Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2023-Q2

[Operator]

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

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

Before proceeding, we would like to clarify that any statements that we made during this conference call regarding COPASA's business prospects, projections, operating and financial goals reflect the beliefs and assumptions of the company's management as well as 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 the macroeconomic policy were in loss and other operational factors may affect due to performance of COPASA that lead to results that materially differ from those expressed in such forward-looking statements.

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

[Carlos Augusto Berto, executive]

Good morning, everyone. Thank you for participating with us in the conference call. I'm here accompanied by our CEO, Guilherme Duarte; Marcia Fragoso, Environmental Officer; and Regulations Officer, Cleyson Jacomini.

So I will start with the part that addresses the company's performance in the second quarter of '23. Slide 2. We talk about the results obtained in the second quarter of 2023. We will discuss in more detail the explanations for the behavior of the main lines of the income statement. We present COPASA's financial highlights for the second quarter of 2023. Our net revenue amounted to BRL 1.6 billion, a growth of 17.6% compared to the same period of 2022.

Before talking about costs and expenses, it should be noted that we had a factor that significantly impacted the costs and expenses line of the second quarter of '23, which was the voluntary separation program, VSP.

According to the notice to the market released in early June, 736 employees adhered to the VSP and the estimated severance payments totaled BRL 115 million, which was fully accounted for in the second quarter of '23. The exits are scheduled to take place within 6 months starting in July this year.

Now let's talk about costs and expenses. Disregarding the effect of VSP, the amount recorded in the second quarter '23 was BRL 1.1 billion, an increase of 10.1% compared to the comparative period, whose details will show a little later. In relation to other net operating income, our expenses in the second quarter '23, the value was negative by BRL 26 million, while in the second quarter '22, we had a negative result of BRL 15 million. The adjusted EBITDA with disregards the effect of extraordinary expenses with the VSP amounted to BRL 648 million with a margin of 40.4%.

The financial result, there was a reduction in the deficit since the amount, which in the second quarter of '22 had been negative by BRL 80 million. The second quarter '23 was negative by BRL 22 million. As a result of the facts presented, the net income reached BRL 249 million in the quarter.

Starting on Slide 3, we're going to detail the main variations in the accounts that make up the income statement. Starting with the revenue from water, sewage and solid waste,in the second quarter of 2023, it grew by 17.6% compared to the same period of the previous year. Our revenue in the second quarter of the current year was mainly impacted by the following factors: Tariff adjustment applied on January 1 of this year with an average tariff effect of 15.7% as authorized by ARSAE and an increase of 3% to the measured volume of water and 2.8% to the measured volume of sewage.

On Slide 4, we show the evolution of manageable costs which, excluding expenses accounted for with the voluntary separation program reached BRL 732 million in the second quarter of '23. And in second quarter '22, the amount recorded as BRL 667 million. Below detailed variations recorded in the main items that make up these costs. Personnel costs increased by 8%, amounting to BRL 400 million due to the effects of the -- on the payroll, resulting from the 2022 collective bargaining agreement whose base date is November with the application of INPC inflation index of 6.46% and due to the increase in profit sharing provisions in the quarter.

As mentioned, the voluntary separation program was implemented with 736 adhesions and estimated severance payments of BRL 115.1 million fully booked in this quarter. Third-party services grew by 7.1%, a growth explained mainly by the following expenses: BRL 3.8 million with outsourcing services for meter reading and bill delivery, BRL 2.3 million in maintenance, cuts and reconnection services and BRL 2.2 million in expenses with IT services.

In turn, the value of impairment of accounts receivable increased by 33.8% in the second quarter of 2023 as a result of the increase in net revenue in the reversal in the second quarter of '22 of approximately BRL 13 million due to the review of the risk metrics carried out at that time, which resulted in a reduction in expenses for the quarter.

Finally, the tariff transfer to municipalities increased by 29% due to the increase in company's revenue given the adjustment of 15.7% applied in January of this year and the addition of 75 new municipal sanitation funds with the right to receive transfers as authorized by the regulatory agency.

