Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Analysis

Company Reports Strong Revenue and EBITDA Growth

The company announced a 17.7% increase in net revenue to BRL 1.6 billion compared to the previous year, with adjusted EBITDA growing 24% and a margin of 38.5%. Net income hit BRL 437 million. Investment in water totaled BRL 473 million and sewage BRL 484 million, with a planned BRL 7.8 billion investment from 2024 to 2027. Gross debt is at BRL 4.7 billion with a net debt/EBITDA ratio of 1.4x. Delinquency rates have decreased to 3.07% due to improved collections. The shareholder payout is at 50% of adjusted net income, totaling BRL 388 million for the first nine months of 2023.

COPASA's Strong Performance in Q3 2023

COPASA's recent earnings call sheds light on their notable third-quarter performance for 2023. The company has achieved a net income of BRL 437 million, underscoring a robust financial position. This performance can be attributed to a few strategic maneuvers, including successful litigation settlements, which led to a positive impact of BRL 155 million from the reversal of provisions, and growth in net revenue reaching BRL 1.6 billion, a 17.7% increase from the prior year.

Investments and Debt Management: A Delicate Balance

The company has been channeling its resources judiciously, investing BRL 1.2 billion with significant portions allocated to water and sewage projects — the pillars of its infrastructure development. COPASA has outlined a substantial investment plan amounting to BRL 7.8 billion for the upcoming 2024-2027 period. On the debt front, gross debt stood at BRL 4.7 billion, with the net debt amounting to BRL 3.4 billion, marking an increase from the previous year, and a net debt/EBITDA ratio of 1.4x. Management seems confident in managing this debt, as evidenced by the stability in their leverage and the diversified nature of their financing, which includes a blend of local interest rates and foreign currency-denominated obligations.

Shareholders' Remuneration & Future Prospects

In good news for shareholders, COPASA has declared that the payout for the financial year 2023 will be 50% of the adjusted net income. This reflects the company’s commitment to sharing its success with its investors. Furthermore, the company's management addressed questions regarding capital surplus options and operational expenditures, ensuring that budget controls remain a priority going into 2024. Such prudent fiscal governance is expected to maintain a balanced approach to expenses while delivering results.

Strategic Movements and Potential Privatization

The Q&A session brought to light two strategic topics: surplus capital management and potential privatization. Management disclosed that it is contemplating either capitalizing the surplus reserve or distributing it as extraordinary dividends, with a decision expected before year-end. As for privatization, the matter is currently in the hands of the controlling shareholder and the state legislature, marking a critical juncture in the company's future trajectory.

Investing in Efficiency and Universalization

COPASA is evidently prioritizing operational efficiencies and expanding service coverage. Management outlined plans to reduce energy costs, leverage solar energy for savings, and improve water supply. The CapEx scheduled for 2024-2027 is extensively dedicated to boosting water and sewage network functions and ensuring universal service delivery within the concession area. These investments are set to fortify COPASA's infrastructure and environmental commitments, aligning with ESG standards, while not being impeded by the privatization discussions.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, good afternoon. Welcome to COPASA's earnings conference call for the third quarter of 2023. Here with us is Mr. Carlos Augusto Botrel Berto, CFO and Investor Relations Officer of COPASA.

We inform that the presentation will be recorded in audio. [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 where the presentation is also available for download.

Before proceeding, we would like to clarify that any statements that may be made during this call regarding COPASA's business prospects, projections, operating and financial goals reflect 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 or in laws and other operational factors may affect the future performance of COPASA and 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]

Thank you, [ Gentera ]. Thank you, everyone and good afternoon. Thank you for participating in this conference call. I'm accompanied by Duarte and our Regulation and Customer Relations Officer, Cleyson Jacomini.

So let's start the presentation regarding the third quarter of 2023 and start on Slide 2, talking about the results obtained in the third quarter 2023.

On the next slide, 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 third quarter of 2023.

