Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. Welcome to the earnings release of Copasa about the results of the first quarter of 2020. We have here today, Dr. Carlos Eduardo Tavares de Castro, President and Director of COPASA; and Dr. Carlos Augusto Botrel, he is the Financial Director and RI Director. Well, we will record this presentation and all the participants can hear the earnings call. And thereafter, we're going to start the Q&A session when we will receive more instructions. [Operator Instructions] This event is also being transmitted simultaneously via webcast and you can access it at the ri.copasa.com.br, the Investor Relations website, where the presentation is available for downloads. Before we continue, I would like to clarify that any statements that might be done during the teleconference regarding to the perspective, business perspectives, projections and operational goals, financial goals of COPASA constitute, premises and expectations of the company, as well as based on information that is currently available. They involve risk and uncertainty because they refer to events in the future. And they depend on circumstances that might or might not take place. Changes in the macroeconomic policies and legislation might affect the future of this statement and might lead to results that are different materially from those that are presented here today. Now I would like to give the word to Dr. Carlos Augusto Botrel Berto, he will start the presentation. Dr. Carlos Augusto Berto. Please, the floor is yours.

[Carlos Augusto Berto, executive]

Thank you, Marcelo, once again. It's a great day to be here with you once again to talk about the earnings release of the first quarter of 2020. Let's go directly to the grain. If we start with Slide #2, we can talk about the financial highlights. Our revenue has grown 9.5% in regards to the first quarter of '19, getting to BRL 1.2 billion. The cost in expenses, they grew 7.5%. And in the same period, getting to BRL 857 million against the BRL 787 million that we had in the first quarter of '19. The EBITDA grew 7.3%. In the period that you can compare to '19, getting to BRL 474,926,000, and these are the revenues that grew above the standards. Our EBITDA margin was of 38.1%, very close to the margin observed in the first quarter of '19. Our financial results because of the valuation of 29% in the dollar and 26% in euro is BRL 41 million in the first quarter of '19 to EUR 93 million, in the first period of '20, this is due -- well, unfavorable directly affecting our net income observed that has a reduction of almost 14%, 13.9% in regards to the first quarter of '19.

If we go to Slide 3, we will present the revenue -- well, the operational highlights of water and sewage, we had an elevation of 9.5% because of the repositioning of the tariff of 8.8% applied to registered consumption in August of '19, the growth of economies of water of 1.5% and sewage in 1.8%. The operation of the tariffs in the 5 municipalities several regions, we have approximately 57,000 economic units that migrated to EDT. And we have the registration of customer clients that we have the review with the CAD unique in the federal sphere. We have the recategorization of the client in social resiliency category. We have sewage now, even though we had an increase in the units or the economy, the volumes of sewage had a reduction respectively of 1.7% from 0.8% in the same period, respectively, of sewage and water due to the heavy rains that we observed in the early part of the year. This reflected in the units of economy for water and sewage that had a drop of 2.8%.

In the next slide, we show the evolution of our administrative costs that grew 4% in the first quarter of 2020. If you have the comparison of '19 getting to BRL 557 billion. Well, the first -- the main factors. The personnel cost, 7.3% in regards to the first quarter. We have that increase mainly due to the provisioning for the readjustment of salaries that we have the agreement of '19, and we have 0.5% and an elevation of 8.8% regarding to the health care plans.

Now talking about the subcontracted parties, we have here, the main items were a reduction with the services of conservation and maintenance, here we have the vehicles themselves that are from the operation and the accounting. And they are registered as depreciation and interest rates as we have the DPC 06. Now in regards to PPP of Rio Manto, we have a drop here, comparison the first quarter of '19 and '20. This decrease due to the reduction in the expenses with electrical bills because we use less of this once we start capturing the waters of the Paraopeba River. We have the accounts receivable, the drop that had an increase of 2.7%, due mainly to the readjustments of tariffs 2019 because the application was applied in August of that year and the methodology of recognition of those numbers, and we are evaluating the evolution of the pandemic and the values. And in the second quarter, we will have a more clear position as to the need or not of doing a provision -- additional provisions or not. Thereafter, we have the tariffs that we work with the municipalities with an increase of 49%. This increase is due to the municipal funds, 59 new municipalities, 59 new cities because of the 110 resolution. In the next slide, Slide 5, we show the evolution of the costs that grew 18.1% in the first quarter, getting to the value of BRL 134 million. The main factors were. I'd like to call, bill. We had a drop of 4.7% on one since we had the credit regarding PIS/COFINS taxes that contribute to the reduction of that account. On the other hand, we had an increase of the application of the tariff in March of '19 and the reducement of the tariffs, subsidies and the tariffs and the increase of 2.1% in the consumption.

