Companhia de Saneamento do Parana Sanepar

BOVESPA:SAPR4

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome. Thank you to the earnings call of Sanepar. We're going to talk about the results regarding the third quarter of 2021.

This presentation may contain forward-looking statements regarding Sanepar's business prospects, estimates on operating and financial results and growth prospects. These are only projections and as such are based solely on Sanepar's management expectation regarding the future and the business and its continued access to capital in order to finance the company's business plan.

Forward-looking statements are no guarantee of performance. These forward-looking statements substantially depend on changes in market conditions, governmental rules, the performance of the industry and the Brazil economy among other factors in addition to the risks presented in the disclosure documents filed by Sanepar and, therefore, subject to change without prior notice. We will only hear the presentation. Once we are done with the presentation, you can start with the Q&A.

We give the floor to the RI Director, Abel Demetrio. Thank you, once again.

[Abel Demetrio, executive]

Thank you, everyone. Thank you for your participation. We have our environmental Director, Social Action; our Manager of RI, our Communicator of [indiscernible] and Water. And we have [indiscernible]. These are the people that are going to follow up with a report. Page 2 (sic) [ Page 3 ], where we see the presentation of the results of the third quarter of 2021 accumulated until September 2021.

Your highlights. When we compare the 9 months of '21 against the 9 months of '20, we have a growth of -- net revenue growth of 7.3%. The EBITDA growth 22.5%. Net profit growth 19.9%. Very important to highlight the investments. We had an increase in the investments of the third quarter of 2021 in comparison to the 1 in '20 of 41.4% increase BRL 258 million to BRL 366 million.

Our service index, water 100%. Sewage is 77.4%. And 100% of our sewage is treated and the EBITDA margin is 38.8% in '20, 44.4% in '21 and 9 months. Transparency Trophy from 2021. And we have here the exercise for the fiscal year.

So Page 4, operational results. The 9 months of 2021, the volume. There was a reduction of 1.2% and our invoice for Sewage is lower than what we had for 2020. We had an increase of economies 73,000 connections of sewage. We closed the 9 months of '21. And our index of [ loss ] is [ 112 ] liters in the 9 months until September of '21. And this is regarding the same period of '21.

Let's talk about what -- the climate change and the weather. We have a drought that has been going on for 3 years. On the left, we have the rainfall from July until September '21 -- July '20 - September '21, we see that the draught was very severe here in September. We had rainfall that was below what was expected, and Southwest and South of the state showed values above and close to the average expected for the month. October, November have been very positive months here in the rainfall for Paraná state.

Next page. We can see that in September, we had a range of 73 -- 123 mm with the average month 53 mm. Next page, the reservoir levels. We have the volumes for September '21, 49.22% on average. Iraí 35%; Passaúna, 58%; Piraquara I 60%; and Piraquara II 57%. Good news. Today, we have 58.4% of the volume of our reservoirs. And this is very different from last year where we had only 26%. The rains of October and November, they were very positive.

Now let's look at the performance indicators. We can see it on Page 8, we have the financial commitments, the covenants. So the debentures that were launched in the market from the 8th to the 11th issues and a CCB contract, we have the covenant that demand the net bank debt adjusted EBITDA less than 3, and we are 1.27. The EBITDA while the net financial expense coverage index 8.65. Along with the BNDES system, we also issued debentures 2nd, 4th and 7th issues. We have the other covenant with the other onerous debt over EBITDA, which the number has to be lower than 1, we have 0.54. So we're servicing these covenants. CAIXA contracts.

We can see the covenants on page 9 now. We still have the other index, which is the indebtedness degree, net bank debt. And we have September 40 -- September '21, the debt level, 47.1%. These are the [indiscernible] covenants. The indicators EBITDA margin, 44.4%, the ROIC, 12.7%. Annualized ROE -- return on investment, ROE 15.7%.

Page 10, let's talk about the financial performance. As we've seen, net revenue grew 7.3% in the 9 months of '21 comparing to the 9 months of '20. So we got to BRL 3.8 billion, net revenue. The EBITDA and EBITDA margin, BRL 1.697 billion, an increase of 22.5% in regards to the BRL 1.385 billion of 9 months of '20. The net profit over the net margin, BRL 846 million. And the operating costs and expenses, EBITDA impact had a reduction of 2.5% going from BRL 2.178 billion to BRL 2.124 billion.

