Companhia de Saneamento de Minas Gerais Copasa MG

BOVESPA:CSMG3

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and welcome to COPASA's audio conference to discuss results relative to Fourth Quarter 2022. Today with us, we have Carlos Augusto Botrel Berto, CFO and IRO at COPASA. The presentation will be recorded in audio. [Operator Instructions]. This event is also being transmitted simultaneously over the webcast and may be accessed at the company's IR website. ri.copasa.com.br where the respective slide deck can also be found for download.

Before moving on, we'd like to remind you that forward-looking statements made during this conference call concerning the company's business perspectives, operating and financial targets are based on assumptions and also on expectations on the part of the company's management as well as on information currently available. Those involve risks and uncertainties as they refer to future events, and therefore, depend on circumstances that may or may not materialize.

Macroeconomic policy changes or legislation changes and other operating factors might affect COPASA's future performance and thus lead to results that will differ materially from those expressed in these forward-looking statements.

We now turn the floor over to Dr. Carlos Berto, who will lead the presentation. Please, Dr. Berto, you may carry on.

[Carlos Augusto Berto, executive]

Morning. [ Christina, ] good morning. Good morning, everyone. I'd like to thank you all for participating in our conference call. I am here accompanied by Guilherme Duarte, our CEO; and our Operations Director, Guilherme Frasson.

I'll now start the Q4 highlights. Moving on to Slide #2. Talking about the results we reached in the second -- in the fourth quarter, rather. And in the next slides, we'll go into a bit more detail in terms of numbers to explain the behavior of the main lines in the income statement. We also have the financial highlights of CAPASA's fourth quarter. Our net revenue amounted to BRL 1.4 billion, representing a growth of 7.7% when compared to the same period of 2021. In terms of costs and expenses, the amount posted in Q4 was BRL 1.06 billion, a drop of 3.9% vis-a-vis the BRL 1.1 billion of the fourth quarter 2021. As for other operating income and expenses, net in Q4 2022, the amount was positive at BRL 19 million, while in Q4 2021, we saw a negative result of BRL 72 million. As for the EBITDA, the amount reached BRL 530 million in Q4 2022, up 16% from the same period in the previous year.

As for the financial result, the value was negative BRL 77 million, while in Q4 2021, the amount had been negative at BRL 60 million. As a result of the facts presented, the net income reached BRL 268 million in the quarter. We'll now detail the main variations in the accounts that make up the income statement, starting with the water, sewage and solid waste revenue.

In Q4 '22, we saw a growth of 7.7% when compared to the same period of the previous year. This revenue in Q4 was impacted mainly by the increase of 4.3% in the volume measured per water economy. And 3.3% in the volume measured per sewage economy, migration of consumption ranges and categories and growth in water savings by 1% and sewage by 1.4%. As we reported in late November 2022, Arsae has also -- has a tariff adjustment with an average effect of 15.7% applied on January 1 of this year. An important point to highlight is that this will be the new base state for the readjustment of the tariffs. This change was offset at this readjustment. This reinforces that we have been -- what we have been emphasizing about the solidity of the company's revenue and the maturity of the regulatory environment in which we operate.

On Slide 4, we have the evolution of manageable costs, BRL 720 million in Q4 2022, corresponding to an increase of 6.3% when compared to the previous period. The main variation in costs, personnel saw a growth of 5.1%, coming to BRL 395 million due to the effects on the payable resulting from the 2022 collective bargaining agreement which -- whose base date is November and INPC applied was 6.46% for readjustment.

In February 2022, we have closed an agreement for previous periods. On that occasion, the change in the database from late November was approved and the correction of salaries was approved. This increases because the INPS was offset -- partially offset by the implementation of a volunteer layoff program that led to the layoff of about 1,100 employees. So when compared December '22 with December '21, the number of employees saw a drop of about 5%.