Before going into the explanation of the main lines that make up the income statement, let's talk about the developments in the employee lawsuit. The question, the legality of the extent dismissal policy for which we made an additional provision of BRL 270 million in December 2021. Throughout 2023, some settlements were made in individual executions. And in July 2023, a final agreement was formalized with the union and the labor prosecution office.

As a result of the Class Action Agreement, we had positive impact on the result of the third quarter '23 due to the reversal of provisions in the total amount of BRL 155 million, of which BRL 50 million were recorded in other operating expenses and BRL 105 million were recorded in financial expenses.

Furthermore, within the scope of the agreement, we made payments of around BRL 93.3 million throughout this quarter. Therefore, the final agreement ends any possibility of including potential interested parties in the aforementioned Class Action. And being conservative, the company maintained a provision of BRL 15.4 million for any individual lawsuits to be filed by potential beneficiaries who did not join the Class Action.

Having said that, let me explain the net revenue of BRL 1.6 billion, a growth of 17.7% compared to the same period of 2022. The amount recorded for costs and expenses in the third quarter of '23 was BRL 1.1 billion, an increase of 12.6% compared to the comparative period, whose details we will show a little later.

As for the other net operating income expenses in the third quarter of 2023, the value was positive at BRL 19 million within the -- while in the third quarter of '22, we had a negative result of BRL 27 million due to the reversal regarding the Class Action Agreement mentioned before.

Now talking about the adjusted EBITDA, disregarding the BRL 49.9 million in the reversal -- of the reversal where the value was BRL 639 million, representing a growth of 24% in relation to the comparative period. In turn, the adjusted EBITDA margin was 38.5%.

The financial income of the third quarter '23 also impacted by agreement was positive at BRL 90 million, while in the same period of 2022, the result had been negative by BRL 32 million. As a result of the facts presented, the net income reached BRL 437 million in the quarter.

Starting on Slide 3, we are going to detail the main variations of the accounts that make up the income statement, starting with revenue from water, sewage and solid waste. In the third quarter, it grew by 17.7% when compared to the same period of the previous year.

The revenue in this quarter of the current year was impacted by the 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 3.4% in the measured volume of water and 3.8% in the measured volume of sewage.

Slide 4, we show the evolution of manageable costs, which reached BRL 749 million in the third quarter of '23. And in the third quarter of '22, the amount recorded was BRL 679 million, giving more detail about variations.

Personnel costs showed an increase of 14% and amounted to BRL 409 million. This increase can be explained mainly by effects of the 2022 collective bargaining agreement whose base date is November with the application of INPC inflation rate of 6.46%, reflections of the increase in profits and EBITDA margin in 2023, impacting profit sharing, variable bonuses and commissions.

We also had an increase in spending on health programs due to the greater use of medical services. As we already announced in the second quarter, the layoffs related to the voluntary separation program began in July of 2023 and are scheduled to be completed by December 2023. Therefore, the savings result from this -- resulting from this program will be fully seen after January 2024.

Third-party services grew by 11.2% in the third quarter '23, a growth explained mainly by the following expenses: BRL 3.8 million with outsourcing bill reading and delivery services, increase of BRL 3.2 million in expenditure on professional technical services and BRL 2.6 million in maintenance, disconnection, reconnection services and an increase of BRL 2.8 million in spending on IT services.

The value of loss due to reduction in recoverable value of accounts receivable had a drop of 34.1% due to the increase of almost 100% in the amounts recovered from accounts written off in third Q '23 compared to 3Q '22. As a result above all, the adoption of more restricted debt collection policies, inclusion of defaulting customers in bad debtors list and [ debt protests ].

The tariff transfer to municipalities increased by 34% due to the increase in the company's revenue given the adjustment of 15.7% applied in January of this year and the additional 75 new municipal sanitation funds with the right to receive transfers as authorized by the regulatory agencies.