Now the cash generation on the next page and the EBITDA conversion. We have a negative variation of 0.8% and a correction of the EBITDA conversion of 77.5%. Net debt and leverage. We can see the short term -- long term -- well, we can see that the total indebtedness and the weighted average cost debt. So the net debt is [ BRL 987 million ]. This is a line the net debt in the first H -- 1H '21, BRL 2,988 million and the net debt in 2020 was BRL 2.8 billion.

Weighted average and cost of debt at the end of '20, we had an average cost of our debt of 8%. We had an increase. We to got 10.3% in the quarter of '21.

And if we look at the indicators of the company, we realized that there is an impact of -- the impact of the accumulated by December, we know the impact when we look at the accumulated for '21 was [ 1025 ]. So an increase in the IPCA, which had an increase in the debt of -- the cost of debt.

This is an index that we have. It makes our 100 average cost, it goes to 10.3%. So the composition of the debt. We have updated debt by the IPCA, then we have an increase in the debt.

In regards to CapEx still on Page 11. In the 9 months of '21, they grew 30.2%. We got to BRL 918 million. We can see 43% Sewage, 50% water, 7% other. We have 3/4 financed, and 23% are with equity resources.

Page 12. The income statement. You can see personnel, the reduction of 32.4% due to the fact that year last, we also had the registration of PAE -- PAI, I'm sorry. And so the comparative base is lower.

The electricity is something that is growing in Sanepar and all companies due to the energy crisis. And in the third quarter '21 comparing to the third of '20, an increase of 36.8%. And when we get to the month of September of '21 with September '20, we had an increase of 50%. It's a significant cost and it impacts the cost of the company.

Page 13, we have the accumulated results, net revenue, as we said, growing 7.3%. Here, we had an increase in the number of connections of water and sewage 82,000 new ones, comparing September '20 to September '21. 82,000 new connections of water, almost 83,000 new sewage, And the readjustment for February and April. Material we have an increased 3%. Electricity, an increase of 13%.

Here, there is a reduction in the subsidy, which happens yearly and it impacts the value we had a readjustment of almost 7%. And this has -- this is very relevant. The subcontracted parties, third parties, 1.7%; general and tax, 2.4%; fee provisions are those from the second quarter, we didn't have big enough provisions. We had a few updates. Healthcare plan and social security, 11.9%. Financial expenses only 46.9%.

We went through this issue, the increase of the interest rate and it impacts our cost and debt. And total cost and expenses is growing in the period 1.5%. We got to the result net revenue of 846 -- BRL 845 million and the EBITDA of BRL 22.5 million.

Now we are on Page 14. Let's talk about the non-recurring items. If we adjust the net profit, BRL 704 million, we have the adjusted BRL 845,000 -- BRL 845.648 million. Non-recurring adjustment of 44.7%.

Next page, 15. We're going to do the adjustments for the non-manageable items. The EBITDA is BRL 1.696 billion on the nonmanageable items are an extra BRL 34 million. So average margin of 45.3% EBITDA margin. The balance sheet in net debt. We've had the -- an increase in regards to the end of '20. And the counterpart, an increase in loans and financing, getting to the BRL 4 billion that we already talked about.

The operating working capital an increase in the accounts receivable, BRL 961.319 million, an increase of 20% and suppliers an increase of 22.7%. And the issue of the accounts receivable with the suppliers and contractors. So we have the 35 days aligned with -- the 35 days for operating working capital turnover.

Let's talk about the cash flow. Operating activities generated in the first 9 months of a height of BRL 1,314.953 million, the amount of investments BRL 919.328 million in investments. Financing and activity, BRL 199.106 million and the payment of dividends. So in the end, we have an increase of BRL 186 million. And we have a cash to BRL 1,070,848,000 (sic) [ 1,070,842,000 ] at the end of the period.

These are the results for the market at the end of the day. And we have called Stabile. He will be in our teleconference.

So we have the presentation.

[Operator]

Ladies and gentlemen. We're going to do the Q&A session. [Operator Instructions] We have 1 question from [ Andrea ]. He is a shareholder.

[Unknown Shareholder]

Congratulations on the results. I want to know. How the company has seen the legal framework? And do you have any thinking about advancing the payout?

[Unknown Executive]

Thank you for the question. our Financial Director, will answer the first part of the answer in regionalization and the legal framework.

[Abel Demetrio, executive]

Hope you are doing well. In regards to the new legal market -- legal framework, we had the regionalization. We can see the policy. In water and sewage, we created 3 micro-regions, understanding the number of population, and we have the operational results of Sanepar. We are very advanced in regards to this theme, and we'll go to the second phase.

