Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the COPASA MG Conference Call to Release Results for the Third Quarter 2024. This conference call is being recorded, and the replay can be accessed at the company's site at ri.copasa.com.br. The presentation is available for download on the platform. [Operator Instructions] We inform you that the presentation is being recorded and translated simultaneously. The translation is available by clicking on the translation button, you can also mute the original audio.

Before we proceed, please bear in mind that the forward-looking statements are based on the beliefs and assumptions of the COPASA management and on information currently available to the company. These forward-looking statements may involve risks and uncertainties as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should bear in mind events related to the macroeconomic environment of segment and other factors that could lead results to differ materially from those expressed in the forward-looking statements.

I would now like to turn the floor over to Dr. Carlos Augusto Botrel Berto, CFO and IRO, who will begin the presentation. You may proceed, sir.

[Carlos Augusto Berto, executive]

Thank you, Rodrigo. Good morning, everybody, and thank you for your attendance at this conference call. I am accompanied by Guilherme Duarte, our CEO; and Pablo Andreao, Director of Technical Enterprises.

We will begin on Slide #2, speaking about the results for the third quarter '24 to share with you the actions adopted by the company to enhance efficiency. We will go through the other slides with greater detail to speak about our statement accounts. In financial highlights, the net revenue reached BRL 1.8 billion, a growth of 9.6% vis-a-vis the same period of 2023.

In costs and expenses for the third quarter, the amount was BRL 1.210 billion. In the second quarter, the amount was BRL 1.142 billion. In the third quarter of '23, our result was positively impacted by the collective labor agreement, and we were able to revert BRL 50 billion in other operational expenses and BRL 120 billion in financial expenses.

Regarding other operational revenues, all net, the amount was negative in BRL 41 million. And in the third quarter, the amount was positive in BRL 19 million because of the reversal that I have just mentioned. To speak about EBITDA, the amount was BRL 726 million with a growth of 13.6% compared to the EBITDA of the third quarter '23, that does not consider the BRL 50 million of the reversal. Adjusted margin was 40.5% higher by 2 percentage points with the results of the third quarter '23.

Regarding our financial results, in the third quarter of '24, it was negative in BRL 51 million. The third quarter of '23, this line was impacted by the reversal of BRL 50 million referring to interest rates and a suit -- a labor suit. Net income reached BRL 368 million. If we don't consider the reversal carried out last year, and without these tax impacts, the growth of profit for the third quarter of '24 vis-a-vis the third quarter '23 would be of approximately 9.3%.

We now go on to Slide #3 with the main variations of our accounts. We begin with the net revenue for water, sewage and solid waste. There was a growth of 9.6% when compared with the same period last year. Our revenues in the third quarter of the year were impacted by the tariff readjustment carried out on January 1st with an impact of 4.21% as approved by ARSAE, and 3.5% in the water volume, and 3.6% in the volumes of sewage.

On Slide #4, we show you the evolution of manageable costs that totaled BRL 800 million with a growth of 6.8% vis-a-vis the period of comparison. The cost of personnel had a drop of 1.8%, the amount stood at BRL 401.4 million, and the salary readjustment of 1.4% applied because of the collective labor agreement and the concession of 2% of salary adjustment for 65% of our labor force was offset by a reduction of 1.3% in the number of employees, a reduction of expenses with overtime, and once again, a restructuring of participation in profit.

We had a growth of 13.9% in outsourced services because of price readjustments. We had an increase of BRL 6.8 million in IT services, BRL 4.4 million in the delivery of accounts, BRL 3 million in cleaning services, and BRL 4 million in the conservation and maintenance of our systems. When we assess personnel and outsourced services in an aggregate way, in the third quarter, the amount was BRL 679 million compared to 749% (sic) [ BRL 749 million ] in the third quarter. Well, the increase is greater than the inflation in the last 12 months and the salary raises given in the last months.

