Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome. Please be welcome to the earnings call of COPASA about the results of the third quarter of 2020. We have here today Mr. Carlos Augusto Botrel Berto, he's the Director of COPASA Investor Relations; and Cristiane, Director of Market relationships.

This will be recorded, and everybody will hear the teleconference during the presentation of the company. And thereafter, we will start with a Q&A, and you will get further instructions. [Operator Instructions] This event is being transmitted simultaneously via webcast and can be accessed at the RI website of COPASA, ri.copasa.com.br. And the presentation is available for download.

Before we proceed, I would like to highlight that anything that might be said during the earnings call regarding the business perspectives, projections and operational goals of COPASA are premises and expectations of the Board of Directors based on information that is currently available. They involve risks and uncertainty. They refer to future events and are regarding things that might or might not take place. Changes in legislation and economic issues and other operational factors might affect the future earnings of COPASA and might lead to results that are different from what was expected.

Now I would like to give the word to the Financial Director, and he will start the presentation. Please, Dr. Carlos Berto, the floor is yours.

[Carlos Augusto Berto, executive]

Thank you, Marcelo. Thank you for the opportunity. Thank you all that are here at the earnings presentation of the third quarter. We have our directors. I will start.

Let's start on Slide 2, financial highlights of the third quarter. We're still going to talk through all the next slides in more detail. We explain the explanations for the main lines of services. We present the financial highlights once again of 2020. Our net revenue has grown 6.1% in regards to the third quarter of '19, getting to almost BRL 1.3 billion in the period. Cost and expenses, BRL 923 million, facing the BRL 864 million in the same period of 2019, an increase of 6.9% for the same period. As it will be explained, we had the provision for losses because of the reduction of values in comparison to the third quarter of 2019. We will explain that. In regards to the other revenues, in the third quarter of 2019, the value is negative BRL 29 million. In the third quarter of 2020, we had a positive result of BRL 17 million due to the reversal of BRL 30 million in provisions regarding to ABL, and we will talk about this later. EBITDA grew 14.7% in the period in comparison to the period of 2019, getting to BRL 526 million. The margin of the EBITDA in the third quarter was 39%, almost 2 percentage points higher than the margin observed for the comparison in 2019. Financial results remained in the third quarter stable. We went over BRL 39 million in the third quarter of '19 comparison to BRL 38 million in the third quarter 2020. Net income, an increase of 24.4% in regards to the same period of last year.

Slide 3. Let's see the water and sewage revenue. Third quarter of 2020, an increase of 6.4% in comparison to the same period of last year. We can highlight the main factors that affected the revenue. The tariff adjustment of 8.32 -- 8.38% from August 2019, there was an increase of 2.6% in the metric volume for water and 2.2% in the metric volume for sewage. This is consolidated, and we can see the economies of 2%. We also contributed to increase the revenue, the client of the social category we registered, and we had an increase of BRL 6 million and an increase in the tariffs in 8 cities from EDC to EDT. So we migrated from Sewage Collection to Sewage Collection and Treatment, increasing the monthly revenue 2.3%. And there is a reduction of BRL 2.7 million and [ index ]revenue from water and sewage due to the measures taken by the company to minimize the impacts of the COVID-19 pandemic.

Slide 4, let's talk about the manageable costs. They grew, as you can see, to BRL 351 million in personnel, for example. Now we will detail the variations that was from BRL 602 million to BRL 570 million to BRL 625 million, an increase of 9.5%. While we had the provisions for 2020, this was compensated by the reduction in the expenses with the transport tariff and because we had the COVID pandemic. And there is the expenses with the health care, there was an increase in the healthcare and dental services. We had a reduction of 109 employees in comparison to the third quarter of '19. We have the value of an increase of 24.6% in comparison to the same period last year. This reflected the behavior that was observed in the net revenue in the comparison period.

In the services by third parties, increase of 2.1%. The outsourced services, the more significant are an increase of BRL 9.4 million were the conservation services and maintenance of systems that are spanning from interventions that were registered in January and February. On the other hand, the reduction of BRL 5.7 million and the increase in the expenses with the transportation of potable water.

Now let's talk a little bit about the losses of the accounts receivable. Third quarter 2020, increase of BRL 46 million, of which BRL 17 million can be attributed to the improvement of the methodology and [ BRL 54 ] million regarding to the aging of the accounts receivable with more invoices being written off. This is due to the economic instability. Well, and there is the aggravated issue of the pandemic. We have the commercial clients as well as the suspension of the -- removal of the pain of these clients that are not paying. We have an increase in the tariffs to the municipalities and increase of 29% in regards to '19. This is due to the increase of the tariff transfer for the municipalities that we're talking to the regulatory body about the readjustment of the tariffs that happened in August '19.

