Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, everyone. Welcome to our teleconference for COPASA for the results of the second quarter of 2021. [Technical Difficulty] Dr. Carlos Augusto, who is the Financial Director of Investor's Relations from COPASA. We inform you that we're going to be recording the audio of this teleconference and everyone will be able to access that. [Operator Instructions] This is also on the webcast page, ri.copasa.com.br. You can watch the webcast over there, and you can also download the presentation.

Before we continue, I just wanted to say that any declarations that might be done, any affirmations during the teleconference about projections or any goals that we might have financially at COPASA are your expectations by the Board of Directors of the company and also any other information that is available nowadays, they have to do with risks and uncertainties, of course, because we're talking about future things that might or might not, may or may not happen. Any changes in legislation and some other operational factors might affect these things and then generate results that differ from those that are on our expectations or our documents.

I will turn it over to the Financial Director now, who will begin the presentation. Carlos Berto, you may begin.

[Carlos Augusto Berto, executive]

Thank you, Fabio. Good morning. Thank you, everyone, for being here today in our conference. I am here surrounded by our Director, Cristiane Schwanka for the Market; and also Operations Director, Guilherme Frasson, for this conference.

Well, let's begin with the presentation as a result of the second quarter of 2021. I would like to show you some of the highlights of the company to begin. Our net revenue grew over BRL 1.3 billion in this period. We see the other operational revenues and expenses against 2020. So we have around 1% change in cost and expenses against the same period of time.

Now going back to other operational revenues and the costs and expenses, we see that there is a change of 17.8%. EBITDA grew 30% when we compare both periods of time. The margin for this quarter went up to 36.7%, whereas we had 31% in the previous -- in the second quarter of 2020. The financial result, as you can see here, and the net income have a few alterations. The net income that we observed in this period had an increase of 62% against the same period of time in 2020.

Now on Slide #3. I just wanted to show you a few details on the main alterations. I mean, when we look at water sewage and solid waste in the second quarter of 2021, we see an increase of around 29% against the same period of time in the previous year.

In terms of revenue, we have an increase of around 5% in measured volume for water and 5.3% for sewage. We see that there is an important increase of savings here. It's important to say that we had an impact because of the tariff adjustment, which is an average of 3.04% and that was applied in November 2020.

On Slide 4, we also see the manageable costs. It went up to around BRL 600 million and in the second quarter of 2020 was BRL 669 million. Now it's BRL 645 million. I'm going to show you why that changed. In terms of staff, we see that it went up 9% because of some provisions that we needed to do.

And from a labor perspective, we also see changing the outsourced services. There was also an increase in terms of provisions for our employees that was BRL 15 million and now BRL 9 million in the second quarter of 2021 against the second quarter of 2020. We also see a change in BRL 6 million in health programs, health care programs.

In terms of the outsourced services, also, I just wanted to mention that we had that 15.4% increase, mainly due to some services with trucks, with water containers, with also the adjustment on the tariff and also the implementation of SAP4HANA. We also had some costs with advertisement, which was also important. We also see here that there are a few more factors in terms of material. I just wanted to remind you that in 2021, we had a nonrecurring event due to the matrix of provision that we started using, that helped us with some geographical aspects.

We started to implement that improvement and had an interesting impact that started back in 2020. We're seeing the impact right now as well. We also had the tariff transfers to municipalities. As you can see here on the slide and that was actually authorized. That was based on the policy of tariff adjustment. And that's based on the annual adjustment that we usually have. So any changes, they are also going to reflect on future changes or on future adjustments.

Now on Slide 5, I wanted to share the non-manageable costs and some other costs. We see electricity, telecommunication, chemicals, fuels and lubricants, tax credit, here are the main variations. In terms of electricity, we see an increase of 18.6% in the second quarter of 2021, especially due to some various adjustments that we observed compared to minus 1% in the second quarter of 2020. There was also a higher operational demand and a change in the consumption.

Now in terms of materials for treatment, we see that there was an increase in the costs, especially due to the utilization of chemicals. Here, we see an increase of around 17.4%.

Now on Slide 6, we see some other revenues and expenses, equity income and financial results. So for other operational revenues, we see that it went to around BRL 27.7 million. On other operational expenses, we had a decrease. It was actually an expense of around BRL 50 million due to some processes, due to some judicial matters.

And the equity income, as you can see here, BRL 2.9 million, and finally, the financial result, BRL 3.1 million in the second quarter of 2021. So that was a positive result in this current period of time. This result, what it has to do maybe with the currency exchange, which had also a variation in the second quarter of 2021, we had this positive result in the currency, whereas in the second quarter of 2021, there was a devaluation of around 11%.

