposal for questions. Thank you. Question-and-Answer Session Operator [Operator Instructions]. Our first question comes from Mr. Kaique Vasconcellos from the Citigroup. Kaique Vasconcellos Good morning. I have two questions. First regarding demand. You said that you will have more stable demand and have had a shrinkage. So up to May, what have things been like? And what are the prospects for the second quarter? And second question is about amortization. So you have cash to cover the short-term amortization. So what are you going to do? Wait for better debt situation in the market or take CDI or any special spread that you are waiting for? Thank you. Wilson Ferreira Jr I will ask Leandro to answer the first question and Gustavo the second. Leandro Cappa Hello. Thank you. The April market has not yet presented the recovery that we expected because it has resolved. We have seen the load improve at the end of March and now in April. But the unbilled that Wilson mentioned has not yet come in load because of the mismatch that we have of reading days, the meter reading. So April was a hot month. So this impacted and helped with the recovery of residential factors. But the billed market, we will only see this during the second quarter. well, in fact, we are seeing that we do in fact have an expectation that this year we will be able to work with almost flat volume. Today we are working with the prospect that it won’t be flat. It will be between 1% more in terms of volume of negative, I am sorry. Gustavo Estrella Regarding liquidity and rollover, I think that the market has confirmed our expectation of credit restrictions allied to an increase of cost. And I think this has been a market trend in general. What we have done was basically bring forward a rollover. Basically last year we have few needs to rollover our debt. Today, in the company, Wilson has shown that cash of BRL4 billion, we have already covered everything that we need for 2016 and 2017. So our focus today for rollover will be only for 2018 which gives us a very much more comfortable situation so that we will be able to fetch extra situations of rollover when they are needed. And we can work from the management of the debt, we are already thinking ahead 2018 and we have plenty of time to find the best moment of the market. More important is that those discussions regarding infrastructure for the distribution sector, this discussion goes on, both the Ministry of Finance and the Ministry of Energy, we have here positive outlook to access the market for distribution and we can rollover lesser cost and greater terms, longer terms. But we don’t have anything now which obliges us to look for money to rollover the short-term debt. We are in a comfortable position for the company at the moment. Kaique Vasconcellos Thank you very much. Operator Our next question comes from Mr. Vinicius Canheu from Credit Suisse. Vinicius Canheu Good morning. I have two questions. One, I want to know if you could breakdown what was the loss with the over-contracting? And second, something which I did not understand, when you see slide nine regarding distribution, you show the gains with the pass through of Parcel A. I would like to know why did this impact the results? Because generally these movements of Parcel A are in the asset and liabilities, regulatory abilities. So why did this come into the result? Thank you. Leandro Cappa Hello Vinicius. This is Leandro. At the moment, when we have the tariff adjustments, we have some gains, because we have been very conservative during the year in our accounting and when we do the adjustments as happened here with the Paulista, we had a gain with Parcel A at the time of the tariff adjustment of this amount to BRL66 million. About half of that is just simple because of the mismatch and also because of the unbilled amount which is later, it does not have an effect. So we have a temporary effect. And during the second quarter, we will normalize this. So of these BRL66 million, half is temporary. So this will come back during the year and half is because we were conservative during the year and we have some gain at the moment of the annual adjustments. Vinicius Canheu Okay. Now could you talk about the over contracting please? Leandro Cappa This had zero impact of the first quarter and none at the distribution company. Operator Our next question comes from Miguel Rodrigues, Morgan Stanley. Miguel Rodrigues Good Morning. I have two questions. First, recently we had the regulation of ANEEL for the group of concessions. Could you talk a little bit about the possibly gains and risks of CPFL, if they managed to group together the five smaller concessions? And secondly, could you comment a little on the change of the methodology of the PLD, calculation of PLD and what about your risk aversion? And is this the best way to adjust the model or do you think that the model should be reviewed more thoroughly? I would like you to elaborate on that please. Wilson Ferreira Jr So starting by the grouping of concessions. Miguel, at this moment, we are evaluating this alternative. We will bring to the Board probably next month. We will bring this up to the Board. The grouping brings marginal gains to the company, but there is something that we don’t know. There are five reports of balance sheet against one balance sheet. So there will be a gain. There are five processes of adjustment and review against one. I have no doubt that some marginal gain will be