Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome. Thank you for waiting. Welcome to the earnings call of COPASA for the results of the third quarter of 2021. We have here Carlos Augusto Berto, Director of RI and Director of Investor Relations with COPASA. This will be recorded. [Operator Instructions] We have also the simultaneous translation being webcast, and you can access on the address, ri.copasa.br. And also, the presentation will be available for download.

Before continuing, anything that is said in this teleconference in regards to the perspective of businesses, operational goals of COPASA, our promises and expectations of the Board of Directors and it's based on information readily available and based on future events that depends on circumstances that may or may not take place. Changes in the macroeconomic policy and other operational factors can also lead to that -- to results that differ materially from the ones expected.

Now we give the floor to Carlos Augusto Botrel Berto and he will do the presentation. Thank you, Dr. Carlos. Thank you for the opportunity. The floor is yours.

[Carlos Augusto Berto, executive]

Thank you, Marcelo. Thank you for their -- for your participation. I am here with my RI Director and Dr. Ricardo Simoes.

Let's start the part of third quarter '21. Slide 2. We can see the results obtained in the results of '21. And over to the next slide, we're going to talk about the details for, well, the financial results.

You can see here our net revenue that has grown 2.5% in regards to the third quarter of '20, surpassing the mark of BRL 1.3 billion. Before we talk about the cost and expenses, we can see here the factors that impacted significantly the results of the third quarter. Comparably speaking, we have 2 effects that are extraordinary nonrecurring. One of them is our voluntary retirement plan, and integrity of the values were provisioned in September '21, totaling BRL 252 million -- BRL 152 million. And we have over 9,000 people [ adhering ] and we -- in October. And now we are programmed for 200 employees per month. And our CapEx is 11 months. PDVI will result in 10% of our employees leaving. And therefore, we will have a negative impact in this month, but we will recover ahead for the future.

Another very important nonrecurring factor, because, as you can see -- and the most representative was regarding the services in Belo Horizonte. It's very important to highlight that this effect -- this impact happened in the period of 2012 to 2018. So we are just correcting these effects that happened in 2012, 2018. The total impact of these returns is BRL 187 million, and BRL 11 million already returned to September of '21. The difference corresponding to BRL 127 million was provisioned in September, and this was accounted with -- as other operational expenses. BRL 44 million, we registered as financial expenses.

Now talking about the cost and expenses. If we do not consider the provisions of BRL 152 million of PDVI as we had in the third quarter of '21, it was BRL 985 million, an increase of 6.7% in the third quarter of '20. In regards to the other earnings in 2020, we had positive results in the third quarter of '21. The value was impacted by the provision of the tariffs, and it was negative BRL 152 million.

Now adjusted EBITDA. Then we are not -- that we're just considering the BRL 152 million from PDVI and the return of tariff, BRL 152 million and BRL 86 million we expect -- BRL 82 million, respectively. Now we can see that is BRL 472 million versus BRL 526 million. According to the financial results, this value is negative in BRL 90 million, and the value was BRL 38 million negative.

Due to the facts presented here, the net revenue is BRL 16 million, and we have to highlight that if we disconsider the nonrecurring events that I just mentioned and the tariffs, we have the net revenue for BRL 16 million to BRL 195 million, a drop of 18.8%.

Now on the next slide, we're going to detail the main variations in the accounts of our results, starting with water and sewage. This is what we have comparing to the same period of the last year, and we can highlight that one of the main factors here in income has to do with 1% variation for water, 2% for sewage. The increase here has to do with the -- also the savings for water and sewage. Now in tariffs and its rates, we had an average of 0.4%. We can see here 3.04% in November 2020, and then there was a review with a reduction of 1.5% in the tariffs.

On Slide 4, we can see the evolution of the manageable costs. These also include or consider the PDVI. And in the third quarter of 2020, we can see here the amount registered. Now we're going to also detail the variations in staff cost. We see that it went up 7% approximately, up to 300 -- more than 300,000. So we had a collective bargaining with a variation of 6.7% in the period from May 2020 to 2021. We also have a change here in the number of employees in the last 12 months. It's worth saying that this still does not reflect the PDVI that was implemented now.

In third-party companies, we see an increase in the third quarter especially because of the IT costs and professional services. And regarding the markets, we have a reduction of 44% approximately. We see that in the third quarter of 2020, we had a change in the methodology of the [ CLV ]. There was also an increase in material costs, which grew due to the increase in prices of those types of systems and also amortization of valid contracts. Finally, the tariffs went up due to municipal sanitation services. There was a readjustment in -- on November -- in November 2020. And then in August 2021, we know that there was also a change in the tariffs.