Third-party services grew 19% in the fourth quarter of 2022, a growth to -- mainly to BRL 17 million in expenses with services and maintenance and preservation of systems and because of service contracts and leakage corrections and also other contractual adjustments. The Rio Manso PPP grew 2.6%, a drop in energy costs, partially offset the contractual adjustment of 10.54% IPCA, applied in May 2022.

As for the recovery value of accounts receivable that was also reduced. Saw a value of 10% lower than the previous period as a result of the reduction in delinquency, which reached 3.22% in December 2022. Being the lowest level observed in the past 6 years as a consequence of collection and renegotiation of that, that we are developing. As an example, we can cite a different companies for social tariffs, warnings for cutoffs, review of renegotiations, and for 2023, we aim to clearing all that up. And finally, the tariff transfer to cities increased by 6.6% following the behavior of the observed revenue amounts. Now on Slide #5, the non-manageable costs, saw a drop of 18.7%, BRL 149 million in Q4 2022. Going in a bit more detail about those costs. Electricity costs decreased by 26.6% due mainly to the application of the [ bandeira ] or flags, which were minus expensive or less expensive than in the previous quarter, and the reduction of the ICMS tax rate on energy. Expenses in treatment materials increased 45.7% due to an increase in prices of chemicals used in water treatment processes. Fuels and lubricants saw a drop of 13% due to the increase in prices of alcohol and gasoline coming from a drop in taxes on those items.

Total costs and expenses in the period reached BRL 1.6 billion, a drop of 4%. As for other expenses, equity accounting and the financial, financial result. There was a drop of operating revenues of 62%. It's important to emphasize in Q4 2021, there was one-off tax burden. On the other hand, the other operating expenses saw a drop of 91%. In Q4 '21, there was a recognition of other operating expenses of BRL 110 million due to a complementary provision for labor litigation suits. So we saw a final -- an increase of BRL 77.4 million negative against a negative value of BRL 60 million in Q4 2021. Moving on to Slide #7. The EBITDA margin and profit. EBITDA saw a growth of 16% compared to from previous period due to the growth in revenue due to cost reduction, as already shown. This value corresponds to a margin of 36.9% against 32.9% in Q4 '21. It is important to note that the value considered for the period was adjusted due to an extraordinary, extraordinary nonrecurring expense that we incurred at the time referring to the increase in the provision for labor lawsuits. Net profit in Q4 was BRL 268 million as a result of the facts already detailed in previous slides. Now on Slide 8, we saw financial highlights of the company. As analyzed, the annual net revenue in 2022, there was a growth of 3.7% in relation to 2021, reaching the level of BRL 5.4 billion, mainly due to the growth in savings and the volume measured for economy, in addition to the migration of consumption and category brackets. On the other hand, costs and expenses present a decrease of 0.3% in 2022, representing BRL 4.1 billion. If we disregard the value referred to the PDV accounted for in 2021, there would have been an increase of 3.5% in total costs and expenses when compared with the 2 periods, a percentage which is lower than the inflation registered in the period. The main item of our cost structure, personnel represents about 37% of our costs and expenses was stable in the period.

