Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. At this time, we would like to welcome you to the COPASA conference call to release results for the first quarter 2022. With us, we have Carlos Augusto Botrel Berto, the CFO and IRO of the company.

We would like to inform you that the presentation has been recorded [Operator Instructions] This event is also being broadcast simultaneously via webcast and can be accessed at the COPASA IR site at the address ri.copasa.com.br where the presentation is also available for download.

Please bear in mind that the forward-looking statements made herein referring to the business outlook and operating and financial goals of COPASA are based on assumptions and expectations of the company management as well as on information currently available. They involve risks and uncertainties as they refer to future events and, therefore, depend on circumstances that may or may not occur. Changes in macroeconomic policy or in legislation and other operating factors could impact the future performance of COPASA and lead to results that differ materially from those expressed in these forward-looking statements.

We would now like to turn the floor over to Mr. Berto, who will offer the presentation. You have the floor, sir. You may proceed.

[Carlos Augusto Berto, executive]

Thank you, Priscilla. Good morning to all of you. I would like to thank you for your participation in the conference call. I am accompanied by the Market Relationship Officer and the Operations Director, Guilherme Frasson Neto.

Well, let's go to what is of interest. Let's begin with the presentation for the first quarter 2022. On Slide #2, you will see the financial highlights. And in the coming slides, we will speak about the behavior of the main line items in greater detail.

You have the financial highlights. Our net revenue, BRL 1.270 million, remaining stable vis-a-vis the fourth quarter '21. In terms of costs and expenses, BRL 1.011 billion, an increase of 11.7% compared to the first quarter of 2021. I will refer to this in greater detail further ahead. In terms of other operating revenues for the first quarter 2022, we had a positive value of BRL 6 million, and we had a negative result of BRL 23 million in the first quarter '21. EBITDA reached BRL 445 million in this first quarter vis-a-vis BRL 520 million in the first quarter '21. Regarding the financial results, we had a positive BRL 22 million, while in the first quarter of '21, the result was BRL 48 million negative. Now because of all of this, net income reached BRL 168 million in the first quarter '22.

Now to go into greater detail for the main factors, in the next slide, we begin speaking about the net revenue for water, sewage and solid waste. We had a reduction of 0.1% vis-a-vis the same quarter the previous year. Now our revenues were impacted by the average tariff readjustment of minus 1.5% because of the second tariff revision that have come into effect in August of 2021 and a drop of 4.2% due to savings in water and 4% (sic) [ 4.5% ] in sewage. Once again, resulting from a reduction of 1.5% in days of consumption in the first quarter of 2022. We also granted benefits of BRL 4 million to the victims of rainfall in Minas Gerais registered from December to February of 2022. These, of course, were authorized by ARSAE, and will be subject to a future tariff compensation.

And Slide #4, manageable costs, reaching BRL 593 million in the first quarter and more in the second quarter. To speak about the variations that we recorded, the cost of personnel increased 4.8%, reaching BRL 374 million. And this thanks to the collective bargaining, and this was partially offset by the number in the employees because of the VSP. Now in 2022, we accounted for BRL 20 million referring to the differences in salaries and food vouchers for the months of November and December of 2021. And we had an agreement in February of 2022, which was a base date that was altered from November [ from May to November ], and we have accounts retroactive from November 2021. The number of employees had a drop of 10.8% in the last 12 months, thanks to the voluntary separation program. And in March of '22, 97% of the employees that adhered to the voluntary separation program had already been laid off.

Now in terms of third-parties, we had a growth, BRL 11.8 million in the preservation of systems due to new contracts for the servicing of heavy equipment, BRL 1 million for technical professional services, consultancy, as well as sundry costs that arise from readjustments of our cost. We had an increase in material expenses with an increase of 14.3% because there was an increase in the cost of materials for maintenance and systems. What is important to highlight are the most important tubes and connections where the prices have been subject to significant raises since the pandemic. And especially, when we speak about PVC and other materials. 150 millimeters of diameter for sewage had an increase of more than 125% compared to our previous procurement.

Finally, we had the tariff transfers that increased 6.3% because we are transferring to 95 new funds in sanitation because of the tariff revision carried out in 2021.

