Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, everyone. Welcome to the teleconference on the earnings call of the second quarter. We have here Dr. Carlos Eduardo Tavares, he is the Director (sic) [ CEO ] of COPASA; and Carlos Augusto Botrel Berto, he is the RI Director (sic) [ CFO ].

Well, everybody will hear their presentation. Please wait for further instructions. [Operator Instructions] This event is also being transmitted simultaneously via webcast. You can find it at the RI website of COPASA, ri.copasa.com.br. You can download the presentation as well.

Before we proceed, we would like to highlight that all the statements that are done during the earnings release, regarding the perspectives of business, projections and operational goals of COPASA are premises and expectations of the company, as well as based on information that is currently available.

They involve risks because they are due -- they are regarding the future events and changes in the macroeconomic policies, and other operational factors might affect these results and conduct to results that differ materially from those expected.

Now I would like to give the word to the Financial Director and RI Director, Carlos Berto, the floor is yours.

[Carlos Augusto Berto, executive]

Thank you very much. Good afternoon, good morning. Thank you to everyone that is here in the earnings release. I have Carlos Castro, and I will start the part of the company's performance in the second quarter of 2020.

We are on Slide 2, talking about the results that were obtained. We will talk about the other slides in more detail and the main lines of the result. We have the highlights, the financial highlights, which are: our net revenue has grown 22.9%, getting to BRL 1.4 billion. Now the expenses have gone up 7% -- 13.7%, BRL 937 million against BRL 824 million in the second Q '19. And we'll highlight, we did a refinement of the methodology on the provision for losses, those that are for the BRL 76 million that affected, the results of 2020, the second quarter. We have a provision that we should not take into consideration, the elevation of our cost in expenses, which is 4.5%.

EBITDA, you can see that it grew 9.4%, getting to BRL 378 million. The margin of the EBITDA, in the second quarter of '20 is 31%, aligned with the margin that was observed for second Q '19. One caution, should this provision not be maintained, the EBITDA would be BRL 451 million with a margin of 37%.

The financial result has a better -- an improvement in the second quarter to BRL 20 million in the second quarter of 2020. This variation might be due to the interest rate indexers. The net revenue in the period has an increase in regards to the previous year. Without PCLD, it would be BRL 119 million.

Now on Slide 3, we have the revenues for water, sewage and others. According to the second quarter of '20, there is an increase. We can highlight as the main factors the reposition of the tariffs that is applied for the consumption of August '19 onwards. The increase in economies of water and the measured volume had an increase of 1.5% for water and 1.1% for sewage. Due to the pandemic, we had the invoicing in the public and the private sector. They are negotiated by the residential category. We also have an increase, the changes in these social categories, and an increase in the revenue in the quarter of '18 in the tariffs.

The invoice, we have started to treat some sewage in an increase of BRL 2 billion. On the other hand, we had a reduction of BRL 10 billion in the water and sewage due to the measures in minimizing the COVID-19 pandemic and also negative impacts.

Slide 4, we have the administrative costs that have decreased in the second quarter of 2020 in regards to the comparative period. The main factors that explain the costs are the personnel, which has grown. And also this increase is due to the provisions for the bargaining agreements for 2020, 3.3% in the comparative quarters. On the other hand, there is a reduction in the period.

Now in the subcontracted services, 2.8%, and we have very significant variations. The fleets of vehicles, they start to be accounted in the results. We contributed as well the reduction with the technical professional services and IT services. PPP Rio Manso, 14.2% increase in comparison to the second quarter of 2020, this is due to the readjustment in the contracts, which is corresponding to 4%, the variation of the electric power. And the provision with a reduction with the accounts receivable, we have calculated in 100% under the auditing. We saw what is the historical records of the customers of COPASA we have by private, by region. And we got to the percentages by range of days in 30, 60 for each of them. And we have in the accounts receivable each category and each region. The more delay, the more the loss has to be provisioned.

And we got to the final provision for June 30, and we have an adjustment of BRL 76 million. Of those, 80% is the improvement of the methodology itself. And the rest is monetary impacts of our receivables, which are the nonresi -- the non -- well, we didn't do the cuts for the residential category, we delayed the payments for the commercial, which have their activities suspended. Thereafter, we have the tariff to the cities, 6% variation. This happened because of the start of -- while they received the investment at the municipalities, and we have the readjustment to deferred from August of '19 onwards.