The provision for doubtful accounts stood at 65.6% higher than the previous period due to the review of our provisions for this year and the recovery of the written-off account. The tariff transfers to municipalities increased because of an increase in revenue because of 13 new sanitation units that were entitled to receiving this transfer.

On Slide #5, we show you the evolution of our non-manageable costs, representing an increase of 15%, totaling BRL 210 million. Now to detail the main accounts, the cost of electricity had an increase of 4.5%, an increase of 6.1% in the consumption of electric power of Cemig with a readjustment of 7% in power rates enforced since May of 2024. This was partially offset by a reduction in expenses and an increase of units obtained for the free market. In 2023, we had 11 units. In September '24, we now have 26 units and the use of photovoltaic sources, reducing our expenses with this line item.

Now our expenses with laboratory materials with a growth of 4.2% because of an increase in price of some inputs because of the increase of laboratory exams carried out. Fuels and lubricants with an increase of 46.2% because of an increase of fuel in the general reserves, and of course, this is compared to the third quarter of 2023. The tax credit is null, because of the process of automatic registration of PIS and COFINS on the expenses of amortization and depreciation. Now with this, the total cost of COPASA for the period analyzed reached BRL 1.21 million, corresponding to an increase of 6% vis-a-vis the same period in '23.

We now go on to other revenues, expenses, equity income and financial results. In other operational results, there was a drop of 51.8%. This variation is explained by the reversal of provisions and because these are now being classified according to the corresponding cost. Regarding other operational expenses, as mentioned before, we had a reversal of [ BRL 49.9 million ] in 2023. And finally, we were negative in our financial results, as mentioned, because in 2023, we had that reversal of BRL 50 million in financial expenses.

We now speak about adjusted EBITDA and adjusted net EBITDA. EBITDA reached BRL 725.7 million. And in '23, it was BRL 639 million. Adjusted net income was BRL 368 million, 9.3% higher than the adjusted net income for the third quarter of 2023. You now see the CapEx information for the company for the first 9 months of 2024, COPASA invested 82% of the value forecast for the year. If we compare this with '23, the increase was 30.7%. The total invested for the quarter, [ BRL 736 million ] geared to water and the rest to sewage.

Capitalization. Well, in COPANOR, we invested BRL 36 million until September of '24. Here, you also see the investment program for the company between '24 and '28, representing BRL 9.8 billion for the period.

On Slide #9, we will speak about the evolution of the debt in the company, gross debt, net debt and leverage. Gross debt in September reached BRL 6.2 million, 11% are short-term debt. Net debt went to BRL 5.2 million, while in September of '23, this amount was BRL 3.4 million. Now regarding net debt EBITDA ratio, this now stands at 1.8x.

We go on to Slide #10 to speak about the representativity of indexes and the average coupon. CDI corresponds to 30% of the COPASA debt, a reduction of 5 percentage points vis-a-vis the previous period. This drop in the representation of CDI is due to the amortizations carried out during the year. Now debt pegged to IPCA represent 35% of our debt, an increase of 3 percentage points vis-a-vis 2023, mainly due to the raising of funds for the 19th debenture, representing BRL 1.3 million, and 77% of the series and IPCA.

Foreign currency shows our debt carried out with the European Investment Bank, the French Development Agency, and the German bank KfW. They represent 19% of our total debt because of the release of loans that have taken place in the last 12 months. Now the accounting impact of foreign currency debt will have a cash effect only upon maturity of the debt. Now we had a drop of 8% because of a drop in the interest rate and the improvement in the economy. The degree of debt is 6.3%, it has gone to 5% in September of '24.

Now Fitch published a report, where the corporate debt has been revised as positive and the long-term national rating for the company because of the debentures are presently standing at AA positive. Now Fitch, -- Moody's, I'm sorry, says that our ratings are AAA.br with a stable outlook.