Looking at the other net revenues and expenses in the year 2022, you can see that there was a significant reduction in the value of other net expenses. Considering that in 2021, there was the accounting of extraordinary items and nonrecurring items as well, such as provisions for tariff returns and for labor litigation suits. As a result of these items, CAPASA's EBITDA in 2022 reached BRL 1.98 billion with a margin of 35.7%. This amount was 2.2% higher than that filed as adjusted EBITDA for 2021. Thus, the net income in 2022 reached the level of BRL 843 million. This result was 67% higher than the previous period. Now on Slide 9. The company's CapEx. In 2022, COPASA invested BRL 1.3 billion with emphasis on investments in water which amounted to BRL 580 million in water, BRL 450 million in sewage and capital expenditures of about BRL 176 million, representing an increase of 30% when compared to 2021. In the scope of the subsidiary, COPANOR, BRL 40 million were invested in 2022. In this slide, we can also see the values of investments scheduled for the coming years with an emphasis on 2023, for which investments are expected to happen to the tune of BRL 1.76 billion in the parent company and BRL 49 million at COPANOR. Now moving on to Slide #10. That -- the company's gross debt reached a level of BRL 4.2 billion, out of which 23% is short-term debt. The net debt went from BRL 3.1 billion in December 2022. While in December 2021, the value was BRL 2.7 billion. And the ratio between net EBITDA and EBITDA came out at 1.6 times. As for Slide 11, at this point, we talk about the indexes, the CDI monthly for 49% of COPASA's debt, an increase of 9 percentage points when compared to the previous period. This increase in CDI occurred mainly due to the raising of BRL 750 million by means of the 17th issue of Debentures which was completed in December 2022. The TR in turn remained in line with Q4 2021, debt linked to the IPCA represented 20% of our debt. Debt in foreign currency reference to the German bank, KfW and the European Investment Bank represents 5% of the total debt. And as for the average coupon, the percentage went to 10.9% due to the increase in interest rates. In turn, the debt rate measured from the leverage level from 41.1% in December to 43.1% in December 2022.

On Slide 12. We saw the shareholder compensation for 2022 as disclosed in the notice to market in December '22. The payout was 50% of the adjusted net income. The statement of JCP on March 17, 2023, the total amount paid out in 2022 was BRL 391 million, on the subject of shareholder payout. On Slide 13, we have information about the revision of COPASA's dividend policy and about the compensation of 2023 according to a material fact released on February 24 of this year, the new policy approved by the Board of Directors and which will be submitted to the shareholders meeting, they have the same rules regarding payout of dividends on a regular basis. As for the payment of interim dividends. The new policy expects that there may be distribution or payout of interim dividends, depending on the analysis of the Board of Directors and in compliance with the guidelines provided for. In addition, the Board of Directors approved on February 24, 2023, the payout of 50% of the adjusted net income for the year 2023. On March 17, 2023, the JCP amount was declared for the first quarter of 2023 to the tune of BRL 131.6 million. Moving on to Slide 14. We'll talk about concession contracts for December 2022. COPASA and COPANOR have together [indiscernible] concessions, of which 632 are in operation. As for sewage, 309 concessions, 269 of which are operated that the company serves something close to 12 million people with water and 8.5 million with sewage services. On the right, we see the same main concessions, which corresponds to 50% of our total revenues. As of December 2022, the company had 19 concessions to mature and 2 concessions, which are considered legally new. All those concessions together represent 3.8% of revenues. On Slide 15, we have our operating data delinquency rate, the relationship between accounts receivable between 90 and 359 days and the total amount for the last 12 months showed a decrease in relation to the comparative period, reaching the percentage of 3.22%. The losses and the -- the difference between the distributed volume and the measured volume divided by the number of connections served in the period, there was a drop in this period than compared to Q4 2021. And finally, the ratio between the number of employees per 1,000 water and sewage connections also decreased and now corresponds to the multiple 1.33. I'll make a brief approach on how we are treating the ESG topic at the company level. COPASA has reaffirmed the purpose of caring for water and generating value for people. In 2021, instituted its ESG agenda, aligned with the company's strategic planning and the sustainable objectives established by the UN. As a translation of its core business, the company defined sustainable development goals of water and sanitation and instituted 6 strategic commitments among which we highlight water protection and gender equity.

As part of its committing to protecting water, COPASA maintains -- has maintained [indiscernible] Pró-Mananciais program whose goal is to protect and restore water springs used as a source of water. The program has already invested BRL 76.3 million in social environmental actions since its inception, covering now 275 cities until December '22, benefiting more than 9.7 million people considering the population that we serve.