Slide 5. We can see the non-manageable costs and others that decreased 5.4% in regards to the third quarter '19, we got to the value of BRL 129 million. Let's detail the non-manageable costs and others. Electricity, there is a drop of 12.8% in the expenses with electricity due to the operation in the accounting of the credits regarding to PIS and coking taxes that were accounted for each expense for its invoice, and they are considered as materials for different sector profits. Therefore, there is a reduction in 45% in the accounts of the credits -- tax credits.

On Slide 6, we have the other expenses and equity income. In regards to the other operational revenues, there is an increase of BRL 40 million mainly due to the approved contingency for remote contingency of division processes regarding the state law. And we have the public services. We have to protect the environment through investment due to the total operational revenue based on the municipalities where they operate. This comes from judicial decisions that are favorable to the company, and therefore, that's why we reduced the provisions for this that were accounted for this finality, for this end. We had a drop in the operational expenses of 10% in regards to the previous quarter. This is because in the third quarter of '19, we did the extraordinary nonrecurring provision in the value of BRL 16 million due to the judicial bargaining agreement.

Let's go to Slide 7. Let's see the data of the CapEx, finished projects. We invested -- COPANOR invested at the end of last year, while we had strong rains, and we had restrictions imposed by the pandemic. COPANOR invested BRL 15 million. COPASA invested BRL 328 million. We generated the discount in the procurement of the works. With the impact of the pandemic, a lot of the works had delayed, and they will go -- they will start in 2021.

Slide 8. We see the evolution of the indebtment of the company, the gross debt, net debt and leverage. Gross debt, that was BRL 3.41 million (sic) [ BRL 3.41 billion ] in September '19, had a decrease in 1.8%, BRL 1.8 million (sic) [ BRL 1.8 billion ] getting to BRL 3.35 million (sic) [ BRL 3.35 billion ]. We have BRL 1.7 billion. The net debt is BRL 2.27 billion. The index of leverage regarding -- well, when you measure the net debt over the EBITDA, got to 1.2. Before, it was 1.8 in '19.

Slide 9. We have the debt by index and average coupon. We have decreased from 6.6% to 5.5% the average coupon, an increase -- while there is a decrease in the interest rates in the Brazilian market, the indexers of the debt. The TGLP had a reduction in their representativeness, the total going over 19% of the current debt to 17% in the same period in 2020. The contracts connected to IPCA, we've had a reduction in the third quarter of '19. The debt in foreign currency, there was a devaluation in the real in 2020, and that's 12% of the total debt. That's why, well, the level of indebtedness measured by the net debt and shareholders' equity, we went from 44.2% to the third quarter '19 to 31.7% in the third quarter of 2020 due to the reduction of the net debt.

Slide 10, we are talking about the shareholder compensation. We have the distribution of dividends that is 25% of the net revenue and it will be in the form of JCP. We declared the JCP. And out of this amount, only in the third quarter of 2020 is corresponding to BRL 63 million that still hasn't been paid of the gross amount. And it will be done in November. The studies on the impact of the company, and we recommended for the deliberation of AG in 19 November. And we will have the payment still in this FY.

Now once we finalize the financial results, let's talk about the concessions that are regarding September 2020. COPASA, COPANOR, together, they have 640 concessions of water, out of which 629 are operational. The sewage is 310 concessions. Out of those, 265 are being operated. The closing of the quarter, the company had 11 million inhabitants being serviced with water and sewage. Now we have an 8.3 million inhabitants with sewage. We can see on the right, we correspond to 51.2% of the revenues the expiration of the 10 largest concessions. We can see here 20 were renewed from water and sewage. We renewed Santa Luzia and São Gonçalo do Abaeté in the concession of water. And we also had [indiscernible] in [indiscernible]. By September 2020, we had 67 expired concessions, which is 3% of the revenue.