On Slide 11, we see the shareholder compensation. Now the extraordinary assembly approved a payout and in terms of regular dividend, this tends to vary between 25% and 50%, and the payments are carried out 60 days after the approval. In the last quarter, the payment will be defined at the assembly. Regarding extraordinary dividends, they may be distributed as assessed by the Board of Directors and the approval of the extraordinary assembly. The payout will be 50% of adjusted net profit. On September 12th of this year, the total amount approved for the first 9 months totaled BRL 452 million, 50% in terms of shareholder reservation and BRL 300 million have been approved in terms of extraordinary dividends.

Now to conclude the presentation of our financial results, we would like to refer to our concessions. COPASA and COPANOR jointly have 337 water concessions, 632 are operating. In terms of sewage, there are 308 concessions with 273 operating. So the company is servicing 11.8 million in terms of water and 8.7 million when it comes to sewage. To the right, you'll see the main concessions of COPASA that correspond jointly to 49% of the company's revenue. In September of 2024, COPASA had 40 concessions that were considered null. Jointly, they represent 4.8% of the revenue and COPASA continues to operate normally and bill normally in these municipalities.

On Slide 13, you'll see our operational data. Now the number of our employees went from 1.27 in September '23 to 1.23 in September '24 because of the layoffs of some employees. Now the loss index between the distributed volume and the measured volume in the last 12 months had a slight drop going from 38.9% in September '23 to 38.4% in September of '24.

Now finally, the delinquency rate corresponds to the ratio between the balance of accounts receivable overdue between 90 and 359 days and the total amount billed in the last 12 months, it has reached a percentage of 2.97% in September of '24.

Now to end the presentation, we would like to show you the volume of the reservoirs used in the Belo Horizonte Metropolitan Area. We have Rio Manso, Vargem das Flores and Serra Azul that jointly are responsible for a volume of 52.4%. After a period of strong drought, we had the beginning of rainfall allowing for a slight recovery of the volumes in these reservoirs.

With this, we would like to end the presentation of operational and financial information for the third quarter 2024. I would like to return the floor to Rodrigo to begin the question-and-answer session.

[Operator]

[Operator Instructions] Our first question comes from Marcelo Oliveira. Our next question comes from Carolina Carneiro from Safra Bank.

[Carolina Carneiro, analyst]

I have a pair of questions, beginning with the cost. If you could refer to your policy to recover debt from customers. Of course, in the last quarters, this represented 2.8%, 2.9% of your revenue and provision for doubtful accounts. Are there any additional measures that you're taking to improve these levels? Or do you deem these levels to be adequate going forward?

A second question, if you allow me. This year, we know you have closed with some municipalities. I would like to know if you're working with other municipalities to enhance the duration of your contract or to work with contracts that are not in effect.

[Guilherme Augusto Duarte Faria, executive]

Thank you for the question. This is Guilherme Duarte. Carolina, when it comes to our commercial activity, whether it is for a reduction of the delinquency rate or the recovery of credits, the company is determined in its intention. We still do not think that the levels are adequate observed by the default levels of the company, although we are at the lowest level in the last 7 years.

Internally, as a goal, we want to have a regulatory default level, preserving the allocation of our capital, our cash and the return to shareholders. What we have done is regular adjustments in our collection system. And of course, we're working with communication with larger customers, trying to recover those older credits that have been reduced through administrative collections or working with judicialization. The company understands that there is room for improvement and our commercial director is fully dedicated and viewed and supported by the management to be able to progress in that direction.

Now regarding the contracts, as you mentioned, we have celebrated addendums with 4 municipalities, Visconde do Rio Branco, Rio Pomba and 2 others that should perform representing 5% of the company revenues. These municipalities are going through a financial rebalancing, and there has been a change in the discretionary regulation for a contractual one where the goal, of course, is always to mitigate and eliminate future regulatory risks, especially those who come from periods of tariff revisions.