Now on Slide 7, just trying to show you the EBITDA, the margins and the net income. EBITDA had an increase of 30.1%. It went up to BRL 492 million and the margin was 36.7%, whereas before that, we had 31%. Now the net income went up 62% in terms of the volume against the second quarter of 2020.

On Slide 8, we have the CapEx, the finished and projected investments. In 2021, we're looking at BRL 331 million being invested by the current company. We see BRL 138 million for water, BRL 140 million for sewage, BRL 53 million for others. And in December 2020 and for the next 4 years, we're going to have the program with annual investments of approximately BRL 1.2 billion in the future.

Now on Slide 9, we're looking at debt. This is what we had in June 2019, June 2020 and June 2021. We see that net debt went to -- went from BRL 2.4 billion to BRL 2.61 billion. That's in billion reals. We have the gross debt in the long term and the short term and also net debt.

On Slide 10, this is a little bit more on the indexes and the average coupon that we have for debt. So we have the CDI, DR, IPCA, TJLP different aspects that we're looking at here against the second quarter of 2020. And also, we have the comparison with the second quarter of 2019.

We have looked at actual loans as well and the impact that we had due to the foreign currency. Currency exchange, as I mentioned before, we had this 11% variation that went from 11% to 6% now because of the change in the dollar, real, Brazilian real ratio.

Now looking at the average coupon, we have here second quarter 2021, 6%. Tiny variation, I would say, slight against the second quarter of 2020. That level went from 34.4% in June 2020 to 38.4% in June 2021.

It's also important to say now that we are -- we have seen an increase in the corporate ratings, they went to AA -- from AA to AA+ now, and they informed that it's a stable outlook. So from Moody's, we also have this information of a stable outlook.

Now on the next slide, we're looking at the shareholders' compensation. There was a meeting in February, they declared here the dividend policy, the regular dividend will be between 25% and 50% of the adjusted net income. These are quarterly declarations.

And we know that the BRL 25 million for this quarter are going to be paid in the future. This is basically what was decided by the Board of Directors Meeting, that is the gross amount and the payment date.

Now on concessions on Slide 12. COPASA and COPANOR have 631 operating units; 265, are sewage. 631 are the water. We see here that in the quarter, the company is serving around 11 million people in water and around 8 million inhabitants in terms of sewage. So we have here the situation as of January, 71%.

We also see the main concessions of COPASA, which are 50% approximately of the total revenue ending 2021, we're looking at 3% of the revenues coming from 69% expired concessions in December 2020.

Now the hydrological situation in Belo Horizonte Metropolitan Area on Slide 13. We have here the Paraopeba System and also the Rio das Velhas System. So you can see here that Rio das Velhas is actually -- it represents around 44% of the distributed volume.

We're looking at the average flow last 15 days prior to August 1, 2021, that was 10 cubic meters, and we also have the average flow collected in the last 12 months. As we informed on the previous release, we believe that this operation will go beyond the 5 cubic meters per second in the next quarter.

Well, that was the last slide for me. I will turn it over to the operator now to begin with the Q&A session. Thank you.

[Operator]

[Operator Instructions] Well, the first question is from Luiza from Itau BBA.

[Luiza de Vasconcellos, analyst]

My first question has to do with dividends, and I wanted to know the low figures and considering the policies of the company, I wanted to understand what you're thinking about the extraordinary dividends payment? When do you think we may expect that to happen?

And also about the regulatory framework for the valid contract, how do you see the financial operational ability of the company? Do you think the company is going to be able to comply with everything that was agreed upon?

[Carlos Augusto Berto, executive]

Well, thank you for the question. About the first one, about dividends. Well, according to the policy of the company, considering that indeed it is -- we have low figures in terms of leverage, the Financial Board of the company is going to be looking at that and probably trust in a plan for the payment of dividends in 2021 is still in 2021. So that's -- yes, there is going to be a plan for that payment, probably around October 2021. That's what we're looking at right now. So that's for the first question about dividends.

Now about the other question, about the financial capabilities, I would say, of the company and your regulatory framework, you probably know about the decrease, right? You probably know about the bill that was published in May 2021. And it establishes a methodology to show the financial capabilities of companies or the situation of companies. And the idea is to comply with all those criteria, financial criteria.

Of course, COPASA complies with all those aspects in that first stage. And about the second stage, which is the technical and operational diagnosis, we have some legal studies for contracts. We also have some other financial models that we're looking at. I would say that this is an ongoing process.

We have 3 very important consulting companies that are specialized. We have Deloitte for project management of our portfolio. We also have another office, Manesco and also EY, for some other viability studies. So I would say that we have a good outlook in that regard about the regulatory framework. I'm not sure if I forgot any of those -- of your questions.

