Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and thanks to COPASA's Conference Call to see the results of Q3 of 2022. We have Dr. Carlos Augusto Botrel Berto, COPASA's Financial and Investor Relations Director. Please note that the presentation will be recorded. [Operator Instructions]

This event is also being simultaneously broadcast via webcast through 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 forward-looking statements made during this conference call regarding COPASA's business prospects, projections and operating and financial targets are based on assumptions and expectations of the company's management as well as on information currently available. They involve risks and uncertainties since they refer to future events and therefore, depend on circumstances that may or may not occur. Changes in macroeconomic policies or legislations and other operational factors may affect COPASA's future performance and lead to results that differ materially from those expressed in such forward-looking statements.

Now we give the floor to Dr. Carlos Augusto Botrel Berto, who will initiate his presentation. Mr. Carlos Berto, you may proceed.

[Carlos Augusto Berto, executive]

Thank you. Good morning to everyone. Thanks to, all, who are with us on this conference call of Q3 2022. I am here with Guilherme Duarte, Márcia Fragoso and the Operations Director, Guilherme Frasson.

We will start our presentation on Slide 2, with the results obtained on Q3 of 2022. On the next slide, we will discuss in detail the explanations for the behavior of the main lines of the DRE. We present the financial highlights of COPASA third quarter of 2022 our net revenue totaled BRL 1.38 billion. This is a growth of 5.3% vis-a-vis the same period on 2021. Costs and expenses registered on Q3 of 2022 were BRL 1 billion. This is a drop of 10.8% vis-a-vis Q3 of 2021.

Now regarding other net operating income on the third quarter of 2022, the amount was negative by BRL 27 million, while in the third quarter of 2021, we had a negative result of BRL 102 million.

Now the EBITDA. The value reached BRL 515 million during Q3. This is a growth of 9.1% vis-a-vis the same period last year. As for the financial result, the value was negative by BRL 32 million, while on Q3 of 2021, the value had been negative by BRL 90 million. As a result of the facts presented, our net income totaled BRL 227 million on Q3 of 2022.

Now on Slide 3, we will demonstrate the main variations in the results account, starting by the water, sewage and solid waste revenue on Q3 of 2022, we had a growth of 5.3% compared to the same period last year.

Our revenue was impacted mainly by the following factors: an increase in the measured volume of water and sewage of 5.6% on Q3 of 2022; migration of consumption ranges, categories and application of new tariffs by the company with a negative average tariff effect of 1.52%, as authorized by ARSAE on August 2021, resulting from the result of the second tariff review.

It is worth pointing that on the second tariff review, there was an alteration in the tariff structure when we comparatively to the sewage revenue. Here, we have the administrable costs that were BRL 679 million in Q3. This is a drop of 14.6% vis-a-vis the same period last year. If we exclude the impact of PDVI, in Q3 of 2021, when we would have had a growth of 5.7% growth in total administrative costs when comparing periods of '22 and '21. This would be lower than the IPCA of the period.

Here, we have personnel costs drop 5.1%, and it is BRL 358 million due to the drop in payroll charges and benefits caused by a 9.5% decrease in the number of employees, resulting mainly from the PDVI in this period. Implemented during the period, the third-party services grew 36.7% on Q3.

This is explained by the increase of BRL 23 million in expenses with conservation and maintenance service for assets and system as a result of new contracts for backhaul hydraulic hydro vacuum services paving an application of contractual readjustment.

The Rio Manso PPP grew 7.8% due to the application of contractual readjustment index. Material grew 24.3% due to the increase in materials for conservation and maintenance of assets and system, as a result of the increase in the price of these material, especially because of product by products.

Financially, tariff transferred municipality increased 18.1% due to the increase in revenue associated to the inclusion of 85 new municipal sanitation funds entitled to transfer as August of 2021, as seen by the regulatory agency.

Now non-administrable costs, there's a drop of 12.4%, being BRL 149 million during Q3 of 2022. In detail, we will explain the electric costs drop 19.7%, mainly due to the applications of less expensive flags on Q3 and reduction of ICMS rate on energy as of June 23, 2022. Expenses with treatment material rose 48.9% due to the increase in prices of chemical products used in the water treatment process.

Now fuels and lubricants presented an increase of 30.7%, mostly due to the increase in fuel prices, especially diesel price. The COPASA's total cost and expenses reached BRL 1 billion. This is a drop of 10.8%. If we disregard -- once again, as we mentioned, the amount spent with PDVI on Q3 of 2021.

On Slide 6, we present other revenues, other expenses, equity equivalents and financial results. As for the other operating revenues, there was a drop of 12.3%, while the other operating expenses recorded a drop of 57.6%. It is worthwhile pointing out that on Q3 '21, BRL 82.6 million were provisioned as other operating expenses due to the returns determined by ARSAE, which increased the result of this account at that time as we disclosed in the report.