Next slide. Let's talk about the regulatory environment. We have the tariff adjustment. Well, the average tariff affected 3.04%, and we are going to -- and we saw the application of this on November 1, 90 days after the data was predicted, which was in August. The second tariff review of about the starting in May this year with the public hearing and the technical meetings, seeing the general aspects of the revision. Second phase, starting in October, we had the public hearing and the technical meeting operational cost, capital cost, regulatory asset base, tariff incentives, tariff structure, and -- among others. And we will see -- and we are paying attention to special points. We are working through the contributions that are working with COPASA in the public here on the application, well, on the -- among others. And we have the third phase where we will start on April 2021. We will have the application of the methodology, annual tariffs adjustment of the methodology.

Now let's go to the last slide. As usual, Slide 13, we see the hydrological situation of Belo Horizonte. We have Paraopeba agreement, so likely that's why Rio [indiscernible] are responsible for 45% -- 47% of the service of the metropolitan region. They have 79% of the volume in Rio das Velhas, which is responsible for 42% of the service for the region. The information is on the right. The average flow in the 15 days is 16.6 cubic meters per second by October 26. The water collection grant in the system -- I'm sorry, average flow collected over the last 12 months is 6.8 cubic meters per second.

Well, with that, we close our presentation of the third quarter, and I give the word to the operator, and we can start with the Q&A.

[Operator]

[Operator Instructions] The first question is from Marcelo Sá, Banco Itaú.

[Marcelo Sá, analyst]

Just a few questions. Well, starting about the tariff review and the documentation, while there's a lot of documentation that was published, and actually, I just wanted to discuss 2 points that really got my attention. One is I understand that the proposal of the regulator is to do an analysis, giving the average. But then we have to work with the methodology of SABESP, and then you will attribute a CapEx and relevant facts that COPASA published and not -- well, you published based on information of COPASA, but it's not the effective CapEx that is projected for the next year. We are considering BRL 200 million, therefore, the average base makes you have a very relevant impact in the active base that will be considered for review. I wanted to understand what you think about this.

The other point, the operational costs. I don't know if I understand correctly. But I understand that based on the benchmark, the regulator understands that COPASA is not more efficient company at 7/8, and there is a different in 5% in regard to the most efficient. Now today, when you look at the regulatory cost base on -- and the regulatory cost, based on this methodology, I understand that the cost of exit would be the current cost of COPASA so that the company will move along. So at D 0, at the moment of review, the EBITDA of the company should increase, and I don't know if this is correct. I wanted just to confirm with you.

[Cristiane Schwanka, executive]

I am Cristiane, the Director of the Market Relations, and I'm the director responsible for this project, and I will answer this question. First of all, I would like to make it clear that the technical notes published by the regulatory agents are preliminary. The company, still with the regulator, with the support of the regulator, is preparing the evaluation, so they can submit the changes in the technical notes. Now the publishing of the technical note based -- will effectively caused a rumble in the market because the methodology used by the regulatory agency administrative is different from the methodology applied, for example, by SOVEST in the state of São Paulo, as you just mentioned. And the calculation of the base of the regulatory articles, the methodology that was published only references the expenses with the maintenance of the base and didn't consider the future paybacks, the future investments. The methodology adopted by -- well, this is a hybrid methodology, different from the methodology applied by the other regulatory agencies in the country. As mentioned, the company is preparing its publication to pledge once again the new numbers with the regulatory agency.

Operational costs, we have the same warning. We have the technical notes preliminary, but the visualization of the technical note isolated leads to the understanding that the operational cost adopted by the regulatory agency is solely based on the market. The regulatory agency didn't do the analysis of the benchmark of the reference market to see the efficiency and the cost of the operator. And this is a point where the concessionary will publish the data when it's opportune, yes.

[Marcelo Sá, analyst]

Just to understand one thing about the methodology that they're proposing, there's still math that needs to be done. According to your methodology, you have the cost of the company, and then you have a component for next sector that would be the 5% factor so you can migrate that to the end of the period of the tariff review. So this would be positive for the company. And does this make sense?

[Cristiane Schwanka, executive]

This is one of the conclusions that is possible, but it's not the only one, as I told you. We are doing a deep dive in the results, trying to do all the inferences so we can have a final position.

[Marcelo Sá, analyst]

If you allow me, one additional point for the people that are connected. When you have a relevant event, as you've said, there is a quick reaction and everybody is trying to understand what happened. It's important for the investors that a company is available and is able to respond these questions or some formal position about this point. So we need to modify this, so we know what's going on. Other companies in the electric sector are positioned. Therefore, if possible, when you leave a relevant event and you try to position yourself, I think it would be good for the market, so we can be in contact with you, so we can discuss. Otherwise, there is an asymmetry of information that is crucial for the analysis of the economy of the company.

