Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. Welcome to COPASA's conference call to discuss the results for the second quarter 2022. Here with us is Dr. Carlos Augusto Botrel Berto, COPASA's Financial and Investor Relations Director.

We would like to inform you that the presentation will be recorded in audio. [Operator Instructions] This event is also being transmitted via webcast and can be accessed on COPASA's Investor Relations website at ri.copasa.com.br where the presentation is also available for download.

Before proceeding, we would like to clarify that any forward-looking statements that may be made during this conference call regarding the company's business prospects, financial and operational projections and goals of the company constitute beliefs and assumptions of the company's management as well as information currently available to COPASA. They involve risks, uncertainties as they refer to future events and therefore depend on circumstances that may or may not occur. Changes in macroeconomic, politics or legislation and other operating factors may affect the future performance of COPASA and these results may materially differ from those expressed in such forward-looking statements.

Now we turn the call to Dr. Carlos Augusto Botrel Berto who will deliver the presentation. Please, Dr. Carlos Berto, you may proceed.

[Carlos Augusto Berto, executive]

Good morning, everyone. Thank you, everyone, who is with us attending this conference call. I'm here with Guilherme Duarte, the President. Good morning, everyone, who is attending our conference today. So we are now going to start talking about the performance of the company in the second quarter of 2022.

From Slide 2, we are going to discuss the results that we obtained in the period. We are also going to address in the next slide in a more detailed manner the explanation of the behavior of the main lines of the income statement. We presented the financial highlights of the second quarter.

Our net revenue amounted to BRL 1.34 billion, a growth of 2.6% in relation to the same period of 2021. Cost and expenses amounted to BRL 1 billion, an increase of 4.8% in relation to the BRL 957 million of the same period of the previous year. In relation to other expenses, the value was negative BRL 15 million. In the second quarter of 2021, we had a negative result of BRL 22 million. The EBITDA reached BRL 492 million in the second quarter 2022, in line with the comparative period. As to the financial result, the amount was negative BRL 80 million vis-à-vis the second quarter '21 when the amount had been positive BRL 3 million. In view of the facts presented, the net income reached BRL 180 million in the quarter.

Now on Slide 3, we provide details of the main variations in the income statement, and we start with water, sewage and solid waste that in the second quarter in 2022 had a growth of 2.6% when compared to the same period of the previous year. Our revenue in the second quarter of the year was driven by the increase in volume of the water and sewage measured of 1.7% as well as the impact when we migrated from the ranges and categories of consumption. As you know, we have a negative tariff effect of 1.5%, according to the authorization by ARSAE applicable as of August 2021. This is a result of the second tariff review.

On Slide 4, we see the evolution of the manageable costs that reached BRL 667 million in the second quarter 2022, and the amount recorded was BRL 645 million in the period of 2021. To provide more details about the variations posted, the main items comprising those costs are the following.

Personnel that had a drop of 3.6% with the amount reaching BRL 369 million driven especially by the gains coming from the program of dismissal that was implemented in 2022, and all the employees that adhered to the program are already disconnected from the company.

Outsourced services grew by 30.5%. That was driven especially by the increase of BRL 20.9 million related to the maintenance of systems and an increase of BRL 6.4 million related to consulting costs, among which PPP of Rio Manso grew by 24% due to the adjustment of the index in the agreement. And the loss due to receivables recoverable value had a drop of 37% as a result of the review of June 20, 2022 of the risk matrix, resulting in lower risk of default rate in relation to the previous year with effects of approximately BRL 13 million as credit to this account.

There was also an increase of material costs that grew by 19.3% due to the higher price of maintenance material costs and also for maintenance and systems such as pipe and fitting. So price grew up to 170% in some cases.

Lastly, the tariff transferred to the municipalities increased by 22% as a result of the inclusion of 85 new municipal funds of sanitation that has the right to transfer as of August 2021, as authorized by the regulator.

On Slide 5, we show the evolution of nonmanageable costs. That grew by 12.5% in the second quarter of 2022, reaching BRL 159 million. Now with more details about those accounts, electricity increased by 7.9%, especially as a result of the increase in the tariff flags. Now for treatment materials, we had a growth of 24%, driven by the increase of product chemicals used in the water treatment. Fuel and lubricants had an increase of 45%, also driven by higher prices of fuels as total costs and expenses of COPASA in the period that we analyzed reached BRL 1 billion, an increase of 4.8%.