And then we're going to talk about each region. We are fulfilling the legislation. And we will talk about the contracts.

In regards to the second question, the payout, the company annually reviewed the investment plan. So we are working for the period of '22 to '26. Two additional elements. We need to think about the other issues on the tax reform. We need to have more clarity for a definition on the payout. And also, the water companies, utility companies, they have protocols with their regulators and our agency.

Basically, we have 3 elements. We have 4 index that is determined in the legal framework. And we need to do viability studies looking to order [ viabilisation ], and all of this is being analyzed, and we are finishing the studies. Seeing the capacity for universalization in the legal framework because it determines that the companies have to get to 90% until December '23. 75% of the sewage collected and we have universal water connections. And we have the investment in water, 50% of all the investment in the company. It is a great amount of CapEx that we need to do for these systems of water.

[Operator]

Another question. Pedro from [ Telling ] Investments.

[Unknown Analyst]

So talking about the contracts of the micro-regions, I would like to understand from the company if October and indicating the possibility for the deadlines for some contracts? And the decree, 10 -- 110 indicated that we can get the extension of the deadline for this program. So I want to understand a little bit more how the company sees the situation.

So with the issue of the legal framework, understanding if the contracts are going to be expanded. At the end of the negotiations, we are going to have a single deadline. We have a contract with each micro region or each city, we have a negotiation and about the deadlines, are they going to be negotiated with the micro regions?

[Unknown Executive]

Pedro, it wouldn't be an expansion. It would be an update of the contract. And this is how much we need to modify our investments. In regards to the forming of the policies in the micro region, which will be composed by the municipal authority. Certainly, we're going to have a look that is not only individual but collective and the [indiscernible] reform the micro regions. Maybe there is a difference in this issue and the need of turbines.

We have the perception that there will be a lot of discussions. The company follow this regardless of the new law. And we have to defend the company, our investors, and we have the amortization of the investments done. And we have to continue servicing our cities.

It's not that you're going to do the provided services overnight. This is very complex. It's the way we are doing interpretation of the legal framework.

[Unknown Analyst]

Allow me another question. Cost of energy. For the unregulated market, are you going to do the implementation of an asset?

[Unknown Executive]

We have a few situations. We are finishing the study. And this is the number that can help us, for example, we have the electric energy. And connection of sewage is very important.

We're going to start after a pilot of 3 years. The first photovoltaic plant we finished the testing for the 3 years and we're going to replicate that. And we have other spaces in hydro energy. We have distribution. And this is for the generation of electric energy.

This we have mapped the [ 50 ] largest units. And we had pledged to the regulating agency that led to a delay in the answer, but this moment is delicate. So there will be a conjugation of efforts. Not only we are going to decrease the cost of electric energy and the provider of energy. Thank you.

[Unknown Analyst]

So I wanted to get an update on the building of the Miringuava. Do you have any updates? And are you building any reservoirs in Curitiba or the state?

[Unknown Executive]

Hello. I'm the Director of Environment, Miringuava. We have the regional building where we have high humidity. So for the construction here of earth at this time of the year, we had to reduce the effort of building because it was not productive due to the excess of humidity. And [ Dr. Adelson ] already gave us 17 percentage points. So if we have a new schedule, it's being discussed, and we have the conclusion of Miringuava.

Second question. We already have a study for the building of the sixth reservoir, which will be in the further region in the metropolitan region of Curitiba. And this has at least another 18 months for the elaboration. And then we can do the licensing -- environmental licensing.

I will say this place at Miringuava is the best place for a reservoir but also the worst place to build because of the humidity in the soil. And every day that rains, we have to wait 3 to 4 days for the earth to be dry and then go back to building. This is a moment. It was a very important volume of water that we had, but this caused working of the total construction of the reservoir.

You have people that are not working, and we have one project from January onwards. There is a trend of decrease of rains so we can work better using maybe even covers -- we're going to cover the building site so we can continue building, and the other reservoirs, we're studying the other possibilities that we can use. For example, a project from Rio Iguaçu. We have reservoirs for the use of Sanepar, again, an effort for the future.

Another detail. Miringuava is something that we have to highlight. For if today it was producing, we would have 46% of the reservoir. So people say that Miringuava being ready would solve all of our problems but not really. It would contribute a lot, but it wouldn't be capable of removing us from this situation. And the equipment at Miringuava is a projection for the population, and we have 30 or 40 years, looking on the future.