Talking about non-manageable costs, they increased by 21.7%, amounting to BRL 181 million in the third quarter of '23, mainly due to electricity costs which increased by 28% in the period. As previously reported from the first quarter of this year, we migrated 43% of the total power consumed by the company to the free market with a reduction of 20% in expenses at these units in this quarter.

However, some factors had a negative impact on expenses such as the 13.27% increase in tariffs and the 3% reduction in the subsidy applicable to electricity tariffs for the public water and sewage utility concessionaires, both starting in June 2023.

We also had the impact resulting from the exclusion of ICMS from the calculation base of PIS/COFINS tax credits as of May '23, and the collection of ICMS on the tariff for the use of Electricity, Energy Transmission and Distribution system as of February 2023.

There was also an increase of 3.8% in the company's electricity consumption. The company continues to seek to optimize spending electricity, and we're working to increase energy contracts on the free market from current 43% to around 52% by mid-2024. So those units served at low voltage, which correspond to approximately 17% of company's total consumption, we are structuring a photovoltaic solar project through distributed generation, which will support around 90% of these units. The total cost and expenses of COPASA in the analyzed period reached BRL 1.1 billion, corresponding to an increase of 12.6%.

On Slide 6, we present other revenues, other expenses, equity pickup and financial results. As previously mentioned, the agreement signed in the Labor Class Action affected other operating expenses due to the reversal of BRL 50 million and also the financial result due to the reversal of BRL 105.2 million made in financial expenses.

Slide 7. We presented data for adjusted EBITDA, EBITDA margin and net income. It is worth noting that EBITDA margin and adjusted disregarding the amount of BRL 50 million, referring to the reversal of provision for employee lawsuit that was recorded in other operating expenses. The adjusted EBITDA grew by approximately 24% in relation to the comparative period and reached BRL 639 million. This value corresponds to a margin of 38.5% compared to 36.3% in the third quarter of '22. The net income in the third quarter of '23 amounted to BRL 437 million due to the facts already mentioned in the previous slides.

Now on Slide 8, we present data from the investment program of the company. It has invested BRL 1.2 billion in the first 9 months of 2023 with emphasis on investments in water of BRL 473 million and in sewage, which amounted to BRL 484 million. We also show the scheduled investments or planned investments amounting to BRL 7.8 billion for the period from 2024 to 2027.

Now Slide 9, we show gross debt, net debt and its leverage. Gross debt reached BRL 4.7 billion in September, of which 15% corresponds to short-term debt. Net debt increased to BRL 3.4 billion in September 2023, whereas in the same period in 2022, the value was BRL 3.1 billion and net debt/EBITDA ratio is 1.4x.

On next slide, we address the weight of indexes in our funding, average coupon, the CDI corresponded to 37% of COPASA [ debt ] remain in line with the comparative period. The debt linked to IPCA increased by around 7 percentage points, representing now 31% of our debt. This increase can be attributed mainly to the raising of funds through the 18th debenture issue, which took place in September 2023 amounting to BRL 900 million, of which 87% are linked to IPCA.

The rise in debt in foreign currency whose share increased from 6% to 9.3% in September 2023 was mainly due to the release in -- of EUR 34.8 million relating to the contract with the European Investment Bank in February 2023. In relation to the average coupon, the percentage went to 9.4% due to the reduction in interest rates. And debt-to-equity ratio measured by net debt over shareholders' equity remained in line with the comparative period.

On the next slide, we talk about shareholders' compensation. For the financial year 2023, as approved by the Board, the payout would be 50% of the adjusted net income. The amount already stated in the first 9 months of 2023 was BRL 388 million.

After presenting the financial data, we now talk about the concession agreements referring to September 2023. COPASA and COPANOR jointly [ owned ] 640 water concessions, of which 633 are in operation. As for sewage, there are 309 concessions, 271 of which in operation. We serve 11.8 million inhabitants with Water and 8.6 million with Sewage.