possible. Our evaluation here is more of a rationalization because this is inside the company also determines for every adjustment processed, the man-hours that you must account for. So there is a gain. It’s not significant, but it does rationalize both our work team and particularly ourselves. We think the gain is more of process rationalization which makes more sense. But for the point of view of consumers, it might have the advantage of a larger area with the same tariff. It’s very difficult for us to face different tariffs from one municipality to another. This occurred in the five distributors. We would try and avoid this. We understand that the regulation was established, it’s good and we, in the next few months, will propose this to the agency. Regarding the PLD, the spot price. Regarding the review of the pricing methodology, there are some points, highlights here. The concern of minimizing, the model must reflect as well as possible the operation cost of the system. Another important point is that in case of an alteration of the methodology of the pricing that this not be done in a raw way because this will cause impact on the market negotiations in the pricing method of the agency. So you must have time to apply this change and it does not cause negative impact for the agents and a negative impression. And if you have to change things, this is under study and the CPFL Group is still studying whether this is the best way to adjust the model to improve this outside the merit. There is no way to. This is under study. We have not decided. Miguel Rodrigues Thank you. Operator Our next question comes from Marcelo Sa with UBS. Marcelo Sa Hello. To continue, it seems that there has been an increase regarding the long-term price that the collective bargaining is discussing BRL120 to BRL122. Is this because of the change of PLD? Or was it for any other reason? Is the hydrological scenario, would it be more difficult next year? And could you give us more data regarding the privatization of the Sul, do you have a new schedule or new price review with the new government, will things change? Wilson Ferreira Jr Regarding your first question, naturally the evaluation of the price curve involves many elements. The discussion regarding the formatting of the price is one of them but you have elements like the delay of Belo Monte line, which affects the price. Hydrology, well, there is a difference of expectation regarding the former one and there are several elements reflected here. It’s not a significant variation of the price, just adjustment of different variables. But nothing stands out regarding the price variation. The second question. We have not been officially informed regarding the process and we now have a new government and this would be important to review as quickly as possible. Obviously the price, there is an error, just comparing comparables of multiples regarding the bases and you will see that we have here a mistake. The sector now has, because of the regulatory movement, we are made important progress regarding the rules of distribution and we see the different states and Electrobras needing cash for the question of privatization, which could bring many benefits to those who want the concessions and for consumers, as I see it personally, should be stepped up considerably in the next few months. Especially, we don’t want to increase taxes. So one way of capitalizing companies and governments is to do this where everybody can gain. So two-thirds of the concessions are private. In all governments, there has been with a greater gain of tax because of the better efficiency of these, better quality and obviously the use of that resource for the rebalancing of public accounts and whoever is doing the selling, I believe, the shares that all the analysts have said that all those interested have already manifested their interest and I would think within the next days or months, we will have the review of this amount. Marcelo Sa Thank you. Operator Our next question comes from Ms. Sergio Tamashiro from Haitong. Sergio Tamashiro Thank you. And Wilson, I wish you all the best in your new activities and Alberto as well. Second continuing regarding the new government now with the entry of Fernando Bezerra, we know that this future government has a quick need to attract new investment to try and reverse this trend towards economic shrinkage. So in your sector, what steps do you think might be taken? You mentioned the process of privatization in the distribution sector. But what other steps could be taken and do you think could be implemented? A greater flexibility in the — what can you imagine? The second question regarding the level of debt, you had said that there was no problem here. There was no short-term cash problem and quickly you are coming into a fast leverage situation. You will have a lot of cash and then you will be thinking, well, among these new projects and you are seeing capacity of generation and new projects for distribution. So what are you seeing? Will you be interested in these other projects? Expansion into other countries? So what would be alternatives? And finally, I would just like you to elaborate regarding the level of losses. It’s a very simple thing. You have the numerator equal losses and then under that the low voltage and these two indicators seem, even in leap year, they are equally intense. So I don’t understand why only the numerator feels the effects of the leap year. Wilson