In Slide #5, we show you the evolution of the nonmanageable costs of -- changes of [ 50% ], reaching BRL 174 million. And we would like to highlight the main variations here. The cost of electrical energy with an increase of 21% because of an increase in expenses because of the new tariff flags and these are higher than what was authorized by ARSAE as part of the tariff revision last year. And of course, these will be offset in the next tariff revision, which will be in August of 2022.

Now expenses with treatment criticals (sic) [ treatment chemicals ] with an increase of 32.6%, and what happened was a supply shock in the chain that ended up causing an increase in the prices. As an example, we can mention increases of more than 100% in calcium chloride as well as other chemicals. There was also an increase in the main chemical products used in the water treatment because of the rainfall level in the first quarter of 2022. Now fuel and lubricants with an increase of 48%, mainly due to the increase in the price of fuels.

The total expenses of COPASA annualized reached BRL 1.0 million (sic) [ BRL 1.0 billion ], corresponding to an increase of 11.7%.

In Slide #6, we would like to present other revenues/expenses, equity income and financial result. When it comes to other operational revenues, there was an increase of 41% because of the return of tariffs to customers, resulting in a reversion of provision of BRL 19 million and reducing the revenues in the same amount. And that is why you will see that impact, a reduction of 39% in other operational expenses because of a reversion of judicial processes. And the most relevant amount is BRL 12.5 million, referring to the process of a loss that we had in 2019 because of the collective bargaining agreement. The financial results had a deficit, reaching a negative level of BRL 22 million, and it means a drop of 53% in financial revenues with gains in other applications. Now financial increase revenues grew less, 35%, thanks to the exchange rate, and represent BRL 29 million.

We now move on to Slide #7 where we would like to speak about EBITDA, EBITDA margin and net income. EBITDA with a drop of 14.4%, with a final value of BRL 445 million, with an EBITDA margin of 33.8%. Now very generally, we had inflationary pressure in several line items that make up the cost in the company. Electrical energy, the cost of materials are reducing the company margins. Now net income for the first quarter was BRL 167.5 million, once again for the first quarter of 2022.

When it comes to Slide #8, we would like to share with you the CapEx of the company. In the first quarter 2022, COPASA invested BRL 197 million: BRL 72 million referring to sewage, BRL 119 million referring to water. In COPANOR, it was BRL 3.6 million, and the total to be invested in 2022 will be BRL 4 million, as approved by the Board in 2021. For the coming 4 years, we will have annual investments of BRL 1.4 million from 2023 up to 2026, and you can see the figures as the years go by.

We now go on to Slide #9 to speak about the evolution of the company debt: the gross debt, net debt and leverage. In March of 2022, we reached BRL 3.37 billion, 12% in the short term. Now the net debt went down to BRL 2.96 million (sic) [ BRL 2.96 billion ] in March of 2026. And formerly, it was BRL 3.74 million (sic) [ BRL 3.74 billion ]. Net debt/EBITDA ratio stands at 2x.

In Slide #10, we speak about the debt per indices. 39% of the COPASA debt based on CDI because of the fundraising that we carried out in September of 2021, the 16th debenture issuance amounting to BRL 507 million and BRL 243 million are indexed to the IPCA. Now TJLP, because of amortizations, went from 14% of the debt in 2021 to 8% in 2022. Debt in foreign currency with the German bank represents 5% of the total debt. In March of 2021, this amount corresponded to 6%. The average coupon has gone on to 9.1% due to the increase in interest rates. We had a growth in our debt level of 21% to 22%, going from 41.1% to 42.9% in the first quarter '22.

In Slide #11, we would like to refer to our shareholders' compensation. At the meeting, the payout of dividends will be 25% of the net profit adjusted. This will represent BRL 33.9 million as payout to shareholders, and the payment date will be on May 16 of this year.

Now once we have concluded our presentation of financial data, we would like to speak about the concession contracts. COPASA is working on 640 water concession. 631 are being operated in sewage. We have 310 concessions, 267 of which are being operated for 8.5 million inhabitants and 11.8 million inhabitants for water. To the right, you will see the 10 largest concessions of COPASA that represent 50.9% of our total revenue. In March of 2022, the company had 14 expired concessions, and concessions with nullity of contract, they represent 3.6% of our revenue.