On the table on the right, we informed the 10 main COPASA concessions, which jointly account for 49% of total revenue. In September 2023, the company had 28 expired concessions and 2 concessions whose contracts are considered void in court. All these concessions together account for 4.1% of revenues. Services continue to be provided and built normally in these municipalities in compliance with the principle of continuity in the provision of essential public services.

On the next slide, we show operational data. The ratio between the number of employees per thousand water and sewage connection showed a reduction. The multiple was 1.27% due to the disconnection program implemented. 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 remained in line with the comparative period.

Finally, the delinquency rates 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 3.07% due to more intense collection and campaigns to renegotiate debts.

In closing our presentation, we showed the volume of our water sources used in the metropolitan area of Belo Horizonte. The levels of the reservoirs make up the Paraopeba system that is Rio Manso, Vargem das Flores and Serra Azul, which are responsible for supplying 48% of the metropolitan area are at around 73% of the total capacity.

In the Rio das Velhas system, which accounts for 42% of the supply in the region, whose information is highlighted on the right side. The average flow on the last 15 days prior to October 22, 2023, was 20 cubic meters per second showing, therefore, a 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 operating and financial results for the third quarter of 2023. And now I pass the floor over to the operator, so we can start the Q&A session.

[Operator]

We will now start the Q&A session for investors and analysts and then for journalists. [Operator Instructions] We'll now start the Q&A session by telephone for analysts and investors. [Operator Instructions] My first question comes from Guilherme Lima from Santander.

[Guilherme Lima, analyst]

I have one question regarding the company's surplus reserve above the social -- the capital. When do you expect to solve that issue? Should we expect some solution for November to prevent any value adjustments? And have you decided what would be more feasible for extra bonuses?

[Carlos Augusto Berto, executive]

Well, actually, regarding this capital surplus, there are two options. First, we capitalize on the surplus reserve. And the other option is to pay extraordinary dividends. We'll take both options to the Board of Directors and they will decide until the end of the year.

[Operator]

[Operator Instructions] We will now start the Q&A session for journalists [Operator Instructions] Ladies and gentlemen, we'll now start the Q&A session for questions received through the web chat. You may continue.

[Carlos Augusto Berto, executive]

Thank you, [ Gentera ]. I'll read the question and then I'll direct it or answer it. There are two questions about extraordinary dividends. One from Marcelo Gonsalves; and from [indiscernible].

As I said, there are 2 possibilities due to surplus reserve and we'll take this to the Board of Directors both options, either capitalizing on this surplus reserve or paying out dividends. This decision will be made this year.

Also another question from Marcelo Gonsalves. What's the prospect of increasing of expenses for the year 2024?

[Guilherme Augusto Duarte Faria, executive]

This is Guilherme speaking. For 2024, the management is closing the budget that will be presented to the Board on the November meeting, but we expect to maintain our cost -- this way -- you -- we operated in 2023. Although in the comparison of 2023 to 2022, there has been an increase in the company expenses as justified by Carlos in his explanation. They were mainly due to facts, they are not part of the administration of the company such as the collection of ICMS on energy subsidies and other factors.

So we expect positive effects, for example, of the first quarter, positive effect of the full recognition of the Voluntary Separation Program and the cost of the company. As of January 2024, we have an increase of another 6 average mega -- megawatt average that will migrate to the free market. So year-on-year, we'll see a positive effect and the low voltage part of the company entering the distributed generation with a significant cost reduction in the electricity line.

The company is now negotiating the migration of its energy consumption from the retail market, which is medium voltage with the connection below 500 kV that has an opportunity to migrate to the free market, but it's not interesting neither to the distributed generation. So we are negotiating an alternative for this retail segment in order to reduce cost for next year.

This segment accounts for 30 megawatts average of our consumption. As for the other lines, especially acquisition of chemical products, the company does not see any significant effect in addition to the adjustment for inflation for next year.