Ferreira Jr Thank you Sergio for your questions and also thank you for your good wishes. One of the things besides being team tried to CPFL, I will continue here being the Chairman of the Board of ABRADEE. We have had a chance to talk to some of the members who will be involved in this process. And with an overview, I can say that the government has already taken the first step with the talking about the partnerships for investments, I feel that there is total clarity [indiscernible] with the attraction of an investment is the most important thing to [indiscernible] invest in capital and infrastructure. So there are two points here. First of all, [indiscernible] in many of the projects we have projects that are up for bidding but have not yet been put into practice also for environmental projects. And on the other hand, we have an important agenda to show legal security and regulatory stability. I think the discussions will come along regarding improvement of the regulations for the agency, improvement of the auction conditions. I want to be very frank with you regarding the electric sector. I think we have made great progress last year and this year, because most of the election, except the last one for distribution had participants and all the lots were sold. In a specific one, the last transmission auction we had the entry of new agents and we did not have the presence of some important private agents or even public that have always been part of it and the main reason was because the fact of the nonpayment of the RBS, was harming these agents, something which was done on the last day of the management of Eduardo Braga. The electric power sector today where the ceiling prices have gone up and because of competition and this is the right way to establish price and this implies in each one of these themes a higher remuneration on your own capital and also as Gustavo has said, the increase of financing or the increase of this ceiling. So the environment expropriation themes will be addressed by the next 12 months. It’s very important that infrastructure if it is useful to country and we can go from 2% to 4% of GDP in investments very quickly. This must be followed by the recognition of this importance. It means that we will have people with us and entrepreneurs trying to make things easier with the government and not complicate it. Everybody wins with this. Things become simplified. The work is delivered more quickly to the population and work is distributed more quickly. As it gets the explicit show that the theme of the investment in infrastructure and the poetry is something very smart. And this committee that is going to manage this is doing right. So they are going the right way. And the electric sector has already done a lot of this improvement. But generally speaking, so that the environment be generalized and not only for the electric power sector, many elements, be it in the agencies or the laws that support the expert preparation which comes from 1941 and all the other periods of loss, the things lost, all have to be reviewed. And I am very positive about that. Now one last point, I think, was the losses. I will call upon someone on my team. Luiza Mariko Hello. This is Luiza Mariko from market planning. As you said, the calculation is simple. What is the difference? We are performing a loss in May where the average is 8.1%, it’s higher. You have more load than market at the moment because you have the effect of temperature on the lead. When you do the reading in the month and it’s a question of date of the month. One is right at the beginning and one is right at the end. So this amount of energy which is not billed from March 15 until the March 31 had a strong temperature effect and as you have said, the load of the year has one day more, 366 days. For the reading, it’s still 365 days but there were more then 100 gigawatts accumulated and I am talking about the residential and commercial areas. Well, looking at this question of losses and as is indicated, as this will effect other quarters, this losses will probably drop. The temperature will give us back its effect in the calendar as well. At the middle of the year, we have three 365 days and so those effects of the calendar and the temperature will give us back the losses stabilizing this expectation. Sergio Tamashiro Now going back to this question of new investments, Wilson, I think the government will be attracting new investments as a priority. Now specifically the electric power, especially the great generators, there was a strong participation of the construction companies. Do you see any structural changes for the fact that this company is no longer here and there is not a participation of Electrobras and they are only private companies? Wilson Ferreira Jr Yes Sergio. I think you have had that. For example, if you take in transmission, the last auction, the great largest lot was sold to a front of infrastructure investment. So these agents that are coming in and if they are skilled, there are many resources in the world looking for investments to have these prospects that we have in Brazil. I would say that it is sure that we will have new agents here. But the CPFL, well, in the specific case of public companies, just look at the balance sheet. It is a difficult situation and I think it’s already difficult to incorporate what has been signed. So you need financial discipline to manage these companies and we participate in these