In addition, the company has invested in energy efficiency such as acquisition of energy in the free market and the installation of solar [indiscernible] on the water in the reservoirs. We are also taking actions to reduce the level of water losses, which dropped 2% in 2022. With an actions reconcile, implementation of the performance contract for the recovery of micro-measured volume in areas of social vulnerability. The acquisition and implementation in 2022 of new hydrometers corresponding to about 20% of the total water connections. As for gender equity, COPASA has taken on the commitment of increasing the representation of the female gender in top leadership positions, setting a goal of 37% of women in leadership positions by 2025.

In 2022, women represented about 9% of the company's labor force. The workforce occupied approximately 33% of leadership positions. COPASA also promotes the Women's Mentoring Program, which is in its second year and includes 38 female mentors and mentees. We're also hiring women from the communities around the areas where we operate. And we are promoting social awareness programs so they can act as facilitators between COPASA and their respective communities. Now we are getting close to our final slide, the water situation have shown the solidity of our water springs in the metropolitan region of Belo Horizonte. The reservoir levels that make up the Paraopeba system, including Rio Manso, Vargem das Flores and Serra Azul. And they account for supplying 48% of the Belo Horizonte Metropolitan area that are practically [indiscernible] of the region supply whose information is highlighted on the right-hand side of the slide, the average flow of at least 15 days before March 15, 2023, was 33 cubic meters per second, therefore, showing a significant surplus in relation to the volume captured, which is about 7 cubic meters per second. With this, we close our presentation of the operating results for Q4 2022. I now return the floor over to [ Christina. ] Over to you, please.

[Operator]

[Operator Instructions] Our first question from Julia Zaniolo from Santander.

[Julia Zaniolo, analyst]

I have 2 questions. Number one, about manageable costs. We saw an increase in the level of DSO per number of calls. So how do you see costs behaving going forward and this indicator in particular, manageable costs per number of connections? And if we could expect some efficiency gains or cost reductions in the company as a whole? And if so, which would be the main areas where this could happen? And then my second question has to do with the sanitation landmark. Do you expect the law to change with the new government and how this would impact the company?

[Carlos Augusto Berto, executive]

I didn't catch your name.

[Julia Zaniolo, analyst]

Julia, Julia.

[Carlos Augusto Berto, executive]

Okay, Julia, I apologize. Okay, Julia, this is Carlos Berto speaking. So first, as for the outlook, we did a very effective PDV when I payback, which was quite reduced, 11, 12 months. And the company's executive management is now studying a new PDV. And with this, the cost of connection per employee will further drop. The PDV, meaning a volunteer layoff program.

[Guilherme Augusto Duarte Faria, executive]

Good morning, Julia. This is Guilherme Duarte speaking. As Carlos just said, we have been working hard, reducing costs on the administrative front and also non-manageable costs, trying to always include in our effective costs, the regulatory costs. And in terms of personnel, our assessment along with the unions is that our PDV or volunteer layoff program is very important.

Of course, the company also wants to use maintenance, third-party contracts, including that because those also impact administrative or manageable costs. From the sanitation landmark, you asked, the company has been following up on the discussions with the federal government. Of course, we do that through our representative associations, and we expect that changes with very, very low impact.

It's a very recent legislative landmark, it still needs to be tested to be put in some stress so that we can identify possible improvements. But it seems to be reasonable. And if some new legislation comes up, that shouldn't be a source of concern at this point. Changes in legislation would need to be assessed when they are proposed. Since that has not happened yet, there is no assessment as is on the part of the company. Changes suggested or mentioned in the media are no source of concern at this point.

[Operator]

[Operator Instructions] [ Rogerio, ] you can carry on.

[Unknown Analyst]

Okay. I'll ask the question. And I'll send the question internally. So the first question from [ Ivan Dusan ]. Is there a chance of COPASA paying out interim dividends this year?

[Carlos Augusto Berto, executive]

[ Oh! Ivan, ] as I said during the presentation, in terms of dividend payout, there could be a payout [ pending ] and analysis on the board and in compliance with the guidelines. Guidelines, which are the universal investment plans, legal and statutory regulations and also the company's covenants. Once again, the company has adjusted dividends from 2022 by 50%, and we have already started in Q1, have started the year by paying out 50%.