Let's talk a little bit about the treatment materials. It grew to 44.5% in regards to the first quarter of '19 due to the increase of the main products that we do for water treatment, and we've observed the increase of those prices in regards in 2019 and the increase of the main chemical products that are used. We also had a reduction of 57% in the tariffs in the tax credit, the taxes on income and the PIS/COFINS that -- and those have been increasing gradually. The increase of 9.6% of the amortization and depreciations, they reflect mainly an increment in the intangible assets and the other points.

Now we go to Slide 6. We show you the other positions of the personnel. Now in regards to the other operational revenues, we had a drop of BRL 8.5 million. We have the reduction in the recovery. And here, we had the operational expenses. We have BRL 14 million and we have an increase of BRL 13.6 million in digital processes, of which BRL 7.9 million are regarding pricing of the -- risk pricing and constitutional provisions for civil and labor issues that are covered. We also had BRL 4.7 million due to the judicial deposits and processes that are finalized where the company did not have any success. Now the participation of the personnel and the profits, they have a drop and they accompany the reduction in the net income of 2020.

Now Slide 7, we present the data from the investments of the company, the investments projected for 2020 as approved by the council is BRL 816 million and -- for COPASA and BRL 37 million for COPANOR. In the first quarter, COPASA invested BRL 95 million and COPANOR BRL 106 million. For the next year, the investment program predicts investments of BRL 1.18 billion for COPASA and BRL 37 million for COPASA for each year of the quadrennial.

Now Slide 8. We had the debt of the company, and we have the debt -- gross debt and net debt and leverage. The gross debt was BRL 3.8 billion in March, of '19 had a decrease of 3.1%, reaching 3.7 -- BRL 3.379 billion. Now the net debt also had a reduction. The net debt BRL 2.6 billion. In March of 2019, it was BRL 3.8 bllion. The leverage index measured by the EBITDA ratio got to 1.5x in March of 2020. Now if we go to the next slide, 9, let's talk about the indexes of the debt. We had the total debt had a reduction of 1 point -- 1 percentage point, going from 6.9% in the first quarter of '19 to 5.9 percent in March of 2020 due to the drop in the interest rate here practice in the country in the indexes of the debt. The contracts were financing had a reduction in the representativeness facing the total indebtedness going from 20% of the total debt in the first quarter to 19% to 16% in the first quarter of 2020. Now we had an increase in the percentage participation of the contracts that are connected to the IPCA rate in the part of the debt and these represented a 20% of the total indebtedness of the company in '19. They is up to 24% in the same period of 2020, due mainly to the capturing of the 14th emission of inventories that happened in June of 2019, once that the second series was connected to the IPCA rate once again. Now indebtedness, measured by the EBITDA and the net revenue, the percentage is 48% in the first quarter to 39%, well, comparing '19 to '20 due to the reduction in the indebtness.

Going to the next slide, we will talk about the payout to the shareholders. For 2020 as we have from the Board of Directors, we approved in March '19, the provision of dividends that corresponds to 25% of the net revenue adjusted we -- in 2020 -- in 20 of March, we have the JCP collections of the first quarter of 2020, and the payment will be done in May 19.