investments. But with the improvement of the economic and regulatory environment and the legal environment and the business environment that this new government is bringing us, we will certainly be capable of attracting investments from other places in the world here because of the demand that you will be offering each one of them. This is the only reason, the only good point of not having invested very much in the last few years, is that there is a lot of repressed demand that can be met. And in fact, as I had said at the beginning of the year, we overcame this small acute moment of the crisis. And CPFL, just look at the indicators of solvency of liquidity and of indebtedness, the company’s situation allows it and I think that this is the main point of this new phase will come in to a new cycle of growth. The company has a very good structure to evaluate these alternatives and fortuitously we have here, if you take the breakdown of the company’s EBITDA, it has a 45% distribution, 45% generation and 10% in commercialization and services and it’s very well balanced. If we could keep this, then certainly we will do so because I think this balance is very good. The opportunities appear and we are looking at most of them according to our strategy which is to follow in the three businesses that we have said. Very focused on the electric power session and distribution and expansion or through M&A or greenfield in generation. We have experience in both and in the strengthening of this activity of services which has been an important arm for the company to make consumers more loyal or to capture new clients. So this structure is possible. But you can’t choose, if it’s a consolidation and this big steps to us to create value, this is very important. We don’t want market share, we want prospects to increase our value and improve our corporate structure. So this is what we want. The company is very aware of this and the group of opportunities is there and we are evaluating them. And we will present the best options which will bring about better value creation for our shareholders. This is our value, to create this and share with the others. Sergio Tamashiro Okay. If you will allow me a quick follow-up, although you have a positive entry on the Itaipu [ph] and also we see other companies came in the electric energy sector and I don’t know, maybe in my point of view, that could be somewhat risky. We have seen in other auctions of energy generation that the new players later on had difficulties in going forward Genpower, Bolognesi. I am not talking about Bengo, but you see that future-ly these assets being that are developed by them so that they would come in the secondary market. What is your point of view? Wilson Ferreira Jr Yes. You are right on your comment. I believe that in the development of the regulation in the auction processes, we will have two things. First, a more correct evaluation in the financial services of the bidders, actually. So some of them maybe would not be approved by the bank. So there was an improvement in the bidder’s qualification. And on the other side, we have a faster pace in the assessment of the delay. There are projects that today are at the base, also of the distributors and we already know that those will not happen. So here we should have a faster pace to make the decision and say cancel the project. That will generate the needed demand for the future because so far, well, when the project is seen as a potential to be connected in addition to the delay it might cause and sometimes this is a serious delay and that could cause a fluctuation in the market price, you then want to do investment that would be needed there. So here we do have adjustments and improvements to be made into the process and I believe that in the system of partnership and investment that has been announced yesterday probably will address the issue. But yes, we do have homework to do, both in qualification as well as in following up the process and in a possible cancellation of that participation considering all the consequences that could be attributed to the bidders. Sergio Tamashiro Thank you very much. Operator Our next question is from Ms. Carolina Carneiro, Santander. Carolina Carneiro Good afternoon everyone. My question is about the next reserve energy auction. The company has any projects that would be interested to participate on that? And a second question, in the prior call, you talked about a flat demand this year and you see a small growth and I would like to know if the economic data and billing data that you have seen in the first quarter, if that estimate is still there? Thank you. Wilson Ferreira Jr Carolina, starting on your second question. I mentioned in the call, yes, with the results of this first quarter we reviewed our projections and we estimate that it’s not going to be flat, zero. It’s going to be slightly negative, maybe one, we could be reaching two. About the reserve energy auction, especially in renewable that has been said yesterday, yes, we do have a set of assets and we will assess timely our interest in taking part on it. But yes, we do have potential assets to take part in this bid or on this auction actually and we will have a saying on that briefly. Operator The conference call of CPFL Energia is concluded. We thank you all for your participation. Have a nice day. Thank you. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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