[Cristiane Schwanka, executive]

As we explained, we are in the moment of analysis of all the technical notes. The fact that the regulator is a regulator that is nonconventional, differently from the regulator of the other companies that you mentioned, the technical notes cannot be read in an isolated way. And the company will manifest itself only after the conclusion of the technical notes.

[Operator]

[Operator Instructions] It seems that we have a question that was submitted via the webcast. From Marcelo, I'm going to read the questions.

Well, will the new regulatory market of COPASA, can you renew the concessions that are currently operated? What are the restrictions? And could you give us detail on the privatization process of the company?

[Unknown Executive]

Well, I will respond in regards to the regulatory -- I'm going to answer on the other hand. As the update of the presentation of the company, we talked about this throughout the call. This is not the agenda of our administration. And there is a decision on the controller. They have that agenda. Our agenda is to make this company as efficient as possible regardless of the controller service. As you could verify, the approval of the NDS, we have a publication.

As we've mentioned the regulatory landmark, yes, you can renew it. We know the veto issue and the -- this can be voted in November, Article 16. And in this article, we believe that there is a position of the government to promote efficiency. And the Article 16, which would be the renewal of the contracts of the program, we understand that the month of November, we have a definition in regards to this. And today, we have the prediction of the variation of the vetoes in the month of November that can keep them or can forgive them. And we are waiting the voting of the veto.

[Operator]

We have another question, from Carlos Eduardo Gomez. The company has a better view for paying their shareholders.

[Unknown Executive]

In regards to this issue, we have a policy of dividends. We have a movement of distribution of extraordinary measures that will get us closer to the leverage, and we are always trying to seek and respect the shareholders of the company.

[Operator]

I have another question from Carlos Eduardo Gomez. What are the SG practices of the company and the company is aligned with a circular economy.

[Unknown Executive]

Carlos Eduardo, COPASA has recently adhered to the Global Pact, and this was published. The company has, well, already adopted for some time the sustainable development of our activities. And we are here motivated to proceed the actions that are necessary for the adherence of the circular economy. Briefly, the next market -- the market will have news of -- about what COPASA is doing.

[Operator]

[Operator Instructions] We have the team of COPASA here for us. Very well, another question from Marcelo Sá from Banco Itau.

[Marcelo Sá, analyst]

If you allow me another question in regards to this -- while we have the extraordinary measure of BRL 820 million, but to submit your accounts, you would need to have more so you can frame this within the leverage, the frame that we have in the policy. Now what you're considering is that next year, you will invest BRL 1.2 billion, we've seen over the last years that COPASA always announces a budget of CapEx, and they always recruit much less than what was speculated. And thinking about what you invested over the last years, it seems like a big leap to execute the CapEx of BRL 1.2 billion next year. How factual do you think that it will be to get the CapEx? And will you consider the BRL 820 million next year?

[Carlos Augusto Berto, executive]

Marcelo, answering your question, we -- the prediction of CapEx took into consideration, well, next year, evidently, we are in the middle of the review of the budget. And even because of the overflow that I just commented with you when I was talking about the CapEx, so yes, there was -- there was the base was BRL 1.25 billion. We can highlight here that it's important to remind you that not only we have the net debt over EBITDA but also taking into consideration all the other quadrants which the company has in order to take into consideration the distribution of dividends.

One of the things that next year we can do for the study of the CapEx of BRL 1.250 billion is what is in regards to the discounts. Given the competitiveness of the companies in the public bid, we will start next year with the premise of maybe a future discounting that can be granted.

[Operator]

Next question from the Internet. In regards to the question of Marcelo Mora's investment plan, can you comment a little bit about the improvement of efficiency that is being evaluated by the current management, the current Board of Directors?

[Carlos Augusto Berto, executive]

Well, we know that since we got into the company, that this Board of Directors wants to bring more efficiencies to the company. And this was seen since the beginning when we reduced the expenses, and we have the reduction in cost and still seeking more efficiency. We still have more efficiencies in the commercial area, and this will bring important returns for the company. We've done an update that was very important, which is the update of our SAP 4 HANA. This was a very important step, so we can see the volume that COPASA has with goods offered.

And I know that Cristiane has several commercial issues that she can detail to you.

[Cristiane Schwanka, executive]

We're working for the incorporation of the market, and we have the technology for the improvement of the management. Our technology on the management not only of the commercial chain but also so we can charge better and also updating functionalities that can make us more competitive and besides the classic organizations for structure organic, so we can have more agility, for example, in billing. We start to see these changes throughout the next fiscal year.