On Slide #13, we show you the hydrological situation of the Belo Horizonte Metropolitan Area. Now Rio Manso, Vargem das Flores and Serra Azul are responsible for the supply of 49% of the distributed volume in the region, and the levels are at 90%. Rio das Velhas system, responsible for 42% of distributed volume. And you will see to the right, the average flow in the last days (sic) [ last 15 days ], it was 21 cubic meters per second, and the average flow in the last 12 months was of 7 cubic meters per second. Now as we informed you in the release, we have begun the recirculation of the water in the Paraopeba system. And based on the test, we will be able to gradually increase the flow of this system.

With this, we would like to end the presentation of operational and financial results for the first quarter of 2022. I would now like to give the floor to Priscilla so that we can begin the question-and-answer session.

[Operator]

[Operator Instructions] Our first question is from Julia Zaniolo from Santander Bank.

[Julia Zaniolo, analyst]

We noticed here that the CapEx for the quarter is somewhat below the guidance. We were thinking of higher values. If you could refer to your CapEx performance and if we will see an increase of investments for the semester.

[Carlos Augusto Berto, executive]

Thank you, Julia. Yes, I am sure that this question was going to come. Our CapEx schedule is fully in agreement with what was budgeted. And according to the budgeting program and in the coming months, there will be a ramp-up in CapEx beginning in the second quarter and onwards. Now if we compare this with what we have included in our budget, we are at 90% or 95% of realization in the first quarter of 2022.

[Operator]

[Operator Instructions] Our next question is from [ Guilherme Reif ] from UBS.

[Unknown Analyst]

We have observed that the increase in leverage, if you could refer to the main points that have led to this increase. Your cash flow and fuel costs, for example, once again, if you could remark on these items, we would be very thankful.

[Carlos Augusto Berto, executive]

This is a very important question, and I would like to clarify that our cash position had a significant reduction, mainly because -- well, you will recall the nonrecurring events that we had in 2021 with cash impact on the first quarter of this year: the PDVI, the ARSAE returns. Therefore, all of these cash movements have led to an increase in our leverage and it has reached the level of 2x net debt/EBITDA. And of course, the collective bargaining would be included here simply to complement the information and why we had that impact on leverage.

[Operator]

[Operator Instructions] Our next question is from Daniel from Safra Bank.

[Daniel Travitzky, analyst]

We also have observed here in terms of personnel that you still have a very high number. Now perhaps this is happening because of that voluntary separation program that you carried out last year. Now when are you going to reach stability in terms of this line item going forward?

[Carlos Augusto Berto, executive]

Thank you, Daniel. Well, that was one of the questions that was posed on COPASA Day. We're going to see the impact, the full impact, of this voluntary separation program only beginning in the second semester. We will be able to see the full impact in this reduction of personnel program.

[Daniel Travitzky, analyst]

No, if you could give us a guidance, the percentage of reduction that we may be able to see, if this is possible.

[Carlos Augusto Berto, executive]

We will reduce, because of this voluntary separation program, BRL 15 million per month in that range. And this is just a calculation.

[Operator]

Our next question is from Arthur Pereira from Bank of America.

[Arthur Pereira, analyst]

My question refers to the agreement that was announced in July of last year where the company made a commitment of carrying out BRL 2 billion investments for Rio das Pedras. At the time, there was a great deal of discussion that perhaps these BRL 2 billion would not impact minority shareholders and could be donated. What is happening with this commitment? And can this capital increase be done directly by the company?

[Carlos Augusto Berto, executive]

Well, Arthur, once again, this is in the hands of the parent company. There are discussions in terms of where these resources will come from. There has been no decision so far in terms of whether this decision will become a burden or not. We're simply awaiting the decision at present.

[Arthur Pereira, analyst]

And is there a timing for this or not?

[Carlos Augusto Berto, executive]

No. Once again, this is a decision of the parent company. And, well, this is my personal opinion. I do not see that anything will be happening in the coming months.