[Unknown Analyst]

A question from [ Eduardo Lazarte. ] I have 2 questions. Number one, about the PDV program. Do you expect to have that happening again this year? Is there still room for layoffs.

[Carlos Augusto Berto, executive]

This has been answered.

[Unknown Analyst]

And second, do you have a target for headcount?

[Carlos Augusto Berto, executive]

No, we don't.

[Unknown Analyst]

In addition to the personnel cost, is there any other avenue for operating gains, avenue going forward.

[Carlos Augusto Berto, executive]

Well, in summary, we have different avenues around automation, outsourcing, outsourcing is also an important avenue. We have been resorting to, to reduce fixed costs. And we are also changing the way we account for some maintenance costs in water and sewage, which before would be accounted for under cost and that will be accounted for as investments.

[Operator]

[Operator Instructions] [ Caroline D'Souza ] asks the following. We saw an improvement in the default levels for Q4, which was below the historical million before the pandemic. What can you tell us about default levels for this year?

[Guilherme Augusto Duarte Faria, executive]

This is Guilherme Duarte, driven by our -- some initiatives and the arrival of our new Commercial Director, Mr. [ Clason, ] very experienced in the commercial area of this industry. COPASA will strengthen its efforts around [ election, ] debt renegotiation and especially keep our customers close to us so that they're never going to default, renegotiating that, the process that we did in January led to a result -- a number of BRL 80 million, which were renegotiated, an interesting level within our debt stock.

With the benefit of bringing those customers back to a positive position in the company. Position we intend to maintain them. So the company has working to strength collection efforts, and we intend to continue doing so throughout 2023 to your point. And the expectation is to gradually reduce default levels. We cannot have a target going forward, but you can say that as we look to our peers in the market, we are at a very appropriate situation at this point.

[Operator]

[Operator Instructions] We have a question from [ Avis. ]

[Unknown Analyst]

And the newspapers talk about COPANOR being incorporated today. Is that in line with what the government is saying, does that impact negatively, the value of the company? What about minority shareholders? What kind of impact will this have on the dividend payout policy?

[Carlos Augusto Berto, executive]

Good morning, Pedro. Actually, as the report says -- the newspaper reports is, the state of Minas is studying a new model for this region to have a new concession plan, current contracts are at a very precarious phase because the subsidiary COPANOR has not been able to prove its credit condition. Should that modeling fail, there is a possibility that an incorporation will happen.

But only if that results into a positive number for the parent company, COPASA, with no harm or loss to the company's profitability. Once again, the tariff adjustment -- the tariff table runs above debt of COPANOR's, which would take those contracts to a new revenue level with no harm once again to shareholders either minor or the parent company. The company will not do anything that will lead to negative numbers for the controlling parent company nor for minority shareholders.

[Operator]

Another question from [ Everton Soza. ]

[Unknown Analyst]

Given the 50% dividend payout, how about the investment CapEx of BRL 1.7 billion.

[Carlos Augusto Berto, executive]

It's important to say [ Everton ] that although fundraising through the 17th debenture issues in December 2022 was made to support that BRL 1.7 billion in terms of investments for 2023. The BRL 1.7 billion is totally assured. Our leverage level is quite low, which allows us to make future fundraising round. But it's important to say BRL 1.7 billion for this year is totally assured.

[Operator]

[Operator Instructions] This concludes the Q&A session. I'd like to turn the floor back over to our CFO and IRO, Dr. Carlos Berto for his final remarks. Over to you, Mr. Berto.

[Carlos Augusto Berto, executive]

I'd like to thank you all once again for participating in our earnings call for Q4 2022 this morning. We remain available for future comments or questions you may have, our IR team is always available. Have a nice day, everyone.

[Operator]

COPASA's audio call is over. Thank you all for participating, and have a nice day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]