Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. Welcome to the earnings release conference call of COPASA for the first quarter of 2023. Here with us are Carlos Augusto Botrel Berto, CFO and Investing Relations Officer of COPASA.

We inform that the presentation audio will be recorded. [Operator Instructions] This event is also being simultaneously transmitted via webcast and may be accessed at the Investor Relations website of COPASA at ri.copasa.com.br where the presentation is available for download.

Before proceeding, we would like to point out that any statements made during this conference call about the business prospects, projections and operating and financial goals of COPASA are based on beliefs and assumptions of the company's management as well as on information currently available. They involve risks and uncertainties as they relate to future events and therefore depend on circumstances that may or may not occur.

Changes in the macroeconomic policy [indiscernible] as well as other operating factors may influence the future performance of COPASA and lead to results that differ materially from those expressed in such forward-looking statements.

Now I would like to turn the floor over to Carlos Augusto Botrel Berto, who will start the presentation. Mr. Berto, you may start.

[Carlos Augusto Berto, executive]

Good morning, everyone. I thank you for attending this conference call. Here with me is Guilherme Duarte, CEO; and Mark [indiscernible], Technical Officer. I will now start to talk about the first quarter of 2023 about the results obtained in this period. We present the financial highlights. Net revenue is BRL 1.6 billion with a growth of 24% when compared to the first -- the same period of '22. Costs and expenses in the first quarter of '23 amounted to BRL 1.05 billion, an increase of 4% when compared to BRL 1 billion in the first quarter of '22. It's important to highlight that the inflation in the period was 4.6%, showing that cost lower than inflation and a very robust control of costs when compared to the other amounts.

Other operating revenues was negative in the first Q '23 -- positive amount of BRL 22 million. EBITDA reached BRL 678 million in the first quarter of '23, with a growth of 52%. As for the financial result, the amount was negative at BRL 49 million. In the first quarter of '22 was BRL 22 million. As a result of the facts presented, our net income reached BRL [ 338 million ] in the first quarter '23.

Now on Slide #3, we show the main variations in the accounts that are in our income statement. Starting with water revenue, sewage and solid waste. In the first quarter, '23, there was a growth of 24% when compared to the same period of last year. The revenue was impacted by the tariff adjustment applied on January 1 this year with an average tariff effect of 15.7%.

According to the authorization of Arsae, also an increase in 4.6% in water volumes per unit and 3.2% in the sewage volume per unit and the migration of consumption bands and categories or brackets and categories. We had an increase of 7% when compared to the comparison period.

Now detailing the main variations of such costs. We start with the personnel cost that had an increase of 3%, amounting to BRL 386 million, given the personnel and the collective agreement on wages of last year, and there was the application of INPC inflation rate. It's important to highlight in this account as well that maintaining a stronger cost control of the company and better operational efficiency, the Board of Directors has approved on [ March '23 ], the new program to lay off people with incentives.

Now until [ June '24 ], with a very important group. Third-party services, outsourced services grew 27%, especially an increase in BRL 24 million in the services of conservation of property with new service agreements and more expenses with collection networks, given the high level of rainfall from December '22 until March '23. The PPP also had a decrease of 6.8% given the reduction of power costs, which partially offset the contractual adjustment of 10.54% by IPCA applied in May of '22.

As for the losses for accounts receivable, provision for doubtful accounts was reduced by 12.1% regarding the reduction of defaults that reached 13% in March, and it was to be 3.56%. And as a consequence of collection and renegotiation actions that we are developing.

As for tariff transfer to municipalities, it increased by 20.1% accompanied the increase in revenue and resulting from tariff adjustment and the increase in the number of municipalities.

On Slide 5, we see the evolution of non-manageable costs that had a reduction of 4% from -- amounting to BRL 167.3 million in the first quarter of '23. Electricity decreased 15% due to less costly costs. Another factor that contributed to decrease in electricity was the migration to the free market. Of the 8 main facilities of COPASA that together account for 43% of the company's consumption.