[Operator]

[Operator Instructions] At this point, we would like to end the questions from analysts and investors. We will now go on to the Q&A session from journalists through the phone.

[Operator Instructions] At this point, we would like to end the question-and-answer session exclusively for journalists. We will continue on with the questions that we have received through the web chat. You may proceed, if you wish.

[Carlos Augusto Berto, executive]

Thank you very much, Priscilla. I will pose the question, and we will then offer the response. A question from [ Joao Pinto Parente ], is there any update on the auction or if you are waiting for the standards of ANA to come out in terms of active and non-depreciated assets to be able to work on this concession?

Well, because of the granting power, the Ipatinga municipality has not signed the terms to update the contract to adjust to the new framework. Now the Ipatinga concession contract ended in February of 2022. So far, there has been no dissemination of the new auction for concession. We are negotiating with the municipality to work on a transition request until this happens. And we would like to preserve the rights and the investments on the assets, assets that are the target of investments in the municipality. Of course, we're still awaiting for the dissemination of the new ANA standard so that we can have legal security when it comes to the reimbursement of our assets.

Another question is from Rafael Dias from Bank of Brazil, I would like to understand if your increase with third-party services refers to a onetime event, services rendered previously to employees who are not there or if it has become a need for you.

Guilherme will give you the answer.

[Guilherme Neto, executive]

Rafael, now this increase in services with third-parties can be attributed to 3 points, especially to the heavy rainfall at the beginning of the year, something completely out of the curve. In the metropolitan region, we had an increase in cost with maintenance. Nowadays, we have more robust contracts. And evidently, they will tend to cause a migration of that outsourcing to our own services. So this did have an impact. And another point is the pressure of inflation, the cost of fuel, which has also increased the cost while rendering these services on the field.

[Carlos Augusto Berto, executive]

The other question from [ Marcela Garcia Ducoto ], why has the company had an increase in operating expenses? And how did this happen?

We can mention as a relevant cause of an increase in operating expenses the inflationary pressure, chemical products, a part of fuels. And we can say that perhaps what was more representative in the third quarter were the rainfalls. The operating cost of maintenance increased significantly. COPASA now has more robust contracts, especially outsourced for sewage work. And of course, this has led to an increase, but everything is within our forecast. A little bit of an outlier but within the forecast, once again.

[Operator]

[Operator Instructions]

[Carlos Augusto Berto, executive]

Another question from Henrique Peretti from JPMorgan. I have 2 questions. First, regarding the cost performance and the inflation of the last 12 months. There seems to be a trend for the coming months. Is there any news on the increase of capital in the state of Minas Gerais because of the legislation?

I believe that I have already responded to this question. Now regarding the first part, Dr. Cristiane will give us more information.

[Cristiane Schwanka, executive]

Henrique, besides the operational points and what has been mentioned by Guilherme, it is important to say that part of these costs are due to the digital transformation and the technological update we're carrying out in the company. Of course, you can follow up on this on the site. You can see this in the stations. We have modernized the reading, streamlined process, which initially, of course, will lead to an increase of cost but will add value to the business in the short and medium term. We have also carried out the digital transformation of the company, leveraging customer relationship, digital payments technological innovation. And of course, initially, this has led to a cost increase and will then add value to the company as a whole.

[Carlos Augusto Berto, executive]

Another question comes from Giuliano Ajeje from UBS. Have you been able to show economic and financial capacity? What are you planning to do? How can you operate concessions with such irregular situations?

As you can see, the state-regulating company has shown that COPANOR has not been able to prove its financial and economic capacity because of that very specific model of our subsidiary. Part of the investments come from the parent company through cross-subsidies. And because of this, it was not able to prove its financial and economic capacity because of the present day model.

Now what is it that we intend to do? The main shareholder and the regulatory agency are holding conversations. Of course, COPANOR will have to undergo a change in its business model. Presently, it is in a public consultation with the regulatory agency, and a new tariff structure will be defined for COPANOR. Now it's very difficult to have a reading of the financial and economic capacity at COPANOR that will be equal to other companies.