On Slide 5, we show the evolution of nonmanageable costs, which increased by 4.2%, amounting to BRL 166 million in the second quarter of 2023. Now let's go into detail about the main accounts. The cost of electricity remained in line with the comparative period, in turn expenses with treatment and laboratory materials grew by 32% caused by the increase in the pieces of chemical products used in the treatment process of water. Thus, as regarding the VSP expenses, the total cost and expenses of COPASA annualized period reached BRL 1.1 billion, corresponding to an increase of 10%.

On Slide 6, we present other revenues, other expenses, equity pickup and financial results. In relation to other operating revenues, there was a drop of 54% in the second quarter in '23, mostly explained by the change we recently made in which the amounts related to the recovery of written-off accounts are now shown at the net value under the impairment of accounts receivable line. In turn, the other operating expenses presented a decrease of 15% mainly due to the decrease observed in the line reversal provision for judicial claims in the second quarter of 2023, given the reversal of amounts referring to judicial proceedings in a scattered manner.

The financial result had a reduction in the deficit, reaching a negative level of BRL 22 million in the second quarter '23 against a negative BRL 80 million in the second quarter of '22. This happened due to the decrease in income from positive foreign exchange variation and the reduction in negative foreign exchange variation given the depreciation of the real against the euro in the period due to the increase in [ real gain ] financial investments and reduction of monetary variations in liabilities due to amortization of debt in IPCA associated to the drop in inflation measured by this index.

On Slide 7, we present the data for EBITDA, EBITDA margin and net income. These are adjusted excluding expenses to the Voluntary Separation program. The adjusted EBITDA grew by approximately 32% and reached BRL 648 million. This demand corresponds to a margin of 40.4%. In the second quarter '22, it was 35.6%. The net income in the second quarter of '23 amounted to BRL 249 million due to the facts already mentioned in the previous slides.

On Slide 8, we present the data from the investment program of the company. The first half of '23, COPASA invested BRL 676 million with emphasis on investments in water, which amounted to BRL 260 million and sewage, which amounted to BRL 293 million. Under the subsidiary COPANOR, BRL 12 million were invested in the semester. In this slide, we also present the amount of planned investments, which are around BRL 9.5 billion in the period from 2023 to 2027.

On Slide 9, we talk about the debt of the company, gross debt, net debt and leverage. The gross debt reached BRL 4.1 billion in June 2023 of which 22% is short-term debt. On the other hand, the net debt increased to BRL 3.3 billion in June 2023, while in June 2022, it amounted to BRL 3 billion. Finally, the net debt over EBITDA ratio is 1.5.

Going to Slide 10, we address the weight of indexes in our funding, the average coupon, the debt-to-equity and rating. The CDI accounted for 45% of COPASA's debt, an increase of around 6 percentage points in relation to the comparative period. This increase in the weight of CDI was mainly due to the raising of BRL 750 million through the 17th issue of debentures completed in December of 2022.

The debt linked to IPCA decreased around 6 percentage points, now accounting for 19% of our debt. This occurred mainly due to the amortization of debentures from several issues carried out in the last 12 months. The debt in foreign currency, first to the German bank KFW and the European Investment Bank, an increase to around 10% of the total debt. This effect was due to the release in February 2023 of EUR 35 million related to an agreement with the European Investment Bank. In relation to the average coupon, the percentage increased to 10.4% due to rise in interest rates. Debt to equity ratio went from 43% in June '22 to 44% in June '23.

On Slide 11, we talk about shareholders' compensation. For the financial year 2023, as approved by the Board, the payout will be a 50% of adjusted net income. The amount already stated in the first 2 quarters of '23 was BRL 260 million. At the special shareholders' meeting held on April 28 of this year, the reform of the company's dividend policy was approved. The rules were maintained for regular dividends and the extraordinary dividends may be distributed as the analysis of the Board of Directors and in compliance with the guidelines provided for in the policy.

After the presentation of the financial data, we now talk about concession agreements on Slide 12. Referring to June 2023, COPASA and COPANOR jointly owned 640 water concessions, of which 632 are in operation. For sewage, there are 309 concessions, 270 in operation. Therefore, the company serves 11.9 million inhabitants with water and 8.6 million with sewage. In the table on the right, we informed the 10 main COPASA concessions, which jointly account for about 50% of total revenue. In June '23, the company had 24 expired concessions and 2 concessions whose contracts are considered void in court. All these concessions together account for 3.9% of revenues.