The financial results finally presented a reduction in deficit, reaching a negative level of BRL 31.8 million. This drop of 65%, in relation to the deficit of the comparative period, is due to the values that were accounted on Q3 of '21 as financial expenses corresponding to the interest and monetary correction and the tariff returns determined by ARSAE at that time.

Now on Slide 7, we present the EBITDA data margin and profit data. EBITDA presented a 9.1% growth in relation to the comparative period due to the revenue growth and cost reductions already shown. This value corresponds to a margin of 36.3%, vis-a-vis 38.8% on Q3 of 2021. It's important to highlight that the value considered for the comparative period of Q3 of '21 was adjusted due to the extraordinary and expenses and nonrecurring expenses occurred at that time related to the provision made under PDVI an BRL 82.6 million recorded as other operating expenses related to the provision made due to the returns determined by ARSAE.

Now on Slide 8. We present the company's investment program. Initially, we point out that the company has improved the criteria for disclosing the amounts invested, aiming at the convergence to accounting and regulatory consents, with the inclusion of interest capitalization of personnel, material and other expenses related to the works performed in the water supply and sanitary sewage system as well as to business and operational development.

The first 9 months of 2021, COPASA invested BRL 940 million, emphasizing investments in water that were BRL 457 million; in sewage, BRL 325 million; and capitalized expenses, about BRL 120 million. The subsidiary, COPANOR, meanwhile invested BRL 24.4 million. With this amount invested in 2022 is BRL 965 million. And the total to be invested in 2022 would be BRL 1.16 billion.

Now to Slide 9. We will show the company's indebtedness. The gross debt in September of 2022 totaled BRL 3.5 billion. And 26% in the short term, the net debt went to BRL 3.1 billion in September of 2022. While in September 2021, the value was BRL 2.6 billion. And the net debt-to-EBITDA was 1.7x.

Now on Slide 10. We will see funding the CDI corresponded 38.3% of COPASA's debt in line with the percentage presented in the comparative period. The TR showed an increase and became responsible for 24.9% of our debt. The debt paid to the IPC remained in line with the same period.

The debt in foreign currency with the German Bank, KFW, and European Investment Bank accounts for 6% of the total debt, the same percentage as in the comparative period. The average coupon went from 9.2% due to the increase in interest rates and the indebtedness ratio measured by net debt over net equity went to 38.7% in September of 2021 to 43.6% in September of 2022.

On Slide 11, here, we have shareholder's remuneration. In 2022, the Board of Directors approved in its meeting of February 16, 2022, the pay out of 2022, that will be 25% of the adjusted net income in 2022.

From January to September, COPASA has already declared BRL 145.7 million as shareholder's remunerations were BRL 87 million have already been paid out and BRL 58.7 million will be paid out on the next 14th.

Having finished the presentation of the financial data, we will now talk about the concession agreements, referring to September of 2022, COPASA and COPANOR, together, have 640 water concessions, out of which 632 are in operation. As for sewage, there are 310 concessions and 268 of which are in operation. Thus, the company serves 11.8 million inhabitants with water and 8.8 million with sewage.

On the right, the table shows the 10 main concessions, which together account for about 50% of the total revenue. As of September of 2022, the company has 17 concessions and have expired 2 concessions whose contracts are considered legally null and void. All of these concessions together account for 3.7% of revenues.

On Slide 13, we show the water situation in the metropolitan region of Belo Horizonte. The reservoir levels of the Paraopeba System. This is Rio Manso, Vargem das Flores, Serra Azul, which are responsible for supplying 49% of the -- Belo Horizonte are in a very comfortable situation with about 81% of the volume.

In the Rio das Velhas system, responsible for 42% of the region supply, whose information is highlighted on the right side. The average flow of the last 15 days before October 31, 2022, well was 19 cubic meters per second. The average withdrawal flow from the system during 2021 was 8 cubic meters per second.

Now with this, we bring to an end the presentation of the operating and financial results of the Q3 of 2022. Now I turn it over back to Jandira, then we will initiate our Q&A session.

[Operator]

[Operator Instructions] Our first question is from Andre Sampaio from Santander.

[Andre Sampaio, analyst]

Two questions here. This question is regarding your CapEx. This is -- you have had difficulties to reach the level of desired CapEx. I would like to know what happened? And what is it that you need in order to achieve an ideal CapEx level during the year?

And another question, there is a discussion -- is the increase of capital. And I believe you've been discussing this increase of capital for the past year. I would like to know what the process is like and how are you preparing yourself? Or how are you planning in order to use these funds?

[Guilherme Duarte, executive]

Guilherme Duarte, thank you for your question. Well starting by your question about the capital of BRL 2 billion, what a company has is that the controlling company has said that they intend to carry out this funding since the last material effect that was published by the company. There has been no new communication in such a way that we're waiting.