[Luiza de Vasconcellos, analyst]

No, that's great. And I just wanted to say -- to ask you one more thing now about the administration. I just wanted to know what's the debate now between state and municipalities. Are you taking part in that new process that they have? And how?

[Cristiane Schwanka, executive]

Luiza, this is Cristiane Schwanka, I am the Market Director at COPASA. Well, about the concessions portfolio of the company, well, that is under my unit. So I will answer this question.

You see this regionalization process or project in Minas Gerais. They had around 30 -- actually, 23 blocks of municipalities. That hasn't been approved in Minas Gerais yet, so COPASA is still acting in a proactive manner in the organization of concessions and renovations as well, or renewals actually, of the new framework in all of the valid contracts.

So for a while now, ever since the beginning of the year, we've been looking at the new projects. We have had, as we said before, the help of some consulting companies to look at all of the details. And of course, we're going to comply with the regulatory framework. So right now, nothing changes. We're still looking at the concessions portfolio, negotiating everything.

[Operator]

Well, the next question is from Guilherme Lima from Santander.

[Guilherme Lima, analyst]

I have also a few questions. First of all, about CapEx, if we consider the comparison, 2020 and 2021, we see that it is a little bit below what you had before. So do you think that's going to accelerate now? Or is there going to be maybe a review of that to lower tariff figures? And also about the credit for the company for the basin of Paraopeba and Rio das Velhas, in the agreement with Vale, how is that operation going to happen? How are you developing that?

[Carlos Augusto Berto, executive]

Thank you, Guilherme, for your question. About the first one, I would say that we know that sanitation is quite a resilient sector, but of course, it suffered as well with the pandemic. There have been a few changes due to the pandemic.

In the first quarter, we had a few different deadlines in terms of material delivery, there was a change in the bidding process as well, where that became integrated. So that also changes the deadlines.

But in accordance with the technical factor, which is -- whose Director is Ricardo Simões, we're going to see, of course, an important improvement after July. So that's what I can say in terms of CapEx.

Now about the credit, I think what I can say here is these resources, they're going to be destined to work that will potentialize Paraopeba and Rio das Velhas project. It is BRL 2.05 million -- BRL 2.05 billion actually, that's the value, but we haven't really defined how that's going to work at the company.

[Operator]

Now we have a question from Carolina Carneiro from Credit Suisse.

[Carolina Carneiro, analyst]

I also have two questions. The first one is the following. You were -- during the teleconference, you were showing the costs in PCLD, I mean what we have this quarter against last year, even though there was an improvement, a clear improvement because the second quarter of 2020 was very complicated because of the COVID 19. This specific quarter now, it showed also a percentage in revenue that is a little bit superior to -- against the first quarter.

So if you're looking at the percentage in your history, I just wanted to know if there was anything special for this second quarter? Anything that created that pressure? Or can we actually expect also an elevation and increase in the next few quarters?

And going back to what Guilherme said about credit for the Paraopeba and Rio das Velhas, just wanted to understand, is there maybe an expectation about that? How is that going to look like vis-à-vis the assets? I mean the credit will come from third parties. So I just wanted to understand a little bit more of that.

[Carlos Augusto Berto, executive]

No problem. I can answer that. I will start with the last question about the credit. Well, again, we still haven't defined how that's going to happen. So I'm not able to say if that's going to have to do with the assets or kind of impact that's going to happen in the company, that's still to be defined.

About the PCLD that you mentioned, if you compare the first quarters 2020 and 2021, and did we had a nonrecurring effect of the new methodology, around BRL 77 million. But right now, we don't see any effect, except for the social tariffs where we can actually change anything.

But if you look at failure to pay, I would say that failure to pay really dropped significantly. So if you look like pre-pandemic and post-pandemic, I would say it's 4.3% to 3.67%. So there is a change, and we see this consistent movement or not much change, basically, in terms of PCLD. So what we're going to see in the future probably is this change that we're going to revert that because of the -- because of what's going to happen with the unit directed by Cristiane Schwanka, what they're doing in terms of billings and all those changes they're implementing.

[Operator]

[Operator Instructions]

[Carlos Augusto Berto, executive]

We are receiving new questions sent through the webcast. Once again, we are receiving new questions sent through the webcast. Just one moment we will begin with those questions. Well, to continue with the questions that we have received, we have one from Ricardo Yoshi Nakamura, and the question is, "I wanted to know if COPASA will be able to deal with the requirements of the new regulatory framework. How is that going to happen?"

Well, Ricardo. First of all, I would say that, as you know, COPASA is very well positioned right now. And it's completely capable of dealing with the new regulatory framework for sanitation. I would say this is an agenda where we're focusing on making the company more and more efficient every day. And about the last question, well, it's not what we're focusing right now. I hope I have answered your question.