Now going to Slide 11. We finalize the presentation of the financial data, and we will talk about a little bit about the contracts for the connections up until March of 2020. COPASA and COPANOR and the other companies, we have 641 water concessions, of which 629 are in operation. As to the sewage services, 311 concessions, out of which 264 are operational. The closing of the quarter, we had 11.6 million inhabitants with supply with water and others with sewage. On the -- here on the right, we can see the main concessions or capacity correspond for almost 53% of the total invoicing. In February of this year, we renewed the water concession and sewage concessions for 30 years. And Santa Lucia, which is the biggest infection. In March of 2020, the company had 64 concessions that were due and -- they represent 2.7% of the revenues of the company.

Now in the last slide, we can see the water situation of the metropolitan region of Belo Horizonte. We see the levels of the reservoirs that compose [indiscernible] They are responsible for the service for 47% of -- to the metropolitan region. They are practically full due to the high cubic meters levels registered in the early 2020. Now in the Rio das Velhas system, which is responsible for 42% of the supply to the region, the information that are here on the right, the average outflow in the days before May 10 was 4.7 cubic meters per second. The average flow of the capturing of the system was 6.8 cubic meters per second.

With that, we finalize our earnings release of the operational and financial numbers of the first quarter. And now I will give the word to our President, Carlos Castro for his ideas and thoughts.

[Carlos Eduardo de Castro, executive]

Well, good afternoon, everyone. Thank you for being here. Always a good opportunity to talk to the analysts and the people that are specialized and those that are getting the detailed information on the results of the company. Now what we achieved in the first quarter of the last year is, keeping an emphasis in gains of efficiency and productivity. Therefore, this Board of Directors maintains the focus in increasing the generation of value and making the company more competitive, so we can have success in renewing contracts and because of the Santa Luzia M&A, let's just say, that had occurred. And later, this process, we have -- our due processes we have here today talks with the powers in play about all these cases. On the other hand, in regards to the participation in public bids, the company made it very clear what is our position in regards to that. So at this moment, we will go -- turn to these processes that occur in the state of Minas Gerais company, follows up attentively to everything that is in the new rules for water supply and the company will be made available and new opportunities beyond the frontiers of the state of Minas Gerais. Another point that has been discussed for all the productive sectors, and this is not different from the water supply and sewage. Well, the COVID-19 pandemic, the results in the business, we've had done a constant evaluation of the effect. The first quarter, the results are -- but we didn't find a lot of impact. In April, we had a very complicated month and then it reached the level that we understand that we will gather a reversal, but the receivables are very profitable in a reasonable scenario. All the actions that the company has taken, there were a few in the first quarter. And along with the strong ratings that we had in Minas Gerais, we are always asserted and aligned with the regulatory agency. So we're talking about measures that involve delaying the dues from the most vulnerable crisis, and we have such a contribution. We have the commercial category -- well, the commercial part could not work. So we delayed the due date of the bills, and this is alongside with the regulatory bodies. So if any adjustments are identified, we can capture them by the regulator itself and make it adequate in the context of the tariffs of the company.

From the strategy of payment and receivables, we have a differentiated on look our market relations -- directorship has taken a proposal to the regulator as to the flexibilization of the installments. This has been a very positive result. Notably, even due to the recovery of clients that were not paying due to the dynamic. So this is an opportunity to capture value with this operation. Now there was an identification of the campaigns that the company does, and the effects are becoming more positive and evident. The expectation to stabilize this drop in income and a reversal for the next month is expected due to the actions of the company itself. And as the adoption of the flexibilization from the social isolation and a program -- recovery of the economic activities might take place in the future. We have to bring attention to the teams that we have here at the company, which today we have approximately 37% of our professionals that are in home office, and they have a negative working hours, and they're generating liability for -- that has to be managed for the future, given that we are -- have a lot of operational contingency that is not in the street. This is an issue. But this is due to the safety issues, and we have to start working with the PDIs, the protection equipment, and we want to preserve families and lives since the inception, our relation of our customer service is taking care of our customers. We closed the physical stores, but the digital channels are open, and they have been broadened. And so we can work with the demand of negotiations, the delay of installments, even -- and we identified a big opportunity of intensifying these channels and some contracting these tools.

