Companhia Paranaense de Energia :ELP-US: Earnings Analysis: Q1, 2016 By the Numbers : May 26, 2016

Companhia Paranaense de Energia reports financial results for the quarter ended March 31, 2016.

We analyze the earnings along side the following peers of Companhia Paranaense de Energia – Centrais Eletricas Brasileiras S.A. – Eletrobras Sponsored ADR Pfd Class B, CPFL Energia S.A. Sponsored ADR, Companhia Energetica de Minas Gerais SA Sponsored ADR Pfd, AES Corporation, EDP – Energias de Portugal SA Sponsored ADR, Edenor SA Sponsored ADR Class B, Enersis Americas S.A. Sponsored ADR, Gerdau S.A. Sponsored ADR Pfd, Petroleo Brasileiro SA Sponsored ADR and Korea Electric Power Corporation Sponsored ADR (EBRBY-US, CPL-US, CIG-US, AES-US, EDPFY-US, EDN-US, ENIA-US, GGB-US, PBR-US and KEP-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 801.45 million, Net Earnings of USD 34.81 million.
  • Gross margins narrowed from 25.44% to 19.33% compared to the same period last year, operating (EBITDA) margins now 18.88% from 23.67%.
  • Year-on-year change in operating cash flow of -20.53% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-03-31 2015-06-30 2015-09-30 2015-12-31 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 1462.01 1262.01 885.77 854.41 801.45
Revenue Growth (%YOY) 11.94 -9.86 -37.64 -50.99 -45.18
Earnings (mil) 149.74 88.9 23.91 101.35 34.81
Earnings Growth (%YOY) -34.8 -6.82 -74.81 9.34 -76.75
Net Margin (%) 10.24 7.04 2.7 11.86 4.34
EPS 0.56 0.33 0.09 0.37 0.13
Return on Equity (%) 12.52 7.92 2.35 11.16 3.55
Return on Assets (%) 6.58 4.05 1.19 5.61 1.76

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Market Share Versus Profits

Revenues History
Earnings History

ELP-US‘s change in revenue this period compared to the same period last year of -45.18% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that ELP-US is holding onto its market share. Also, for comparison purposes, revenues changed by -6.20% and earnings by -65.65% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 25.44% to 19.33%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from 23.67% to 18.88% in this time frame. For comparison, gross margins were 22.12% and EBITDA margins were 19.69% in the previous period.

Gross Margin Versus EBITDA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

ELP-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 48.43 days, compared to last year’s level of 26.35 days.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

ELP-US‘s change in operating cash flow of -20.53% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 19.91% to 13.06% and (2) one-time items that contributed to a decrease in pretax margins from 15.82% to 4.67%

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

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Company Profile

Companhia Paranaense de Energia engages in the generation, transmission, distribution and sale of electricity. The company also provides telecommunications and other services. It operates its business through the following segments: Power Generation and Transmission, Power distribution and Sales, Telecommunications, Gas and Holding Company. The Power Generation and Transmission segment comprises the generation of electric energy from hydraulic, wind, and thermal projects, the transport and transformation of the power generated by the company, and the construction, operation, and maintenance of all power transmission substations and lines. The Power Distribution and Sales segment comprises the distribution and sale of electric energy, the operation and maintenance of the distribution infrastructure, and related services. The Telecommunications segment comprises telecommunications and general communications services. The Gas segment comprises the public service of piped natural gas distribution. The Holding Company segment comprises participation in other companies. Companhia Paranaense de Energia was founded on October 26, 1954 and is headquartered in Curitiba, Brazil.

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