[Carlos Augusto Berto, executive]

There's a question from Jefferson. 40% of the units have solar energy, when will other units also have solar energy? And what will be the savings? Guilherme will answer.

[Guilherme Augusto Duarte Faria, executive]

As I said previously, the company has migrated its high voltage and part of its medium voltage to the alternative energy market with sources -- energy sources with incentives, thinking of ESG, but also thinking of cost reduction. We are signing an agreement for distributed generation of solar energy. When I talk about the migration of this retail segment of 30 megawatts average, we are tending to a production of solar energy. So the company has focused energy cost line and its energy matrix on the cost reduction.

So we no longer want to depend on the flag system of the distribution company as well as on its tariff adjustments. We want predictable costs and the cost reduction that's focused on alternative sources of our -- according to ESG, one of them is solar energy.

[Carlos Augusto Berto, executive]

Another question from Felipe. What is the prospect of privatizing the company?

[Guilherme Augusto Duarte Faria, executive]

This is Guilherme speaking. Privatization is a topic that's under the responsibility of the controlling shareholder of the company. And as said, publicly, the controlling shareholder intends to continue with this process. And so far, the bill of law has been sent to the [indiscernible] legislative power in order to create a bill of law that will enable privatization. And so this is something that the controlling shareholder is administering and it is not up to the company's management to deal with.

[Carlos Augusto Berto, executive]

Question from [indiscernible]. What is the expected tariff adjustment for 2024. [indiscernible] will answer.

[Unknown Executive]

The regulatory processes for -- just for the analysis of the tariff adjustment are with the agency. Recognition of a positive ex factor when compared to the period of last year is an interesting factor. We're waiting for the final resolution by the agency so that we can disclose it.

[Carlos Augusto Berto, executive]

A question from [ Luiz Guilherme ] [indiscernible]. You mentioned the CapEx scheduled for coming years. Where will this investment be allocated?

[Guilherme Augusto Duarte Faria, executive]

This is Guilherme speaking. As for the CapEx scheduled not only for coming years, but for the 5-year period that's been authorized by the Board of Directors, the main challenge of the company is to reach its universalization metrics or goals. In terms of water distribution, we are above 99%. So we serve and we meet the assumption of [indiscernible] Sanitation Framework and in sewage, we are at 79.4% of our coverage area with sewage that's collected and duly treated.

So most of our current investments and investments in future years will be directed to the increase of our water and sewage treatment network as requested by the Sanitation Framework, but also we have to be more efficient in water supply -- decreasing it's fluctuations of water supply.

So we want to invest CapEx to reduce losses, [ replacement ] of assets, installation and improvement of pressure control valves and also replacement of hydrometers which is about 1 million hydrometers per year by the company, which will significantly reduce our sales losses.

[Carlos Augusto Berto, executive]

Question from [indiscernible]. The intention of the governor to privatize COPASA could get in the way of company's review of the investment plan for 2024 to 2027.

[Guilherme Augusto Duarte Faria, executive]

So far, no, the company's investment plan from 2024 to 2027 is in compliance with our corporate goals in terms of universalization of the services in our [ concession ] area as presented to the regulatory agency when improving the company's financial capacity and right now, the privatization subject is being developed and controlled by the controlling shareholder and does not affect the management of investments by the company.

The company has had growing investments lately because of our need to increase our goals in terms of universal coverage of sewage and water services.

[Operator]

[Operator Instructions] The Q&A session has now ended. I now turn the floor over to Carlos Augusto Botrel Berto, CFO and IRO, for his final remarks.

[Carlos Augusto Berto, executive]

Thank you, [ Gentera ]. Thank you again for attending this conference call for the third quarter of 2023 of COPASA. We remain at your disposal for clarifications through our Financial and Investor Relations Department of COPASA's Investor Relations area. Good afternoon, everyone.

[Operator]

The conference call of COPASA has now ended. We thank you all for attending, and have a good afternoon.

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