The company has prepared itself internally for the different scenarios that we may face in the future. But as a matter of fact, there is no news regarding the progress in this matter. This is regarding the mother company, your controlling company.

Now regarding your question of initiatives for investments in our CapEx, what we have done is modernize the way we contract people. Number one, we -- and the hiring of our expansion director, Marcia Fragoso, that gives us a market view. Not only modernizing the way we hire, updating our hiring regulation, but we modernize how we inspect our work.

Yes, we believe that we can gain speed and breadth in this process with a number of reasonable expectations that perhaps, next year, we will be able to surprise you regarding the total that we have agreed upon with the Board.

[Andre Sampaio, analyst]

Just another -- how does this happen? This -- the funds come into the company, and what do you do with this CapEx? Is there -- do you know that this will be part of your asset base or if this is a risk that -- is there a risk and perhaps this will not be part of your asset base?

[Guilherme Duarte, executive]

If these resources come as an increase of capital, this will be part of the asset base of the company. According to the accounting practices in the company, everything that is invested as a capitalized resource will be accounted in our asset base and will be remunerated according to the regulation. Yes, there -- if they're -- the contribution of capital, yes, this is how we see it.

[Operator]

Our next question is from Henrique Peretti from JPMorgan.

[Henrique Peretti, analyst]

I have a doubt regarding your yearly adjustment. The regulatory agency changed it for January of 2023. You are going to incorporate of all the accrued since September. When will we know about the readjustment index? Will this be in December, in the beginning of January?

[Guilherme Duarte, executive]

Henrique, this is Guilherme once again. Yes, we have already presented this to the regulatory agency. Here, we account not only the accumulated inflation from August of 2021 to December 2022 and the financial recovery of the post development of this funding between August and December of 2022.

So we -- so our plea presents this, and we're waiting for an answer. Our expectation is that the result of our plea will be deliberated by the regulatory agency in the end of November. So -- and it will be announced in December, and it will be applied in January to all of our consumers.

[Operator]

[Operator Instructions] As we have no further questions, I would like to start with the webcast questions. We will begin with the questions made through the webcast. So our speakers may proceed.

[Unknown Attendee]

Thank you, Jandira. I'm going to read the question. And if it's necessary, I will hand it over to my colleagues. The first question here was from Evandro Santos.

Is there a possibility of paying extraordinary dividends this year? As we've seen our dividend policy, we have two windows for this: one, regarding the second quarter of this year, where we total deleverage of 2. So this does not allow us, according to our policies, the payout of extraordinary dividends. And the next window did we on Q4, where we will assess? If the financial situation of the company is not in risk, we will, yes, assess this after the results of Q4, a possible payout of extraordinary dividends.

[Unknown Executive]

Now regarding another question from Fernando Porto about investment coming from Bali, we have you decided what you will do. Will there be a capital contribution? This was already answered by our CEO a couple of minutes ago.

And question from Lucas. Could you elaborate on the Belo Horizonte concession? What is the likelihood of renewing concession. Guilherme Duarte will answer this question.

[Guilherme Duarte, executive]

Now regarding the possibility of renewing any of the COPASA's concessions, so any -- are marked has to be done without a bid. Therefore, the new mark of a framework of sanitations can extend -- would you extend this? It would be for privatization and the municipalities that are, according to the extensions, can extend their contract only those that work only with water can extend their contract, including sewage.

In addition, the new sanitation framework imposes that at the end of the concession, new concessions have to be bidded by the grantor. And we will be a competitor within this bid.

[Operator]

A question from Gustavo Fabricio.

[Unknown Attendee]

I would like more details about the terms signed with Bali to know how the assets will be transferred to COPASA?

[Guilherme Duarte, executive]

Gustavo, this is Guilherme. What we have in our agreement is we are adapting the deadlines to deliver this new funding of Paraopeba, so it can be operated by COPASA. We are in direct contact with the mining company carrying out operating -- testing the assets that we will receive. And regarding the incorporation of these assets, these assets are -- will be part of our assets, and they will not be part of the remunerated assets for tariff means.

[Operator]

Ladies and gentlemen, our Q&A session has come to an end. We will hand it back to Carlos Augusto Botrel Roberto for his final remarks.

[Carlos Augusto Berto, executive]

Well, thank you, Jandira. Thank you to all of our participants.

I believe that the company has been delivering consistent results. And with the robust financial education, in order to face our challenges, I would like to highlight that we are at your disposal for further clarifications through our financial management and through our department of Investor Relations or our Investor Relations department. Thank you very much, and thank you, all.

[Operator]

The COPASA conference call regarding the results of Q3 of 2022 has come to an end. We thank all of you, and we wish you a very good day.

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