And going back to the first approach, this is an opportunity of gain of efficiency and productivity for the company. This is very important, and we are -- we had the reading here the -- we made available to the customers, and we leverage the possibility of the -- we have a big number of well -- the readers really that are still in the houses and we don't have to have the customer -- the contact with -- well, we have the internal water meters. And really, we want to avoid the readers who got in continuate the people, and we can keep the social distancing. And the COVID, we try to at least do the readings weekly from the readers, and we have the management of our professionals as well as we have an unlock on the impacts that occur over the business. Of course, we are certain that we will beat this period and we will have the opportunity for regaining the growth. The important thing is that during this month, we have a dialogue with our partners and suppliers. In the same way that we are trying to utilize the conditions that the federal government provides for the entrepreneurial class to defer the payment of certain taxes, INFS, PIS/COFINS. We also discuss with the main providers and partners to negotiate with them, deferment payment of their invoices in such way that the company can still be solvent and keeping the cash flow in the period, especially at the beginning of April, the period was uncertain. Of course, the uncertainties remain. But today, we have a condition of navigating through this period. Through these turbulent waters, but we have a direction of where we're heading. We have the investments regardless of all the difficulties. We have kept the investments and we are trying to intensify the actions that were somehow hindered in the first quarter because of the heavy rains, and we could not do -- or continue some work that we're already ongoing. But we had the expectation of recovering that with our volume of investment so that it can be reached. Additionally, we -- our regulatory agency published over the last days, starting the review of the tariffs for the company is getting ready -- very adequately ready to participate in this debate, not only with the regulator but with the entire society, so we can identify everything that affects water supply and sewage supply.

Well, so the technical composites team is here facing this, and we are opening and broadening the debate with society and the regulatory bodies. This is all that I had to do to highlight, and we are ready for the Q&A.

[Operator]

[Operator Instructions] The first question will be from Giuliano Ajeje from the UBS Bank.

[Giuliano Ajeje, analyst]

My name is Giuliano. I have a few questions. The first one, so I can understand a little bit more about the payment of the interest rates. I just wanted to understand, first, if there is the possibility of payment payout to the dividends, since there is a lower leverage. And these are some of the factors that might make you get to a different bill. You have a stronger cash flow, you commented of the possibility of expanding the concessions. These are two factors to strengthen the cash flow. And can you talk about the critical situation in the state of Minas Gerais?

How should this decision take place? With the latter explained to the investments the effects of the pandemic. Also, I wanted to get from you, what is -- why hasn't default taken place yet? And if you can go over the negative number, please.

[Carlos Augusto Berto, executive]

Giuliano, answering your question -- we're going to start to answer it in parts. As to the extraordinary dividends, these are under the deliberation of the Board of Directors. They can deliberate in 90 days deadline and about the dividend -- extraordinary dividends and taking into consideration the pandemic itself that is affecting us as well.

[Carlos Eduardo de Castro, executive]

Giuliano, Carlos Eduardo speaking. Just to complement on the answer of our CFO. And to the second question of your -- second part of your question. The government of the state of Minas Gerais is still the controller with 54% of the company. And they placed in the Board people that have had the responsibility to conduct the business in the best way possible. Of course, we had actions here that are interesting, but everything is deliberated. To taking into consideration the best interest of the business. It's very premature to say anything if the Board of Directors will deliver -- will deliberate favorably or not, but whatever is manifested, they will bring more explanations for the market as a whole. It's undeniable, and we've had a lot of different movements with an anticipation of position, but we see the set of companies taking measures that are very conservative in regards to the impact of COVID. Of course, COVID is a theme that will be in the -- will be one of the main issues that the Board of Directors will debate about, but any position of the Board of the directors takes them anticipation. As to the debt of water and towage, the news was in the previous meeting that there is almost -- we almost got the consensus of the leaders in the financial debt. This will be voted. There is only one leader to sanction this agreement and the result is positive as to the conduction of the agenda -- political agenda, and there will be 120 days that we will have approved even with the unlock, so that we do not modify the tax of the tender of deputies. And you should see that in the last manifestations of the minister of economy, we've listed the credit for water and sewage, the utilities. The -- we have some initiatives that can contribute to the regrowth of of the company -- economy as a whole. We are optimistic and we think that this brings a great opportunity from the standpoint of elevating and demanding that the companies are efficient. COPASA has the conditions to occupy a position of highlight that is very relevant in the market. We've got, at this point. We've got to a curve of efficiency, productivity and more value generation. And we're at the point of becoming very competitive to fight, first, in our state. And then in the second moment, we can work with the entirety of the national territory of Brazil. And the governor, which represents the bigger shareholder, has contained the intention of adhering to the destatization program. That's the position of the state government. And for that, we need to advance, and we have the regulatory framework. And of course, the results of the legislators of the state of measure. But the management of COPASA is focused on these pillars, productivity, efficiency, competitiveness, and we will generate more value for the company, regardless of whatever is the main shareholder -- controlling shareholder.