Slide 5, let's see the nonadministrative costs. We have a growth of 14% in regards to the period that was compared, getting to BRL 125 million. The main factors that contributed for this increase is electrical energy. There was a drop in 1% in the expenses. On the other hand, there is a reduction by the changes in the way we accounted in regards to PIS and COFINS, the tax credits, and this is a stimulus for the process on the other hand. We had an increase because of the readjustment of May '19, and that impacts the tariffs.

As the material for treatment, an increase of 26.3% in regards to second quarter '19 because of the increase of the materials used in water treatment as well as the increase in the prices of the main products that we use. We also had a reduction of 52% in the purchasing, procurement of the tax credits due to the automatic accounting of the credit of PIS and COFINS paid taxes, which is very gradual.

Slide 6, we have the other revenues and expenses and the participation of the profit sharing. We have other operational expenses, an increase of 37.9% due to the payments that are pulverized in the processes. In the other operational expenses, a drop of 39.3% corresponding to BRL 29 million. We have to say that in the second quarter of '19, there was a need to have extraordinary nonrecurring provisions due to the traditional processes. One is the ISS tax in the value of BRL 11 million. The other one, tariffs of BRL 21 million of the state that impacted our quarter. Now the profit sharing increase of 23.3% reflects the behavior that was observed in the comparators period.

Slide 7, we present you the investments done by the company. The value of the projected investments for 2020, as approved by the Board of Directors, is BRL 816 million and BRL 37 million for COPANOR. We can see BRL 184 million for COPASA, and COPASA plus COPANOR, BRL 194 million. This is for the 2 first months of the year, and then the reduction of taxes by the pandemic. The company is doing the forecast of the next 4 years. And the investment program as you can see, '21 to '24, we have BRL 1.2 billion for COPASA and BRL 37 million for COPANOR.

Slide 8, we have the evolution of the indebtment of the company, gross and net, and leverage. The gross debt, which was BRL 3.3 billion, had a decrease of 6%, getting to BRL 3.3 billion in June. Now the net debt is BRL 2.4 billion. Anyway, have to highlight that this level was registered in the cash flow is due to the measures of the -- adopted by the company to preserve the cash flow due to the uncertainty caused by the pandemic, therefore assuring the expenses for the future. The index have leverage, we can see over the 12 months, got to 1.3x versus 2 in June of '19.

Slide 9, the indebtment, the average indebtment had a reduction in 1.4%, varying from 7% in the second quarter of '19 to 5.6% in the second quarter of 2020, a reduction in the interest rates practiced in the Brazilian market. The indexers of the debt, the TJLP contract, had a reduction of the volatility, going from 23% of the total debt in the second quarter of '19 to 17% in the second quarter of '20.

Now there was an increase in the participation of the contracts that are connected to the IPCA rate. And in the second quarter of '19, these contracts represented 20% of the total investment. And they went to 23% in the second quarter 2020. Now the debt in foreign currency, we can see the fluctuation in real in 2020, and that represented 11% of the total debt. Well, we have the rate of the net revenue and the profit sharing, the participation of 47% in the second quarter of '19 going to 34.4% in second quarter of 2020.

Slide 10, the payment to the shareholders for 2020. The Board of Directors approved in a meeting done in March '19 that the profit sharing would be 20% of the adjusted net revenue, and it will be under the JCP in the first quarter of 2020, an impact of BRL 45.47 million, declared a dividend of BRL 49 million due to the reduction of the JCP in the second quarter, which we'll pay in August.

We have to highlight that, as it was published, the Board of Directors decided not to do the extraordinary dividends to preserve the cash flow of the company due to the current scenario caused by the pandemic. We believe that before the end of the FY the economic scenario will return to normal, and then we can talk about this.

Once I finish the financial results, let's talk about the concessions. COPASA/COPANOR alone, they have 641 water concessions. Out of those, 629 are operational. As for the sanitary, we have 311 sewage. Out of those, 264 are concessions that are operable. We have 11 million -- we can see that we have 11 million inhabitants serviced for quarter and 8.3 million with sewage services.