In -- on Slide 5, we're going to see the evolution of the non-manageable costs. We can see that it went up 32% in the first quarter (sic) [ third quarter ] of 2021. Comparing with the previous year, we have here a value BRL 170 million. So we have a cost for electricity, an increase of 33%. It's not just the tariffs but also the consumption due to the operational demand and also growth in electricity and subsidies. For fuels, we see that it went up 43.4% as well. And the total expenses in that period went to BRL 1.1 billion, 23% increase basically. But if we consider the expenses without the PDVI, then it would have been 6.7% increase.

Now on Slide 6, we are presenting the other revenues, the other expenses. For other operational revenues, we see a drop 43% approximately due to a few changes in the classification in the third quarter of 2021 due to some judicial processes, and that resulted in -- at the time, we saw different provisions. There is an increase in other operational expenses as well, as I mentioned before. And in the financial results, we see an increase here getting to BRL 90 million, and this is mainly due to interest rates and also the financial review [ FI ] has established.

Now on Slide 7, we have the EBITDA margin. We see here a drop of 10% approximately. It went to BRL 472 million in the third quarter of 2021. So that would be the adjusted EBITDA figure here. It's important to say again that these figures, we consider PDVI and the tariff of BRL 83 million. In a summarized way, we see a result of the company. We see electricity, 33% increase, fuel. We see staff. We see third-party services. We see the margins of the company and also the extraordinary effects, nonrecurring effects that I have mentioned.

Well, now on Slide 8. We also have the investment program of the company. The first few months, we have invested BRL 284 million in water, BRL 225 million in sewage, as you can see here. As was approved in December 2020, for the next 4 years, we're going to have a program with investment of BRL 1.3 billion.

On Slide 9, now talking about debt of the company. We see debt of BRL 4 billion approximately in September 2021, which 18% is short term. The debt went to BRL 2.57 billion approximately, and you see the comparison with the previous years here. And we see the comparison as well here for EBITDA and also the debt.

Well, on Slide 10, we see a bit more about debt and the average ticket. CDI is now 40% of the debt of COPASA. We see that that's mainly due to the debentures that we have, around BRL 500 million in the second period here of the 16th issue is going to be, in 2021, around BRL 507 million. TJLP, due to some amortization, went from 17% in '20 to 9% in 2021. We also have the European Bank of Investments here, and we have 6% of the amount -- the total amount of debt in foreign currency. The drop has to do with also a prepay that -- with Banco do Brasil, and it was around BRL 25 million approximately. Now on the average ticket, the percentage went to 6.7% due to the increase in the interest rates. So the debt level went up in September '20. It was 31.7%. And in September 2021, it went to 38.7%.

On Slide 11, we're talking about the compensation for shareholders. Here, we see for September 17, we see it play off around 60% of the adjusted profit. For the 9 months of '21, COPASA declared BRL 273 million as compensation for the shareholders. As was informed to the market, the policy is now being reviewed. So the council is going to decide -- agree and going to decide on that and then have a shareholders' meeting to discuss this a little bit more further.

On Slide 12, we have seen all the financial figures. Now I just wanted to mention our data on concession contracts. COPASA and COPANOR have 640 concessions of water and operations in sewage at 310. 266 are operating. With that, the company has 12 million [ inhabitants ]; and water, 8.4 million inhabitants in terms of sewage. Now we see the 10 main concessions of COPASA as well, which is around 51% of the total invoicing. In September, we have 39 expired concessions. And in June 2021, the company has 789 -- 69 actually, which is 3% of the revenue.

Now on the water situation on Slide 13, we see the situation in Belo Horizonte, the levels of the reservoirs in Paraopeba, so Rio Manso. And in 2021, we started with the 5,000 liters per second, which is the flow rate, and that should occur at the end of this year. So with the levels that we've seen in the reservoirs, the company is in a more comfortable position in Belo Horizonte.

Well, this is the end of the slide presentation with the operational, financial results of the third quarter. I will now talk to -- turn it over to the operator for the Q&A session.

[Operator]

[Operator Instructions] We have a question from Renato.