On Slide 6, we present other revenues and expenses, equity income and financial results. Other operating revenues, there was an increase of 22%, while other expenses had a drop of 2.2%. The financial result had a deficit, reaching a negative level of BRL 80 million. And this result was driven by the depreciation of the real against the euro, an increase of interest rates and of our debt and also the increase of the indexes of those debts.

On Slide 7, we show the EBITDA, EBITDA margin and income. EBITDA was maintained in line with the comparison period with a margin of 35.6%, 36.7% in the second quarter 2022, and the net income ended at BRL 180 million.

Now talking about the investments of the company. In the first half of the year, COPASA invested BRL 474 million, BRL 278 million of which related to water and BRL 176 million related to sewage. As to COPANOR, we invested BRL 7.3 million. As approved by the Board in December 2021, for the next 4 years, the program estimates annual investments of BRL 1.4 billion between '23 and '26 and BRL 1.6 billion in the years 2024 and 2025.

On Slide 9, we address the indebtedness of the company. Gross net reached an amount of BRL 3.8 billion, out of which 25% are in the short term. And net debt moved to BRL 3 billion in June 2022 in comparison to June 2021 when the value presented was BRL 2.7 billion. The ratio of net debt and EBITDA remained at 2x.

Now on Slide 10, we are now going to address the representativeness of the indexes in our funding, average coupon and indebtedness rate. CDI started to account for 39% of the debt of COPASA, and this increase can be attributed especially of the capture of funds after we made the second series of the 16th issue of debentures in September 2021 in the amount of BRL 507 million and another issue of BRL 243 million indexed to IPCA, amounting to BRL 750 million.

In relation to the TJLP, we had amortizations debt in foreign currency related to the German Bank of KfW and amounts to 4.7% of total debt. And in June 2021, the percentage accounted for 6.4%. The average coupon started to be 9.8% as a result of the increased interest rates. The indebtedness level, measured by the net debt and the net income, is now 39% in June 2021, and now it's 43% in June 2022.

In relation to the shareholders' compensation, the Board approved the payout of 25% of the adjusted net income. And in January and June, COPASA has already declared BRL 87 million as the shareholders' compensation, and BRL 34 million have already been paid in May and additional BRL 53 million will be paid on the 12th of this month of August.

We ended the presentation of financial data, and we are now going to talk about our concession contract. And COPASA and COPANOR had, together, 640 water concessions, out of which 632 are in operation. As to sewage, we are talking about 310 concessions, out of which 268 are operated. And the company provides service to 18.8 million of inhabitants for water and 8.5 million for sewage. In June 2022, the company had 17 concessions that were overdue and 2 concessions whose agreement are considered legally null. All those concessions altogether account for 3.7% of revenues.

In relation to Slide 13, which is our last slide, we show the hydro situation in the region of Belo Horizonte. The reservoir levels that comprised the Paraopeba system that are responsible for 49% of the supply of the metropolitan region of Belo Horizonte are in a very comfortable situation with about 94% of the volume. Rio das Velhas system, responsible for 42% of the region, we show the average flow rate of the last 12 months was 12 cubic meters per second and in 2021 was 7 cubic meters per second.

With this, we end the presentation of the operational and financial results of the second quarter of 2022, and I turn the call back to the operator. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Julia Zaniolo with Santander.

[Julia Zaniolo, analyst]

I have 2 questions on my side. The first is related to CBD. I would like to know, we saw that there was a reduction. And we would like to know if it's a normalized level that we can consider for the next quarters.

And my second question is related to the tariff review. I would like to know if you have any estimate of a new date for the adjustment to happen.

[Carlos Augusto Berto, executive]

In relation to the PCLD, we reviewed the matrix. Yes, Julia, you're right. We reach to more constant levels in our receivables. The level of delinquency have affected our numbers as a result of the initiatives of collection efforts. So we believe we are at a level which is quite reasonable in the company.

In relation to the tariff review, I would like to turn the call to our President, Guilherme Duarte.

[Guilherme Duarte, executive]

Thank you, Julia. In relation to the adjustment, as soon as we reach the company, our movement was to reinforce with the regulators the need to give attention to the update of the inflation, especially in relation to chemicals and electricity, which is very relevant to our costs. So when we understand how important this is, when we had the collegiate meeting, they asked us more time for the decision and they also required some further information. And this information is being provided. And our intention is that the result is going to be seen in the review that we're going to see for the future that will favor the company so that it can reflect all the increasing costs that we have. We have no estimate when this decision is going to be made. We have a state legislation that provides us with the comfort that the situation will be retroactive to August 1. This is the day when this should have been published.