[Operator]

[Operator Instructions] Here from [ Marcos ] from [indiscernible] Capital.

[Unknown Analyst]

We can see that there is a connection of [indiscernible] that is very low. [indiscernible] are much better than last year. I want to understand, what is your strategy? Are you going back to normalcy, and are you going to deliver mix? And also in supply, we have more surface levels. That generates an additional CapEx. The strategy is to capture more rainwater. And in this part of the consulting, extension or updates, I want to understand how you're different from what is the current -- you do the CapEx in the space, and you had an underappreciated asset.

[Abel Demetrio, executive]

Thank you, Marcos, for the question. We had an increase of 0.4%. When we see the evolution here of invoiced sewage, there's an increase in the connections September 2020 onwards, and we have the sewage and water connections. When we look at 2020 and we looked at August, we had a turnover system of 36. In August, we had 36 by 36. We had that system until March of '21. We had up until 36 hours without service.

This year, we had a situation that is much better. In August '21, we have 36 hours of service and 36 without. So 7 months, we have less of year turnover. 60 hours with service, 36 without -- until 36, so we can come back to the service. All of that is the result of the several actions that we took on the company, the climate change, and we are at the beginning of the rainy season, December, January, March, and we have a better expectation if we compare to the same period last year.

[Claudio Stabile, executive]

And added to what Abel said, population has helped a lot. There was the participation of the local press in understanding the drought, and that helped. So that conjugation is extremely important. So we have the number 20,000. So we have 80%, and it's not getting to a number.

We can suspend the turnover until the return of the regular rates. That's why we have 80% reservoir. That's a magic number, 68%, and we have 60, 90 days, and we have the total suspension of the turnover. So the CapEx, we have the Capivari River. It's one of the reservoirs that services the system. It is very important for this system. It is something that is predicted. We had a different date, 2024/'25. And we still have a water treatment station.

This was used for facing a water crisis that is 90 years recurrent. We didn't have such a drought in the metropolitan region of Curitiba. In regards to CapEx, it is an investment, and there is no other possibility. And this was done in record time. No other investments in the company.

And we have besides Curitiba other regions that have also suffered with the drought. Sometimes a solution is to build wells. The company always does a mix. But through -- while we capture rivers, but wells, we have water availability and investment. Any more questions about consulting?

The update on the deadline. We had mentioned this is necessary, so the company meets the requirements. We have a new legal firm, and they're working with the different regions. And obviously, the new regulations, the companies are catching up. The company is defining its interest, and we want to balance the system.

We need to have the financial economic health preserved, so we can fulfill the universalization roles, so these studies were submitted. And this is what will be evaluated. These are representatives of the municipalities.

Another point. We're working with losses, and what have you done in terms of work? Is there any reduction of losses? And now we're expecting that the drought will be decreasing the effects.

Well, yes. The issue of losses and the turnover, we have a decrease in pressure that reduces our consumption. We have 212 leaders. For 2020, we see the number 2020, it was pre- water crisis. Obviously, part of this water crisis is -- has to do with the series of investments that the company has done. We have somebody with the projects area. And that is taking a look at the main gaps. And we want to have the better results for the company. This is a very well-elaborated project, very daring. And has a good technique, and obviously, that contributes for the reduction.

Obviously, how much we're going to be able to reduce, it is versus what the water crisis has done. We have a normalization, and we will be able to compare the records. And it [ trade per ] in 2022, and maybe there's 2023, and we have the investments.

Remember that we have to reduce our losses. And this is predicted in the new legal framework, and this is what is within the batch inflation. We have the obligation with our shareholders to reduce this because it has a cost. This is expensive, so it's not just the pressure. There's a lower incidence of loss. It's not just loss of water, but also by -- there is the connections are now legal. We had actions to avoid that.

And we found the [ condensate ] connections in lots of places. We have to work with everything that is necessary in the event is in the second company, and we're working with the losses. And it's a very important contract that is performance. So it will only receive what we bring as a result. That changes again. We are charging employees, for example, so that they receive -- they're going to have to get it. They're going to be charged, and we understand that this is going to be very important for the prevention of losses.

[Operator]

[Operator Instructions] We will be closing the audio conference shortly. [Operator Instructions] As we haven't received any questions, we have the Financial Director, Abel Demetrio, for the final consideration. Abel?

[Abel Demetrio, executive]

Thank you for your participation. In the name of the -- Sanepar, the company, we would like to thank you, all the professionals involved.

[Operator]

This way, the audio conference of Sanepar is finished. Thank you for your participation.

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