[Giuliano Ajeje, analyst]

Another question. I want to discuss the impact of coronavirus. I also want if you talk about the bad debt. This is around the public sector. But -- well, I just wanted to talk a little bit about the default rates and the [indiscernible] you pay. What is our position?

[Carlos Augusto Berto, executive]

In regards to the revenues, Giuliano, we are working from the standpoint of selling the service provision, so getting volumes with -- we had a small drop and there is, as you mentioned, the expectation of compensating the migration from one volume to the other. Nonetheless, on the other hand, what we are going to start to see, and the scenario is the price of selling that is lower due to the differences in the categories and the tariff of the category A is relatively high. But our analysis of studies and the scenario that we will face is that we will still have a smaller revenue than we projected initially. However, as you mentioned, utilities in COPASA will be more resilient than the average economic activity as a whole. As to the [indiscernible] pay, from the standpoint of the public entities, we then identify a growth that can be seen as a highlight. COPASA has a very positive policy along with the government, and we have not identified. And we have the support of the regulatory body. And COPASA, at no moment, we had a reduction. But of course, on the other hand, we are -- it's mandatory that we recognize, and we have done so, tried to create conditions that are facilitated or easier, so we do not lose these customers, and we do not worsen the pandemic scenario. We want to provide water, treated water, clean water to the people. And this is the first area to try and break the expansion of coronavirus. These are the government issues, the government ideas and the -- maybe working with the flexibilization of the social isolation. And maybe in the second quarter, we will start to have a reversal of that very specific increase in the favor [indiscernible].

[Operator]

[Operator Instructions] We have another question from Mr. [indiscernible] from Geneva Capital.

[Unknown Analyst]

I wanted to know a little bit more about the regulatory -- well, the regulations are being voted in the Congress. How can that affect the future of the company? Is there still space for growth? And can you tell us a little bit more about that subject?

[Carlos Eduardo de Castro, executive]

Carlos Eduardo here. How -- well, as many of the things from the entrepreneurial standpoint, we have opportunities and threats. If the threat from the standpoint of getting new competitors and a bigger pressure from the standpoint of the renewal of contracts -- with our contracts. And at the same time, giving the opportunity for the company to work with contracts that, as we said, outside of the state of Minas Gerais. So what the Board of Directors are doing, what management is doing is to provide instruments to the company that will make it more competitive, and we will have gains some efficiency. The first action here are still in 2019 with a reduction of almost 20% from -- well, we have a reduction of senior positions, and we have other actions and we have a restructuring of the organization with the Board of Directors, with the fusion of 3 operational directorships. We have a big Board of directors or directorship of operations that will provide new opportunities for synergy between the areas. And this will place us in a situation, a position that is better for -- should be competitive. So what the -- what this will bring as a whole to the sector is to privilege the efficient operations. The company will have to adapt to this regulatory benchmark as they happened in the past, different companies have to adapt in different segments. And we have -- we're expecting that very positively. In a company, we will have a more efficient company, and we will have the conditions if we compare it to others to provide a better, higher quality service, servicing the users for the best price.

[Operator]

[Operator Instructions] The next question [indiscernible] Rodriguez from Credit Suisse.