Now the next question here is by Lisandra Castro. And she says, "Hello, I wanted to know about the last decision of our site, how is that going to work? What are the conditions for payment?

[Cristiane Schwanka, executive]

Hello Lisandra, good morning. This is Cristiane Schwanka, I work with the -- I have worked as the Market Director. I believe that you're talking about the demand or a desire for Belo Horizonte for the inhabitants in Contagem. You're probably talking about the possible mandatory payment towards sanitation services.

Well, if that's what you're talking about, I have a request of BRL 246 million. That's actually something that was communicated to market for all the investors to know about that. We recently -- last week, just last week, knew that our administrative process did not go through. So we're still looking at what specific points show that the return is going to be -- or the reimbursement is going to be mandatory.

Now in terms of deadlines, the rule is usually given that back, returning that amount and the very invoice, I mean when we're billing. So we wouldn't be talking about something that would happen in a one lump sum. We're talking about that amount being distributed over different invoices, different bills actually, and then that's going to be returned to the customers.

That's something that has been discussed with the regulatory agency now, because there are many factors that don't really have to do with COPASA. There are the electric vehicles that were broken or something that didn't work during the rainfall season. So we're still looking at how that's going to be returned, really.

[Carlos Augusto Berto, executive]

Well, we have another question from Luciano Santino. "We see that debt has decreased. Okay, that's interesting." He is saying here, "now according to statute, when that happens, one of the possibilities would be extraordinary dividends. Should we expect that?" he's asking.

Well, I think I actually answered that before, but I'm going to repeat what I said. The company has dividends and the executive directors are going to take that to the Board. I mean, they're going to take a proposition for the payment of extraordinary dividends or also the review of the regular dividends, and they have up to October 2021 to approve that plan or not. If extraordinary dividends are to be paid, then that is going to come from the revenue reserve.

We have another question here from Alvaro Paiva. Now I wanted to know about the reimbursement for customers and also sewage system in Patos de Minas.

Alvaro, as you know, there is a CPI as we call it here in Brazil. And the institute or the institution that is actually going to define that is the main agency. Until that happens, we cannot say anything until they finish their investigation. We cannot say anything about that matter.

Well, now Luiza is saying, "The dividend, the quarterly dividends plan, is it going to be maintained in the long run?"

But we have a policy that talked about payments of the JCP every quarter, unless that policy changes in the future. But yes, we're going to maintain -- we're going to continue to observe that because it's in accordance with our policy.

We have another question here from Felipe. I wanted to know about the expiry of the concession in Ipatinga, how much that represents in terms of results? And about the expired concessions, do you continue to offer services and obtain revenue in those cases? Are you going to renew those contracts?

[Cristiane Schwanka, executive]

Felipe, this is Cristiane Schwanka, the Market Director. As Carlos Augusto mentioned before, we highlighted that the concessions that will expire in 2034, they represent 78% of our revenue. So even though we are concerned about Ipatinga, because it is an important municipality, an important city for us, in our portfolio, please remain calm.

I mean, as I said before, in a previous question, the company continues with negotiations with all of those say to adapt all of the concession contracts to adapt everything to the new sanitation framework. And Ipatinga is one of those cities.

And about the expired concessions, well, the legislation determines that we continue to operate in all these systems in the situation here with the expired contracts and we have this possibility according to the legislation, because we also have this asset to be in the nice, if it happens to be the case.

[Carlos Augusto Berto, executive]

We are receiving a few more questions through the webcast. We'll be back soon. Again, we're receiving a few more questions through the webcast.

So we have a question here about the perspective of COPASA to participate in concessions outside of Minas Gerais. We have the example of Cedae, which is a public partner -- a public private partnership.

Well, COPASA is looking at the opportunities of concession in Minas Gerais. For each opportunity, we assess the possibility of participation or not. We discuss that with the governance team and the administrative or the management team. And then depending on the case, we present a plan or not. Every opportunity is discussed with the governance team for -- or actually to make a final decision.

[Operator]

Thank you. We are now ending the Q&A session. I will turn it over to the Financial Director, Carlos Berto for some final comments.

[Carlos Augusto Berto, executive]

Well, I would like to thank everyone for participating. We're always at your disposal. Should you have any questions, our Investor Relations is, of course, at your disposal with Osvaldo, who you know very well. I think just as a final message, I wanted to mention the resilience that we have especially during the pandemic, that became very important, and we have been working to reduce nonpayment and also to implement PTVI in the second semester. That's going to potentialize the revenue of the company. Thank you very much. Have an excellent day.

[Operator]

Thank you very much. This is the end of our conference for the second quarter of 2021. You may disconnect now. Thank you. Have a great day.

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