We correspond to 52%, the current budget -- 52% of the invoicing, the 10 biggest concessions. We had the concessions renewed in February, and we also renewed the concession of water and sewage for São Gonçalo do Abaeté and a concession with Joaquim Felício. In June of '20, the company had 63 overdue concessions, which represented 2.7% of the revenue.

Slide 12, we can see the water situation for the macro region of Belo Horizonte, the Paraopeba System, therefore Rio Manso, Vargem das Flores and Serra Azul are responsible for the water service of 47% of the region, of the metropolitan region of Belo Horizonte. And we had strong rains, therefore, we have 95% of the volume in the first quarter of 2020. This is the biggest volume registered in the last decade for a dry season.

Now Rio das Velhas responsible for 42% of service to the region, the information is on the right. We, over the 15 days before the July 20, it's 7 -- 16.7 cubic meters per second. The average flow in the system is 6.8 cubic meters per second.

So with that, we close the operational and financial results of 2020. I will give the word to our President, Carlos Castro, about his considerations about the company.

[Carlos Eduardo de Castro, executive]

Good evening. Good afternoon. It's a wonderful opportunity to follow the entire Financial Board Director as a very important moment. And we're opening for the journalists the revenue of the company in the second quarter of 2020.

We had a set of advancements over the same period last year. Even though we are still affected due to the pandemic, there are some accounting issues, and we could proceed. Whenever needed, the administration will try to find the best alignment for all the best practices of governance and be sure that we will look ahead in the results, so that we get more clarity.

And now we can open for Q&A. Designing, -- well, we're going to have a COPASA Day actually. The pandemic is demanding that we do a signing. The results that we are talking about, they should have happened in this format. Unfortunately, we couldn't do it before.

And we have a design for the investors and the journalists, just so you can have a more clear vision of the work that the company is developing. Therefore, we remain at your service should you have any questions.

[Operator]

[Operator Instructions] First question, Carolina Carneiro from Credit Suisse.

[Carolina Carneiro, analyst]

Two questions, the first one is in regards PCLD, which is the one that you just mentioned there in this quarter, it was higher because you had, if I understand correctly, it was a little bit longer for the invoices. I just wanted to know if as in the electric sector, can you -- what we follow the sector data if there was an improvement in that loss by aging by the reduction of the accounts receivable? Well, just so I can understand how the adjustment will work for PCLD in the third quarter onwards. Are we going to continue with the same level? Should we have an improvement?

And the second question in regulatory, given that we have the -- a [ lot ] of project approved, you have some concessions that are already overdue or close to being overdue. So I need to know if you know how the dynamic would work in your case for reimbursement. And we know that the law is saying that ANA should define criteria for reimbursement. While you have some contracts that are overdue, and help me to understand if there is any sort of idea how will this process of the concessions overdue or to be due, I know it's more of the revenue, but I wanted to understand the process itself.

[Carlos Augusto Berto, executive]

Carolina, Carlos Augusto answering your first question. Well, as I had informed, we did an improvement of the PCLD. What did we do? We saw the historical records of these receivables. We subdivided by category if it was public, private, by region, and we got to the percentages of the receivables, the ranges. Now these percentages that we found, we multiplied by the accounts receivable for each category, for each region. And the more delays you have on that, the more is the loss that is provisioned.

This is an improvement therefore of CPC 48, which was -- that was started in 2018. And this improvement was necessary due to the discussions that we had with our auditors as a matrix for calculations to expect effectively implement that adjustment, which is the one that you verified in our results of BRL 76 million. Out of the BRL 76 million, 80% are of the improvement in the methodology, and the rest is the impact of COVID as I had mentioned. So there is no adjustment. That adjustment was necessary for this year, and this is a correction of the previous years.

[Carlos Eduardo de Castro, executive]

Carolina, this is Carlos. Just to complement, given the provision for the doubtful accounts, we have that improvement with the auditors, we are only making ourselves adequate to the criteria, and we didn't do it. And this is another of the actions that we have acted on to try and improve our best practices. This provision for doubtful accounts is simply that.