[Operator]

We have another question from Felipe Rached from Goldman Sachs.

[Felipe Rached, analyst]

I want to ask a question in regards to PTD, and how do you see that issue up ahead? If you can tell us a little bit of an overview of how -- well, when do you expect that things come back to the normal stage?

[Unknown Executive]

When we're talking about the default of [indiscernible] Tropez, we are implementing several changes in the management of our billing chain. So all the economics sector, not only the water and sewage sector, was impacted by the pandemic. Especially in the state of Minas Gerais, especially in the metropolitan region of Belo Horizonte, several economic sectors have their activities closed more than the rest of the country. And that situation of the productive value chain, of course, impacted the consumption of our clients. And it led to the [indiscernible] of Tropez because of the regulatory agency company could not do cuts, stopping stoppages in the service. We still have the impossibility of cuts in the service for the categorized users enrolled in the social category. And we are regaining the -- well, the issuance of payment warnings for our clients. This is very recent for us to comment. What would be the possible return? It depends on the economic return. We can see that the enrollment of new clients goes back to the normal standard of -- of usage, so we can be more effective for their value chain.

[Operator]

[Operator Instructions] We are receiving a series of questions, and we have Antonio Gaspari. Well, the company wants to open the shares and modifications while the issue of being listed.

[Carlos Augusto Berto, executive]

Our intention is to increase economy of the company, and we opted by the development, but there wouldn't be a change. This is an important moment. And we also had the issue of dividends, extraordinary dividends, so we can place them in the same package.

[Operator]

[Operator Instructions] I have another question. Ricardo Rodrigo Mora. He wants to understand the issuance of the dividend.

[Carlos Augusto Berto, executive]

The company has -- well, we published communication to the market that we would be distributing extraordinary dividends in this year. And when we had the issue of the pandemic, the company had a very conservative position here. And as you know, we are very privileged in our sector in regards to the other companies. The pandemic ended up not having that effect, I should say. And as we've announced way back when that we would review this issue in the fourth quarter, and this is where we've done the study. Respecting all the covenants and the financial results that we have and facing the policy of dividends, we deliberated by the management council the payment up until this year.

[Operator]

Another question from Allison Rodriguez. I would like to know about the BRL 6.4, the value that is going to be paid by share.

[Carlos Augusto Berto, executive]

Well, that value of BRL 6.48 is the current value per share. The next value to be the basis of BRL 820 million takes into consideration that value per share, Allison.

[Operator]

There's a question of Marcelo Moras. Can we separate from CapEx to the maintenance that is predicted?

[Carlos Augusto Berto, executive]

We are in the process of reviewing of our 5-year plan. We don't have that information separated.

[Operator]

Another one from Felipe. I would like to know the reason why we have extraordinary dividend, having the position of the expenses with CapEx in 2021.

[Carlos Augusto Berto, executive]

Felipe, we have the policy. The evidence set is very clear in regards to the optimal leverage that we had, we have facing the pandemic, we were very conservative. And now it's the time of doing the allocation -- well, adapting to the policy. Now this distribution does not -- well, that was asked before by another investor. If we had considered in the distribution of the dividends, the CapEx were BRL 1.2 billion next year, yes, it is considered. And the company has the complete capacity of leveraging financial leverage to capture in the market. So there is no impact in that distribution of dividends that will affect the CapEx of 2021.

[Operator]

Another question from Felipe. COPASA will increase the margins on the long term?

[Carlos Augusto Berto, executive]

Certainly. What we are doing now is effectively all of the process of management that will bring better margins in the long term.

[Operator]

Another question from Felipe and another doubt. The distribution of the extraordinary dividend will be given as dividends or HCP, and this is the best?

[Carlos Augusto Berto, executive]

This is due to -- up until '19.

[Operator]

Very well, we close now the Q&A session. We return the word to Carlos Berto for the final considerations. Dr. Carlos?

[Carlos Augusto Berto, executive]

Thank you, Marcelo. Thank you, once again, all of you for your participation in our teleconference. We remain at your service for any clarification with our Board of Directors, with our RI area of COPASA. And here, I would like to invite you to participate in COPASA's AGM that will be in December, and the agenda will be submitted briefly.

[Operator]

The audio conference of results for the third quarter of 2020 is closed. Thank you for your participation. Have a wonderful day.

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