[Renato Pinto, analyst]

This is Renato Pinto from Scotiabank. Just wanted to understand the [ data for the ] following -- beginning of the year. The programmed investment was BRL 1.3 billion and 620,000 (sic) [ BRL 620 million ] have been invested already. So in 2021 -- next year, actually, you have a program, another few millions. There is a lot of topics ahead, and here we have a policy of dividend that is very interesting. And I would like to know -- to get to the execution of such a high CapEx, I wanted to know what the plan would be because in one area, it is a difficult thing to do. And also in terms of cash generation, how are you going to finance this CapEx that built up for the last few years?

[Carlos Augusto Berto, executive]

Thank you for the question. I'm going to answer these, and then I'll turn it over to Ricardo to answer more of the technical part of this. Well, about the investment plan, at the beginning of the year, we had a lot of rain. We have [ the dynamic ] as well. So yes, it had an impact. But in the past 2 years, the runway for CapEx for the company, it went up significantly. So that gives us yet another idea comparing to last year's performance, and that will lead us to the levels that we expect to have for the next few years. But let me turn it over to our Technical Director, Ricardo Simoes, to give you more information.

[Ricardo Augusto Campos, executive]

Hello, everyone. Good morning. Just to complement on that, the company is indeed trying to accelerate its recovery, its capacity of investments to try and deal with all of the contracts that are already in place and also the ones determined by the framework. We are recovering our capacity and investment. For the volume of investment, we have a significant acceleration in the levels that we have now in the second semester are higher than what we had in previous years. And the perspective is that we're going to have a backlog of projects already available now. So everything has been contracted now, you have a perspective that for 2022, the company will continue this recovery of investments. And thanks to that, it is going to be able to deal with all of the contracts that are ongoing.

[Renato Pinto, analyst]

And to finance that CapEx that is higher than the averages for last year, how do you work this?

[Unknown Executive]

Well, as I told you, in the part of the increment of the gross debt, we just captured just BRL 652 million in the market. Therefore, we're completely equated for '22 in regards to CapEx. And the company always tried to be in the market, trying to capture and also the total not only considering all but all the transactions, last transaction. We have almost BRL 1.6 billion subcontracted that were still not [ dis-imbursed ].

[Operator]

[Operator Instructions] Well, if we don't have any more questions, we are going to have the Q&A for the journalists. [Operator Instructions]

[Carlos Augusto Berto, executive]

All right. So I have here the questions and I'm going to read them and I can answer. The question is from [ Lucas ]. What is the perspective for the distribution of dividends for the next quarters and having the need of investment according to the operational goals of the company?

[ Lucas ], as I told you, we're in a phase of reviewing the dividend, and as you've mentioned, we have other variables, other external factors. And we just had a review, the tariff review of 2021. And all of these factors, they bring important discussions and therefore, the need for the review of the dividends. And then as the program was presented to the administration council, the Board of Directors, we will review that policy of dividends. And from then on, we will have more clarity in regards to the distribution of possible dividends. But just to let you know that the company currently distributed 50% of the profits.

There was a question from [ David ]. I would like to have extraordinary dividends this year. I believe that I answered this in the other question.

In regards to [ Reynaldo ], key expenses that reduced the profits in '21 are recurrent or not recurrent?

They are mainly nonrecurrent. It was BRL 152 million, the effect; and BRL 140 million, the effect in the [ DRI ]. As I highlighted very well, besides those costs, nonrecurrent, we had the effects, as I told you, 7.3% of an increment in the personnel, 33% in the line of energy, 11.5% in service line for third parties. Despite these costs in nonrecurrent, we also had the other costs that are inflationary effects.

The next question is from [ Reynaldo ]. What are the measures that COPASA wants to have so that the measures are not expenses recurrent? Dr. [ Picciani ] can answer.

[Unknown Executive]

Hello. Good morning. Let me just do a correction. He's probably talking about the state of Minas Gerais and COPASA has adopted. So this is not recurrent. But the most important thing is to say that the changes in the tariffs, that happened in the next process of tariffs. And already mentioned, the regulatory agency, which are the different tariffs for the regulatory agency of the state of Minas Gerais, consider that COPASA invoiced the service for the treatment of sewage in some connections due to the breakage in the lines. In the current tariff structure, there is the tariff for the treatment of sewage, and this thesis cannot be applied anymore. There is considerable differences here and the regulatory process. The other causes that were measured and the update for the registration were also adopted. But [ Reynaldo ], the possibility of an inflation such as the one of 2020, which was related to the tariff structure, now disappears.

[Carlos Augusto Berto, executive]

[Operator Instructions] A question from [ Luciano Centena ], concession of Ipatinga in 2022.