If I can understand your question correctly, you asked if this was a reflection of the first payment of the accounts. Actually, the nonpayment of the accounts in the beginning of April not only COPASA, but the -- well, everybody was scared. But now what we see is a return of the payments -- well, so this provision has to do more with the past. That was already accounted this way, Carlos Augusto detailed. And this is a direct effect of the pandemic. We are very optimistic in regards to the results that we are working with, and there is an increment in the activities. This was still a part -- well, this is simply to improve our audit processes and to gain more robustness.

The market, as a whole, we are waiting for the veto of Article 16, which influences our strategy. However, regardless of the veto or not -- well, according to the regulatory body, regardless of having a contract or no, we -- they received -- the concessions received the value, the financial amount. Therefore, this -- well the payment of the investment -- of the invested capital. And we have the review now.

So the hypothesis that the city that has overdue balance, our understanding is very clear and registered for the non-amortized amount that will be reimbursed as using the word that you have said, ANA will establish a criteria. However, the good regulators of water and sewage, the company has agreed with everything that is agreed in historical -- with the historical processes, and we can adjust if necessary.

[Operator]

I think Carolina is not in the call. [Operator Instructions] Carolina, you were out of the call.

[Carolina Carneiro, analyst]

A follow-up in regards to PDA. Actually, what we should see in regards to the previous year is a higher rate, given that you adjusted the methodology. That's it, right?

[Carlos Augusto Berto, executive]

Certainly, Carolina, this is the highest level of provisions necessary. But now the next months will just be an update in the accounts receivable, and at that time, a different methodology.

[Operator]

[Operator Instructions] One question through the Internet.

[Carlos Augusto Berto, executive]

There is a question from the Internet. I'm going to read it. It's from [ Anderson ].

Due to the strong reduction in the net revenue, there is the -- discussion will be extraordinary event, well, going over twice the EBITDA.

Well, as I had mentioned, [ Anderson ], the -- this is in the discussion with the Board of Directors to protect the cash flow in the impacts of the pandemic. We are taking the discussion to the fourth quarter or before, where we will deliberate the provision for the extraordinary dividends in the -- the payment of the extraordinary dividends by the Board.

[Operator]

[Operator Instructions]

[Carlos Augusto Berto, executive]

Well, there is a new question from the Internet. Can we talk about the readjustment of the tariffs? The review?

Well, we're going to talk about both. There will be an annual adjustment in the tariffs aligned with the regulatory agency. And we have the effects of the pandemic on society as a whole. The adjustment would be in August, but it was delayed for November, 3.04%. We are considering that this is the first quarter of review of the tariffs, the temporal difference will be considered for the review.

Now we have of the adjustment every 4 years. We are extremely ready for this discussion, and we hired a good adviser from the regulatory standpoint, which is Siglasul that has excellent work and a good experience. The company will be alongside with COPASA and the regulator as to increase the technical discussion to preserve the interest of the company, the shareholders and more importantly, the balance of what we do and between the operator and the citizens, so that the service can be delivered with regularity and quality. I would just like to highlight that COPASA is very much adjusted and prepared for the review of the tariffs.

[Operator]

[Operator Instructions] This is for all the shareholders and the journalists present in the call.

[Carlos Augusto Berto, executive]

Another question, it's more of a confirmation. Could you please repeat the PDA, an increase of 80% the new way of accounting, and 20% COVID pandemic?

Yes, agreed. It's an improvement alongside with our auditors in regards to PCLD, which is an English provision for doubtful accounts. We have the public/private and regions along with the methodology. We got to the value of BRL 76 million in the result. Out of these BRL 76 million, 80% is reverted to that incorporation of the methodology, and 20% are the impact of COVID.

A new question from [ Thais Irata ]. I think that I cannot ask via the telephone. Can you talk about the destatization issue? Is there any improvement in the process? I also wanted to know.

Well, [ Thais ] had the opportunity to talk to other people and with the investors. The agenda for destatization is done by the government of the state as the main shareholder. And we have the direction of the company, the company has throughout the 12 months. With new Board of Directors and a new support, we want to make the company and take the company to another level of operational efficiency and prepared for a scenario of competition that will happen with the approval of the next regulatory framework.