[Unknown Analyst]

We talked about what [indiscernible] has just asked about the regulatory benchmark. We have the issue of the legislators here in the set of minas the difficulty of approving the project of privatization of the company. And I just wanted to get your opinion. How is that evolving? Is COPASA -- can COPASA use this new regulatory mark still being state company, but they can capture the opportunities that the regulatory benchmark will bring for the privatization process. Is it essential? Or can it occur without a proper referendum.

[Carlos Eduardo de Castro, executive]

Carlos Eduardo once again. I think that from the standpoint of posture of the main shareholder, I already mentioned that this is the same. We have the strategies for the government. And the strategy of the government is still the strategy of the company. The difficulties approving in the legislator assembly, we can see how the government is trying to improve its relationship with the deputies. And showing the new challenges of the companies of today. I believe that the government is considering the best interest of the population taking care of these issues. And as we've seen, the meetings are no different from the deputies. The works are a little bit slower. And the government will continue to do the negotiations. As you mentioned, to destabilize COPASA, it's necessary that you do an operation from the state or continue with the referendum. So the political agents that have the relationship with the assembly are seeking the best way. But the other side of the question and the one that we can respond objectively. We think that the regulatory market will -- milestone will bring more opportunities and threats. And for that, we are getting ready. And I think that this regulatory milestone mark will be beneficial for all the company and the shareholders.

[Operator]

We have another question. Giuliano, please.

[Giuliano Ajeje, analyst]

Once again, about the new bill of law. It's very clear, there is a belief of a smaller state, less intervention of the state economy. My question is the bill of law, as it is today, does it have the legal binding for a private company to, for example, precured -- purchase COPASA?

We have the contracts and I just wanted to get your opinion on that. There have been municipalities -- and there is another part of the articles of the law that will generate, let's just say, tranquility with theirs. I am following the discussions on the regulatory milestones since the first discussions, and we care this issue since the 884 There are different visions. There is no consensus. Maybe this is one of the points that are the most complex, talking about COPASA. Well, I'm talking about the sector as a whole. In regards to the need to be effective or not. As I remember, the fact is that we have the contracts and there wouldn't be the need for, as you mentioned here, and we have concurred so far [indiscernible] and we would have -- we would be safer in the future. So we've worked with the of keeping the same conditions without any previous consent. There is no need for the [indiscernible] or concurrence. We are still waiting for the voting, from the public ministry.

[Operator]

[Operator Instructions]

[Unknown Analyst]

Well, the question of Gustavo, I would like to know if there is any plan for the increase of investments because every quarter, the investment standard has dropped. Is it a strategy to distribute the extraordinary dividends from the controller company, given the cash flow situation of the state is you -- if you're doing anything to reverse this scenario, can you expect a better result in the second quarter of 2020, a comment Eduardo say, well, I would like to say that this administration would never adopt any strategy in that sense of reducing the investment plan that has been approved by the assembly and submitted to the company -- submitted market to do any extraordinary dividend distribution. I'd like to make it clear, and I want to refute that formation. On the other hand, we've seen through 2020, we're going to see a recovery of all the flow of investments and all the efforts done in that sense.

[Unknown Executive]

Well, we received another question here from [indiscernible]. I wanted to say that this question has been answered already by the President. The question was, can you talk a little bit about the behavior of the demand of the, well, the bad debt in April and your expectation for 2020, what is the areas for expansion of profitability? Where do you have more space work cutting the costs.

And well, once again, mentioning the [indiscernible] today, we already mentioned. In that way, the Q&A session is closed. Let's give the word to the President and Director of COPASA, Dr. Carlos Eduardo de Castro for final considerations. Dr. Carlos?

[Carlos Eduardo de Castro, executive]

Once again, I would like to thank for your participation here of all of you, and COPASA has done -- well, we are going through this very difficult time with the big consequences from the losses -- and the loss of life and the impact, COPASA is under the mission of taking help of treated water for all the municipalities where we work. And once again, from define, I will need to recognize all the professionals of composite that have been tireless working tirelessly working from their home, so we can assure that we have the water and sewage services in every single [indiscernible]. Thank you very much, and we remain at your service. Have a good afternoon.

[Operator]

Therefore, the earnings call of the first quarter of COPASA is closed. Thank you for your participation, and have a wonderful afternoon.