Well, now that the election period is over, and we know who is responsible for the granting power, those who continue to have a forecast of continuity, and we know the mayors that will continue with us in the coming year, we intend to continue with our negotiations that are underway. What I can say is that the company will attempt to create a general change in its work with municipalities with the aim of a regulation. And of course, we will have to have a better consertation among municipalities.

If this does not work out, we will continue with individual negotiations with those municipalities that have shown interest in working with us. If not, in the fourth quarter, we should have other municipalities having an addendum in their contract in the coming year. I will personally devote myself to enhance awareness when it comes to contractual regulation at COPASA.

[Operator]

[Operator Instructions]

[Carlos Augusto Berto, executive]

Rodrigo, we will, therefore, go on to the questions that we have received through the chat. I will read the question, and the question from [Indiscernible] for Santander.

Congratulations for your results. If you could give me a review of the tariff process.

[Guilherme Augusto Duarte Faria, executive]

This is Guilherme Duarte. Thank you for the question. As I mentioned previously, the company is working along 2 parallel paths that do not interfere at this point in time, and with the goal of mitigating future regulatory risks. The company, therefore, is attempting to broaden its revenue base with changes in contractual regulation to mitigate future risks of tariff revision. Nevertheless, most of our revenues come from municipalities based on a discretionary regulation.

And in the horizon, we have a tariff review based on new tariffs for the year 2026. And because of this, the company is undergoing public consultations, conversing with ARSAE regarding this tariff revision. We're speaking intensely with the regulatory body, signaling out some points of enhancement that we have identified that results from eventual changes in the way of assessing or acknowledging the company's base of assets. Our proposal is to work with a shielded base that we had in the past to a future base similar to what was done at Sabesp based on future cash flow or something intermediate that will update the base of assets year-on-year.

We understand that we have been able to convince the regulatory body on this need. And in the future, we will have a new tariff cycle if we maintain the present day regulation with an intense level of investments being carried out. And there should be a correct allocation of capital or the payout to shareholders for our internal managerial needs. And of course, this needs to be acknowledged. And there are other points such as a proposal to share gains or capture costs that come from operational efficiency, things that we have already seen in the electrical sector or streamlining that we have observed in the case of Sabesp.

We're having an interlocution with the authorities to have a positive result, not only for the shareholders, but for the sanitation sector in Minas Gerais that will undergo heavy investment in the coming cycle. We hope to have more favorable regulatory outlooks, and the company is quite devoted to this conversation. We believe that the authorities are more sensitive to what is happening, and we hope that changes will happen in the last quarter and coming quarters until we can conclude this process at the end of 2026.

[Carlos Augusto Berto, executive]

A question of [ Arlindo Sousa. ] Robust data on your investments. If you could speak about the growth of the regulatory basis for the tariff review 2025.

[Guilherme Augusto Duarte Faria, executive]

Thank you for the question. This is Guilherme Duarte once again to complement what I said previously, especially with this outlook of having future tariff cycles that will correspond to very robust investment cycles made by the company. The trend is that the asset base of the company, the remunerated base will grow considerably. And our intention is to foster this without losing a focus of the tariff review.

Our intention is to assess the possibility of capturing efficiency gains in tariff revisions, not only between cycles. Efficiency gains affect the movement of tariffs, and this takes us back to the question of Carolina. We work with delinquency rates with default levels, but what truly remunerates our shareholder is our asset base. We intend to expand our asset base and lead to regulatory enhancement that will acknowledge this, so that the next tariff cycle will have that due component of remuneration based on an updated base, so that our shareholders can be compensated adequately. If I understood your question, it's a connection of the base of assets with regulation that has an impact on the shareholders' compensation in the final account.

[Carlos Augusto Berto, executive]

Question of Rafael Dias. The outlook to renew the concession in Belo Horizonte according to the new regulatory framework.

[Guilherme Augusto Duarte Faria, executive]

Thank you for the question. Once again, this is Guilherme Duarte. When we speak about the renewal of concessions, the sanitation framework sets forth that the only period or the only provision allowed for this is an advent of privatization. We can speak with Belo Horizonte very similar to the addendums that were done in the contract, a rebalancing of the contract perhaps with a change of regulation.