On Slide 13, we show some of our operational data. The ratio between the number of employees per 1,000 water and stowage connections remained stable at a multiple of 1.32. In turn, the loss rate measured by the difference between the distributed volume and the measured volume divided by the number of connections served and the number of days in the period decreased by 3.1% in the second quarter '23 compared to the same period of 2022.

Finally, the delinquency rate corresponding 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 decreased in relation to the comparative period, reaching 3.11%.

Water situation. Closing our presentation, we saw the volume of water sources used in the metropolitan area of Belo Horizonte. The levels of the reservoirs that makeup the Paraopeba system, that is Rio Manso, Vargem das Flores, Serra Azul, which are responsible for supplying 48% of the metropolitan area are at around 90% of the total capacity. In the Rio das Velhas system, which accounts for 42% in the supply in the region, this information is highlighted on the right side, the average flow of the last 15 days prior to July 23, 2023, was 18 cubic meters per second, showing therefore very significant surplus in relation to the captured volume, which is approximately 7 cubic meters per second.

With that, we conclude our presentation of the financial results, and we can move on to the Q&A session.

[Operator]

Thank you. We'll now begin the Q&A session, initially for investors and analysts and then for journalists. [Operator Instructions]

First question comes from Julia Zaniolo from Santander.

[Julia Zaniolo, analyst]

I have 2 questions. The first relates to the expected decision for extraordinary dividend payment and the cost of electricity. Because you mentioned in the last quarter of attempt to reduce these costs. Do you have any update on this? So what we could expect from the performance of this line of costs in the next half of the year.

[Carlos Augusto Berto, executive]

Hello, Julia. Good morning. Well, regarding extraordinary dividends, we are within the policy and we have increased the payout of the company to 50%. And the focus of the company with robust investments we have now is to invest in CapEx. As for electricity, Guilherme will comment.

[Guilherme Augusto Duarte Faria, executive]

Good morning. This is Guilherme speaking. As for electricity, the company continues its effort to migrate its medium and high voltage to the free market. We have agreements in execution and others that will start due to recent invitations to bid, and the migration term happens after the invitation to be processed. It's worth mentioning that there has been no significant change when compared to the previous period.

Nonetheless, we had paid the return of charge of ICMS on transportation and distribution costs of electricity [ initialized. ] So since there has been no significant change in the volume of energy used, there was no change when the comparison to the previous period and fixed cost for electricity have dropped, which was partially offset by the return of ICMS. The ICMS that was once again charged by the company, we'll be taking into account in the next tariff adjustment since it's a nonmanageable expense.

[Operator]

[Operator Instructions]. There are no further questions by phone. We'll now start the Q&A session for questions sent by webcast.

Now starting the questions from the webcast, I'll read the question and then direct to my answers. The first question is from [ Marcelo Gonsalves ] from the CapEx for 2023. Does COPASA believe it will impact the BRL 1.7 billion projected for 2023? Marcia, could you answer that?

[Marcia Soares, executive]

This is Marcia speaking. Talking about the CapEx of 2023, we do not have any indication that will not be able to execute or fail to invest the projected value. We are working a lot to execute on our expectations so that we could deliver on our promises.

[Operator]

The next question was also asked by at [ Marcelo Goncalves. ] Is there a possibility of renewal of concession of Belo Horizonte that is due in 2023 in advance?

[Guilherme Augusto Duarte Faria, executive]

Well, from the legality point of view, the only possibility of renewing concessions according to the sanitation law is upon privatization. So considering the current situation of the company, there is no legal provision for renewal. In the event, the government advances and [ CapEx ] privatization process, then there's a window of opportunity to review concessions and inclusion of object in which we only have the concession of water, sewage could be included.

[Operator]

Thank you. This ends the Q&A session. Thank you very much. I now turn the floor over to the CFO and IRO, Carlos Berto for his final remarks.

[Carlos Augusto Berto, executive]

We thank you all for attending this conference call for the second quarter of 2023, and we remain available for any questions you may have in our financial directors as well as Investor Relations area. Thank you, and have a good day.

[Operator]

The conference has ended. You may turn off your phones.

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