Good evening, [ Luciano ] -- good afternoon. The concession has been defined in a contract for the year 2022. Negotiations are ongoing, and we cannot anticipate anything. The representativeness of this concession for COPASA is 1.8%.

Another question. First is operational question, a curiosity about the increase of 2 water and 1 sewage concession in comparison to 2020. What is relevant for these concessions?

These are concessions that are close to the concession portfolio of COPASA. They got into an operation in 2020, and they have small representativeness for COPASA.

Another question from [ Anderson Seta ]. The company wants to do extraordinary dividend payment. Let's wait. There was another question. COPASA is studying the solar panels, the idea of implementing solar powers to reduce electric energy.

Actually, COPASA is studying not only the utilization of photovoltaic energy but the several sources, alternative sources of energy. We published a proposal for the private market so that we present studies and alternatives for the use of photovoltaic energy for the use of the gases that stem from the sewage and for the residue of the waterways. So these studies are being evaluated, and now we're using the solar panels. And the alternatives would be for the assembly of solar panels in areas available for the company. But also, the implementation of the solar panels, these studies are under analysis. They were submitted to the company, and the evaluation process is undergoing.

Another question that is very similar to the other questions, in regards to the pricing of dividends, [ Antonio Morales Raucio ].

This is being reviewed. We have external factors that are important, such as the tariffs review. This made us revisit that we would have the need to review the dividend policy, and that is the main reason.

There's a question from [ Antonio Luis ] about the penalties.

Well, hello, [ Antonio ]. It's hard to explain that in a general manner. Know that this is a different thing that COPASA is doing, using its write-off defense and to manifest the penalties.

[Operator Instructions] We're just waiting for the rest of the webcast questions. There's a question from [ Felipe ]. Will there be any cost effect for 2021?

No, [ Felipe ]. The PDVI had its effect accounted for in September '21.

A question from [ Siri Diracas ]. How are you preparing for the new framework?

The company prepared for this. We have hired companies that are looking at the viability, financial viability. And we are looking at some consulting companies that are independent as well. So this process is ongoing now. It is well addressed, and we will follow the deadline put into [ decree ] that reduced the deadline for December 2021. So a lot of the protocols and documents will be done by then.

Another question by [ Paris ]. I would also like to know if with the advance of the studies and all that, if there are discussions for new concessions or PPPs of the company.

Well, we're always looking at the movements in the market. We understand this is very important. This is something that COPASA needs to do for the challenges -- to see what challenges there are out there in the market. The next question by [ Paolo Enrique ]. The result wasn't good for the market, and small investors had suffered a lot. So what kind of message would you leave for them to trust the company?

That's a great question, [ Paolo ]. An important thing about that, as you can see, this impact, nonrecurring impact, for PDVI is going to have some important results, consequences, as I said before. We are now in the performance. As Dr. Ricardo mentioned, the investment performance has increased and we are now able to deal with future investments as well. The company -- in terms of resources, the company has a good idea of the cash flow. The water situation also is, I would say, pretty favorable, as I said before. And also, we have all the other operational aspects. [ Marcino ] has a question. What do you expect for next year considering inflation and the investments? Do you think it's possible that we're going to have another negative readjustment?

Well, I just wanted to say that at the end of the process of the tariff review in 2021, I mean this was not a readjustment. It was a complete review of the scenario, of the regulations, of the expenses and the tariff, also the projection of the market, market growth. So the tariff was reviewed in 2021. In 2022, we also had readjustment of the rates, but the macroeconomic aspects will maybe change the situation. I mean the readjustment will only deal with the inflation rates basically. So that's what I can tell you right now.

We are expecting the rest of the questions. Marcelo, there are a few questions about dividends here but we have already answered that, very similar to the other questions.

[Operator]

Okay. We'll see if the journalists have questions. [Operator Instructions] We have the COPASA team here for you. Just journalists now. [Operator Instructions]

Very well. This is the end of our Q&A session. I will turn it over to the Financial Director, Carlos Augusto Berto for the final comments. Sir Carlos, you have the floor.

[Carlos Augusto Berto, executive]

Thank you, Marcelo. I would like to thank everyone again for participating in this conference. We are -- we remain at your disposal should you need anything for future questions or any doubts that you might have. Thank you very much.

[Operator]

Very well. This is the end of our audio conference. Thank you all very much for participating. May you have an excellent day. Thank you.

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