And as we have defined the electoral process in Belo Horizonte, we will once again converse with the municipality, presenting not only the company's operational proposals for the municipality, more especially the investment plan that we have for Belo Horizonte to make them aware of the need considering the maturity to hold this conversation. And the outlook is to rebalance the contract with a contractual change. This is part of my agenda for the coming months and the beginning of 2026.

[Carlos Augusto Berto, executive]

The next question, well, these are questions we have received about federalization and privatization.

Thank you for the questions. I'm not going to name the people. We have more than one question on this theme. Regarding the issue of federalization from the viewpoint of external news, we haven't seen anything novel, and we haven't been formally communicated by the controller on the initiative of federalizing the company.

Now from the viewpoint of privatization, what I can say is that formally, we have not been communicated on an initiative to privatize on behalf of the controller. What we have seen are recent news where the interlocutors of the controller manifest their interest of resuming this with the legislative assembly. And the company, of course, will be prepared for this movement if it is of interest for the controller, and if it is duly approved by the legislative assembly, we're working in terms of investments, regulatory issues, we're trying to prepare the company for a new moment focused on costs.

Presently, we have 3 great actions in-house in terms of execution. One of them with the help of external consultants is focused on the management of assets, it's a company regulated by its asset base, which means we have to enhance our in-house asset base. Another is focused on the organization of our labor force with an impact on the organizational structure. We want to reduce costs, increase efficiency, and we're going to restructure the way that we contract and manage works.

We can say very assertively that in 2024, we have reached the best level of investment in the company. And in 2025, there will be a new leap in investments with the aim of having a company with the ability of realizing a CapEx never observed in the past for COPASA. Why do I mention this? It's an in-house movement of preparation as well as preparation in regulatory work. And it will bring about a very significant legacy for the company, whichever our corporate model or control model is for the future of the company. It is our role in terms of management of constantly streamlining the management, offering the best compensation for shareholders, of course, offering good services.

Our next question, it's from [ Daniel Travitzky ] from Safra. If you could speak about the practical and regulatory differences in your contracts carried out with municipalities in the renewal of concessions.

Thank you for the question. Daniel, to complement what we have said previously, the movement to renew a concession, well, the law allows us to do this, and it's a movement where we agree upon the same conditions of the contract once again. And ensure that those conditions are at a new level, that movement of working with an addendum to reach a financial balance, it depends on the regulatory changes. When we speak about a change of regulation in the base of assets, when we're going to amortize a base of assets that at the end of the concession will represent an expansion of the base of assets, so that you can pay back the company.

When we speak about a regulatory model where these assets are amortized or depreciated or returned to COPASA and the shareholders within the contractual period, we find the possibility of rebalancing terms, so that the cash flow can operate and be equaled out in terms of profit and losses or any other dynamic that you can use compared to what was done previously and what will be done in new contracts with this contractual change.

Now to try to be simpler, more objective. A change of regulation brings about an entire framework, so that we can look at a new cash flow that we can foresee an asset that would not be amortized until the end of the contract and the possibility of rebalancing terms, so that everything can work within that novel cash flow. We're quite comfortable with this movement, and we're being aided with internal and external consultancy and consultations at the tribunal of accounts.

[Operator]

[Operator Instructions] Question-and-answer session ends here. We would like to return the floor to the CFO and IRO, Carlos Augusto Botrel Berto for the closing remarks.

[Carlos Augusto Berto, executive]

Thank you very much for your attendance at our conference call for the third quarter '24. Once again, should you require any clarifications, we have a team that can help you. Thank you, Rodrigo, and thank you, everybody, that have participated.

[Operator]

Thank you. The COPASA conference call has been concluded. We would like to thank all of you for your attendance. Have a very good day.