As for treatment chemicals, they grew by 35% due to an increase in prices of chemical products used in the water treatment process, especially products for [ coagulation ]. With that, the total cost of the company accounted for BRL 1.054 billion, with an increase of 4.2%.

On Slide 6, we show other revenues. Equity income and financial result when compared to other operating revenues, there was a decrease of 54% in the first quarter of '23, mostly due to the operation we did recently with the recovery of accounts were changing the reduction of accounts receivable -- as for other operational expenses, there was an increase of 29%. In the first quarter of '22, we had reversals from several core proceedings regarding the participation in profits from the employees. And due to the collective agreement on February '22. Financial results, there was an increased deficit, a negative BRL 49 million against BRL 22 million in the first quarter of '22. Financial revenue had a decrease of 14%. [ BRL 40 million ] for the variation of foreign exchange and was a devaluation of [ euro ] 14% when compared to real.

Expenses grew by 11.8% given the interest rate on fundings and due to the increase in interest rates in the economy.

Now moving on to Slide 7. We show the EBITDA margin and net income. EBITDA grew by 52% in the comparison period as a result of the increase of revenue higher than the growth in costs and expenses. This accounts for a margin of 42.1% compared to 33.8% in the first quarter of '22.

Net income amounted to BRL 337.7 million.

Investment CapEx on Slide 8. COPASA invested in water of BRL 104 billion with an increase of 14% when compared to the first quarter of '22. As for COPANOR, BRL 7.2 million were invested in the first quarter of '23. In this slide, we also show investments scheduled for coming years with highlights of '23 for which we project investments of [ 1.757 ] in the parent company and [ 267 ] at COPANOR.

On Slide 9, we talk about the debt, gross debt, net debt and leverage. Gross debt, around [ BRL 4.2 billion ], of which 20% is short-term debt. The net debt amounted to BRL 3.1 billion in March '23. As in March of '22, it amounted to BRL 2.9 billion. The net debt over EBITDA is 1.4x.

On Slide 10, we see the indexes and average coupon. CDI accounted for 45% of COPASA's debt, an increase of 6 percentage points. This increase in CDI amount was due to the funding of [ BRL 650 million ] to the 17th issue that was finished in December '22.

TR is in line with the first quarter of '22.

IPCA dropped, now accounts for 19% of our debt. And foreign currency, [ Bay ] and German bank now account for 10% of the total debt because EUR 35 million were released by [ Euro ] Bank.

Now it's now the average coupon, 10.4% due to increase in interest rates. The [ debt level ], measured by the net debt over shareholders' equity went from 42.4% in March '22 to 41.6% on March '23. As for compensation for shareholders, we sent a communication to the market with a payout of 50% of the adjusted net income. The total amount to be paid for the first quarter of '23 is BRL 132 million. It's worth highlighting that in the shareholders' meeting on April 20, we approved a new policy of dividends. As for the regular dividends, the current rules were maintained. And for extraordinary dividends, they may be paid out as assessed by the Board of Directors according to the current directives.

On Slide 12, we show the concessions agreement COPASA and COPANOR owned together. 140 concessions of water, of which 632 are in operation. 309 concessions of water, 269 operating.

On the right chart, we show the 10 main largest water concessions that account for 50% of the total revenue. On March '23, the company had 23 concessions expired and 2 that were canceled by court, and they account for 3.9% of our revenue.

On Slide 13, we present some operating data. The number of employees per 1,000 connections remained stable at 1.33. The loss index measured by the number of the volume distributed and the volume measured divided by the number of service connections and the number of days in the period dropped in the first Q of '23 as compared to the same period of '22. And delinquency that corresponds to the ratio between the balance of accounts receivable overdue between 90 and 359 days and the total amount invoiced in the last 12 months, dropped in the comparison period, reaching 3.15%.