Now when it comes to operating irregular concessions, on April 1, we received something from [ Ricardo ], which has brought us clarification on the contract. These are not regular contracts. They were celebrated according to the regulatory framework. And what is irregular is the operation and not the contract per se. Once again, we're holding discussions with all of these municipalities, and the terms set forth by the law was March 31. We are resuming our conversations with the municipalities to regularize the operations of sanitation at this point in time.

Another question is from [ Peter Sara ]. Congratulations for your results. I would like to know which is your forecast for tariff revisions going forward.

Well, we also have underway the exchange of information and discussions for the coming tariff revision in August. The operator has a legal term until July 30 to include its considerations. As mentioned previously, we have included several points at the regulatory agency, points that require alignment especially in the financial areas, electrical energy, the issue of inflation we have had during the period. And presently, we are drafting and including technical and regulatory foundations, offering them to the regulatory agency to obtain an appropriate readjustment of our tariffs. And of course, we are hoping that they will anticipate these values. But at present, we have presented all of the formal documents, the regulatory documents, to the regulatory agency.

A question from Giuliano Ajeje from UBS, COPASA constantly reports with an indebtedness below the payout of dividends, 2.1, if you're thinking of paying additional dividends.

Well, Giuliano, as you know very well, we are honoring our commitments vis-a-vis the regulators. And because of the recurring events, the company has broken its covenant and has limited the payout of dividends to 25%. Now this happened for the first quarter of 2022. As we mentioned on COPASA Day, this is a topic that will be debated once again. And because of all of the previous impacts, which we are no longer faced with, we can resume this topic and begin to speak once again about dividends.

[Operator]

[Operator Instructions]

[Carlos Augusto Berto, executive]

Another question from [ Jonathan Krucoc from ECM ], if the dividend policy will stand at 25% for the entire year of 2022.

Well, as I mentioned, formerly, Jonathan, we are going to revisit this after the nonrecurrent events. Now this topic will be once again discussed at the Board already in the second quarter.

[Operator]

[Operator Instructions]

[Cristiane Schwanka, executive]

Well, to make the most of the opportunity and to speak about the management that has implemented structural projects in the company, as I mentioned previously, and in COPASA Day, initially, all of these tend to increase the costs. In the medium and long term, they will be adding more value to the company. Now these main projects that we are implementing refer to growth. We have more than BRL 575 million that we have invested in terms of customer service. All of this will enhance our customer service.

We are also working on field activities, which is our main focus of attention when it comes to rendering services. Innovation in terms of the intelligent readers so that we can leverage all of this with greater speed, leverage our operational excellency programs, especially those that are geared to protecting our revenues. The apparent losses and other losses, investments on logistic because of our value chain and all of the ESG activities that are being carried out in the company, aligning the company to be able to obtain funds in the market at better rates and at better values, all of these activities will gain value to the services that we are rendering, especially in terms of water, sewage and environmental presentation, so that we can offer that better perception in terms of the sanitation services that we offer.

We do have an adequate and very competitive tariff, and we're seeking the recognition of our customers so that we can add value to our brand. We spoke about the streamlining of our reading process that will enable us to enhance our efficiency in terms of billing. And we will be able to do all of this much faster, and this will mitigate regulatory risks, which is once again a focus. We are regulated based on incentives and efficiency, and we want to become ever more efficient in the market.

Now COPASA is a very efficient market company, and we have to share with society part of the gains of our tariff structure. And this is a recognition of the company's efficiency by the market. What we can say to you besides the classical comments are those that were mentioned by Carlos Augusto, Guilherme. The cost increase is due to cost, to the heavy rainfalls and the investments. And the increase in costs initially will enable us to streamline the company, enabling us to offer more streamlined public services.

[Operator]

The question-and-answer session ends here. We would like to return the floor to the CFO and IRO Carlos Augusto Botrel Berto for his closing remarks.

[Carlos Augusto Berto, executive]

Well, thank you very much for your participation. We are at your entire disposal through our IR department. I wish you all a very good day.

[Operator]

The COPASA conference call ends here. We would like to thank all of you for your participation. Have a good day, and thank you for using Chorus Call.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]