[Operator]

Our next question comes from Rafael Nagano with Credit Suisse.

[Rafael Nagano, analyst]

My question is in relation to Divinópolis and Patos de Minas, which are 2 municipalities which have problems related to the contract. I would like to know if there is any update as regards to when you were talking to the other municipalities. Do you believe that those agreements are going to be canceled and be considered null? And I would like to know what's the share of those municipalities in the total revenue.

[Guilherme Duarte, executive]

Rafael, this is Guilherme again speaking. In relation to Divinópolis and Patos de Minas, we continue providing services to those municipalities. There is no change in relation to the regulatory or legal aspects. In relation to the agreement, there were no initiatives by the municipalities to terminate those contracts, and we continue providing the services. I was with the public administration of Patos de Minas, and there is an interest of improving the relationship considering the importance it has in our company. And I'm going to talk to Divinópolis administration with the same purpose. So we see them as applicable and valid concessions. We are going to send the information you requested, by the way.

[Operator]

Our next question comes from Mr. Mario Wobeto with Safra Bank.

[Mario Wobeto, analyst]

I have one question on my side. I would like to understand the revenue related to sewage. You have higher volumes year against year. But we know there's some changes. So there was a drop. I would like to understand why the drop happened.

[Carlos Augusto Berto, executive]

Mario, this is associated with the restructuring of the tariff. In the past, we had a tariff that was differentiated. What was collected was about 33% of the amount of the water, and it accounted for 90% of the value of the water. And the total value now is 75% for sewage in comparison to the value of the water. So this is the variation that you saw.

[Operator]

[Operator Instructions] We have a question made by Taís Hirata with Valor Econômico.

[Taís Mayumi Hirata]

I would like to know if you study or consider any type of PPP to meet the requirements of the new sanitation framework. Do you have any project being developed similar to what Sanepar is doing?

[Guilherme Duarte, executive]

Taís, it's Guilherme speaking here. In fact, there is no study underway at the company at the moment. We have been focusing on meeting the requirements of the investment plan for the municipality serviced by the company. But considering the opportunities that may emerge, for sure, the company will those opportunities and see what's the best model so that we can be competitive, so that we can be good players in the market. But we have no studies underway at the moment.

[Operator]

[Operator Instructions] We'll continue with the questions received through the web chat. And I turn the floor to Dr. Carlos Berto who will read the questions. You may proceed, sir.

[Carlos Augusto Berto, executive]

So I'm going to read the first question, which comes from [ Sydney Lacemainte ], local broker adviser. Can we expect personnel expenses to be kept at stable levels considering the current levels?

[ Sydney ], as a result of what the company did last year, we started a dismissal program, and you're going to see a significant reduction. You have already seen significant reduction this quarter, this half of the year, and about BRL 152 million were obtained from this cost reduction. And we expect that this cost reduction, in comparison to 2021 and 2022, will have those reductions accounted for in our figures.

And the other question is by [ Everton Jocking ] who's an investor. So you had been affected by provisions for labor lawsuits. Are those provisions still impacting the results of the company?

No, those provisions affected the results of the company in December 2021. Specifically in this period, what is affecting the income of the company is if we maintain the EBITDA margin aligned with BRL 492 million in comparison to last year, what is affecting are the financial expenses driven by the increases of the indexes and also the increase in interest rates, as I mentioned during my speech.

A question from [ Ivan Santos ], is COPASA going to pay high dividends this year?

[ Ivan ], as you know, we have a policy implemented whose metric is the leverage of the company. Net income over EBITDA, we stand at 2x. This is according to our policy. If this leverage drops a lot, then it's going to be necessary to review to make a new calculation of new dividends so that we are not going to put the company in a complicated situation. So we are also discussing with the Board how we are going to review this policy as also a result of the tariff review and the new framework.

[Operator]

[Operator Instructions] The question-and-answer session has come to an end. We turn the call back to the CFO and IRO, Dr. Carlos Augusto Botrel Berto for his final remarks.

[Carlos Augusto Berto, executive]

Thanks, Sheila. Thank you, everyone, for participating in this conference call. We remain at your disposal on our RI platform. Have a good day, everyone. Thank you.

[Guilherme Duarte, executive]

Thank you, everyone, and have a good day.

[Operator]

COPASA's conference call has come to an end. We would like to thank everyone for having participated, and have a good day.

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