What I can tell the market as a whole, is that the government has a destatization work group that works to do the destatization not only for COPASA, but other assets that are in this process. And we've dedicated ourselves.

What I can tell in regards to Article 16 is that there is a scenario with it and without it. But we have the representative, the shareholders, the project of -- this will be following up and will be taken into account due to the legal positions on the debt.

[Operator]

[Operator Instructions] We have one question from Cristian Favaro from Estado.

[Cristian Favaro;Agência Estado;Journalist]

I wanted to get your comments in regards to the regaining -- the return of the commercial activities. A few companies are stopping still. Do you see a regrowth that is faster than you imagined?

[Carlos Eduardo de Castro, executive]

Cristian, Carlos Castro. Thank you for the opportunity to talk to you again.

Yes. We start to see and identify a regain. The state government has launched a program, which is called Conscious Minas Gerais -- Minas Consciente. And we need to get alongside with the return of the activities, the entrepreneurial activities as a whole, the commercial activities. And we've identified a regrowth a little bit faster than we imagined.

And maybe throughout the next month, we will gain strength, and somehow that will change the tariff mix as it was commented by our CFO. The mix of tariffs was affected the residential and commercial. But we good -- we have indication that we can improve the results for the tariffs.

[Operator]

[Operator Instructions]

[Carlos Augusto Berto, executive]

Another question from [ Rodrigo ]. What is the profitability rate current of COPASA? And what is the new rate for the agency?

Well, our rate is 7.94%. And as we've mentioned in our release, this is being discussed, if you verify our regulatory environment and the second phase of methodologies, where we have the capital costs where we will have on October 26 the results from January 2021.

[Operator]

[Operator Instructions] Cristian Favaro from Estado.

[Cristian Favaro;Agência Estado;Journalist]

Well, since you commented the 20%, I can get to the BRL 26 million that you just mentioned and can get 20% of the BRL 76 million. And we have the impact of the COVID, of course. Those are the lines. I just wanted to make sure that I got the numbers right.

[Carlos Augusto Berto, executive]

Cristian, just to highlight the issue of PDA. We have categorized the calculation based on this matrix public and private. And we have the accounts receivable profits of the company. And we found that in the result, we have a new methodology of total impact of BRL 76 million.

But out of those, we have 20%, which is a reflection of the pandemic. And out of the 20%, BRL 15 million in regards to COVID.

[Operator]

[Operator Instructions] We have a question from [ Lima ], Santander Bank.

[Unknown Analyst]

Just to confirm the issue of PCLD vis-à-vis PDA, will there be a change in methodologies?

[Carlos Augusto Berto, executive]

Thank you for the question confirming the information. Yes, we did a readjustment of the new methodology now in the second quarter. And from now on, we will have an update of this value for the next quarters. But the biggest adjustment in the second quarter of this year. And from then on, we will see an update according to the Board.

[Operator]

Well, now the Q&A session is closed. We will give the word to Carlos Castro to -- so he can do the final considerations.

[Carlos Eduardo de Castro, executive]

Well once again, in the context of this very challenging scenario in the Brazilian economy has gone through the first and second quarters, the pandemic and other consequences, COPASA had the pleasure of broadcasting the earnings call for the second quarter. And therefore we have a path with several challenges, structural challenges, and we're working with them.

As we say, we are trying to find -- trying to get the company under the conditions of being competitive about the possible changes in the scenario considering the regulatory operation on the new legal framework context. And we are doing the readjustments, everything that we will implement. And in the future, we should gain more information.

And certainly, COPASA will have a highlight in -- will be a highlight in the new market for water and sewage services. We have solid results, and we are reviewing the tariffs. And this is a great moment, and it will allow that the company will talk about all the strategic issues and obviously the effects of the new legal framework. And the challenges are many, and at the same time, they motivate us. When we compare the results to the previous year, we can see that this is going to be a great year.

Thank you for your participation, and we remain at your service. To our investors, the journalists, the media, and our CFO Carlos Augusto, we remain at your services. It's important to show that to the market. Thank you very much. Good morning and good afternoon.

[Operator]

Therefore, the second quarter earnings call is finalized. Thank you very much, and have a wonderful afternoon.

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