And closing the presentation, we show the robustness of our water sources in the metropolitan area of Belo Horizonte. The level of reservoir that compose the Paraopeba system. Rio Manso, Vargem das Flores and Serra Azul that account for the supply of water of the metropolitan area of [ Belo Horizonte ], 48% are absolutely almost 100% full.

And the information is declared in the average flow in the last 15 days prior to April 20 was 26 cubic meters per second with a considerable excess, which is the average flow collect from the -- compared to the average flow collected, which is 7.2 meters per second. This ends the presentation of the first quarter of 2023, and I turn the floor over back to you Gentera to start our Q&A session. Thank you.

[Operator]

We'll now start the Q&A session for investors and analysts and later for journalists. [Operator Instructions] A question from Rafael Nagano from Crédit Suisse.

[Rafael Nagano, analyst]

I have 2 questions. 1 regarding PDV. Could you share with us what should be the estimated cost for these dismissal program with incentives for employees. In the first dismissal programs you had, there were more expensive employees. So I would like to know how -- what you expect for this one.

Also for energy, you said that the migration for the free system, the main operating units, I would like to know whether there is an additional room for other units to migrate or given their consumption, if you are limited to these 43% announced.

[Carlos Augusto Berto, executive]

Thank you, Rafael. I'll answer about the dismissal. The voluntary dismissal program and Guilherme will answer about electricity. Regarding the dismissal program, there is -- the volume is [ BRL 240 million ]. We estimate with regard to the last dismissal program that focused on retired people, we now have other employees such part of administrative and operational employees as people who do the readings. So we believe that the number will be bigger when compared to the last voluntary dismissal program.

And the term is 15 months for this project.

Regarding the energy costs, the company is working to migrate other smaller units also connected to medium and high voltage to the free energy environment and the effects will be observed in the end of 2023 and beginning of '24. We continue to migrate the units that can to the free market, given the better price conditions. And the company is also working to migrate a large percentage of low voltage to the distributed generation, expecting 15% remembering that low voltage is also significant in the total consumption of the company with effects to be observed in 2023 in an optimal scenario, but certainly in 2024 for distributed generation.

[Operator]

[Operator Instructions] We will now start the Q&A session for journalists by phone. [Operator Instructions] Since there are no further questions, we'll continue with the questions sent by the web chat.

I would now like to turn the floor to Carlos Berto for him to read the questions.

[Carlos Augusto Berto, executive]

Okay, Gentera. I'll read the questions. And then we'll see who will answer them. The question from Marcelo Gonsalves. Is there any negotiation to renew the concession of Belo Horizonte?

[Guilherme Augusto Duarte Faria, executive]

This is Guilherme speaking. Actually, the new sanitation framework does not allow state companies to promote the renegotiation directly in order to extend or automatically renew their concessions. What exists is the hypothesis of extension if there is a privatization. And if this privatization is carried out by the parent company of privatizing the company, then the management of the company will endeavor all efforts to renew the concession of Belo Horizonte because it's strategic for us.

But Other than that, the new legal framework does not allow the company to extend or renew the concessions automatically.

[Carlos Augusto Berto, executive]

The second question also from Marcelo what is the dividend policy from COPASA? Is the policy of maintaining debt over EBITDA [ of 2x ] is still valid? The company's management decision approved by the Board of Directors. With the update of the dividend policies to this not relate anymore, the expectation of interim dividends with the debt over equity ratio of the company. We are committed to the current dividend policy with a payout of 50% for the year of 2023, with the possibility of extraordinary dividends according to the criteria of the policy.

Of course, in parallel, we are keeping track of the indebtedness of the company, which is currently in a very adequate level, allowing the company to look for new funds in the financial market.

The next question comes from [indiscernible]. He's talking about the capital and reserve when that should be distributed in ordinary dividends or increase in capital by bonus.

Yes, exactly that -- that we are currently aware of that, and we have the year 2023 to study and decide. There is either will increase our capital or pay dividends according to the policy, as you detailed in your question.

A question from Rafael regarding the non-manageable costs, could you comment on the factors that led to the increase in 48% in telecommunication costs?

Rafael, this is due to improvement in our performance. In our bracket, we increased our availability, the speed of data in our band, but the figure is reasonable regarding the size of the company.

Question from [indiscernible] about the concession of BH expiring 2032. Will it be renewed? As I replied to Marcelo's question, there is no legal possibility to renegotiate the renewal of the concession of Belo Horizonte unless the company is privatized. This is due to the new sanitation framework.

The next question from Daniel Travitzky. What are the effects of the operations proposed by the sanitation framework in the company, thinking about current operations and expansion of services.

[Guilherme Augusto Duarte Faria, executive]

Daniel, this is Guilherme speaking. The new changes in the new legal framework have no significant impact on the current strategy of the company. It's important to highlight that there is no movement either in the controlling shareholders or the company that will use the provisions that allow for direct hiring in micro regions or metropolitan areas in Minas Gerais. We preserve the competitive environment of the sanitation environment in Minas Gerais and the strategy of the company is to have the most efficient situation to compete in this competitive environment.

Of course, some of the provisions of the current decrees enacted by the federal government are maintained, there is a possibility of normalizing some overdue contract but -- or expired contracts. But then we are still waiting for the development of these decree because there are still discussions in the federal legislation -- legislative bodies. And so we'll wait for that to end until we can make a decision on what to do.

[Carlos Augusto Berto, executive]

A question from [indiscernible]. The government of Minas Gerais said that it was going to invest in COPASA, will that occur or not? How can the company bring more than BRL 2 billion for environmental issues.

[Guilherme Augusto Duarte Faria, executive]

This is Guilherme speaking. As already communicated by the company and a communication to the market was posted recently, there will be no investment from the controlling shareholder in the company to solve the water safety projects in the metropolitan area due to the judicial agreement. What there is, is the possibility of transferring the funds in a non-onerous way for COPASA to do the construction works. Or in a negotiation, we are now undergoing with the state of Minas Gerais in that the state does the construction and then transfers it to the company.

If that happens, that will be a lower burden on our internal capacity so that the company can concentrate on the ordinary program, which is the assets that are part of the company.

[Carlos Augusto Berto, executive]

A question from Daniel Travitzky how the discussion on privatization is happening within the company.

[Guilherme Augusto Duarte Faria, executive]

Daniel answering your question and also of Mr. Nelson Mello, that's about the same topic. The privatization is for the controlling shareholder to discuss. And we are aware that it is part of the controlling shareholder strategy as posted in the media. But currently, this is not being discussed by the current administration of the company.

[Carlos Augusto Berto, executive]

Question from [ Eduard Mochi ]. Congratulations on the results. How this amount of dismissal program we accounted for in the income statement.

We expect this amount to drop in the second quarter of '23. But of course, after the confirmation of the adoption by employees, which they have a 30-day period during the month of May.

Another question from Adezio Cabral. COPASA is preparing to expand its business outside of Minas Gerais, what initiatives are being taken in that direction.

[Guilherme Augusto Duarte Faria, executive]

Thank you for your question. The current strategy of the company approved with the Board of Directors. And according to the guidelines of the controlling shareholder, is to strengthen the current concessions of the company and its market within the state of Minas Gerais.

[Operator]

[Operator Instructions] The Q&A session has now ended. We now turn the floor over to the Financial Officer and Investor Relations Officer, Carlos Berto for his final remarks.

[Carlos Augusto Berto, executive]

Thank you, Gentera. I thank you all again for attending the conference call for the first quarter of 2023. We remain available for any further questions you may have. Please contact our officers as well as Investor Relations area of COPASA. Thank you all, and have a good day.

[Operator]

The conference call of COPASA has now ended. We thank you all for attending, and have a good day.

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