Aguas Andinas S.A. (AGUASA) Earnings Call Transcript & Summary

Good morning, everyone. Hope you are well and safe. I am Tomas Gonzalez, LatAm utilities analyst at Scotiabank. Welcome all to this webcast with Aguas Andinas, where we will review the first half results of this year, and we will have an update on the regulatory front and an update on the measures Aguas Andinas is taking to [ upfront ] the current drought. Joining us from Aguas Andinas is Didac Borras, CFO; Alejandro Riquelme, Deputy CFO; Pedro Bustamante, Regulatory Affairs, Deputy Manager; Cristian Schwerter, Director of Planning, Engineering and Construction; and the Denisse Labarca, Head of IR. We will start with Aguas Andinas presentation and then a Q&A at the end of it. [Operator Instructions] Finally, today's presentation and Q&A will be conducted in Spanish. To be able to listen to the rest of the call in English or in Spanish, you can select the language in the lower right part of the screen. So [Foreign Language], Cristian, [Foreign Language] [Interpreted] Cristian, you have the floor.

[Interpreted] Thank you, Tomas, and good afternoon to everyone. Thank you so much for joining this call. I will begin this report talking about the contingency. First of all, the COVID contingency. We aim at ensuring the operations to keep our teams safe so that we can continue delivering our services. In that regard, we have more than 700 people working on site and 685 people working remote. We want to continue with our investment plan. We have vaccinated more than 1,500 people with a rate of 92% for the essential staff. Something else that we can indicate is that from September, we are going to implement the safe back to work scheme for those who need to go back to the offices. And that's why we are going to follow all the safety protocols so that our personnel can work safely back to the office. We've also faced many challenges vis-à-vis climate change. Today, we are seeing a drastic reduction on rain, which reduces the resources or the availability on the natural resources for the Maipo River. I mean we've seen a reduction of more than 45% for 2020 in comparison to a normal year. And for the Mapocho River, we've also seen a reduction even -- an even greater reduction on 2020 in comparison to normal years. For the 2021, you'll see that we've chosen a darker color for the flow of the rivers. It has -- the flow has increased, but it is under the normal levels of normal years. You see the graph that shows the reduction on rain that we've seen in the last decade, which is way below under the normal rainfall. We have 80% capacity of water, which is better than other years, and with that, we can face the coming summer. So having less rainfall and having a lower -- smaller rivers then will translate into the levels of water that we can have access to. In green, in this graph, you can see the fluctuation of the water that we have collected due to our rights; and in light blue, the purchase needs due to the scarcity in water because of lack of rainfall. And with dark blue, you see the increase that we can see on the underwater going from 14% to 21%. In regards to the rights to the river, we have seen a reduction to 43% in 2020, and we're seeing the same behavior for '21. We can see the increase in the purchase of water that we have needed to do because of this scarcity of water. The silver lining here is that we have signed an agreement with Regantes Association of the first section of the Maipo River, which will ensure the availability of surface water for the Andean region. The purchase price is -- it's aligned to the market price in the different months of the year. And this agreement also takes into account investment that look at fighting climate change. For instance, the reuse of the water from our factories, the construction of wells and the implementation of filters when we have [ extended ] water in the rivers. We are working towards the development of concrete solutions. The plan towards 2030 aims at obtaining 300 -- between 310 and 340 hectometers. We are focusing on finding new sources of underwater. We are working on the wells in the Antonio Varas sector. We are using our resources in the underwater in a sector that was a mixed sector. And it is -- we are working on advancing the well construction. We want them to be more efficient. We want to be able to build more wells as well as use -- smart use of energy. We are also improving the grid for the water resources, trying to control loss and leaks. I told you that we are considering the reuse of our waters. It is part of our plan. And we are also considering doing some environmental impact studies. We have several projects underway. The site -- we have some sites that have developed more than 50% that will give more water to a sector that is basically using underwater at the Mapocho river who has been affected by the reduction of the flow. Another project well underway is the Cerro Negro/Lo Mena well, who will give us 1.5% more of water, underwater. And lastly, we have a project well underway and it is part of the commitment. We want to have more than 48 hours of autonomous water for the city. So we will be able to send clean water to the independent take of the city. Aligned to the investment plan, I want to remind you that we are in a more -- in a better position today to tackle other issues like the climate change, the drought. We've invested more than 77,000 million, which allow us to have 4 hours autonomy to 24 hours in 2019. And we were able to tackle the incident that we had in January that affected our water resources for more than 2 days. Moving on to the financial report.

[Interpreted] Thank you for joining the call. Good morning to all. We are going to talk about the financial results of this company in these last months. I would like to clarify 3 things before beginning my presentation because that will give us the context of the figures that we will present. First of all, we are facing 3 important crisis. First of all, the COVID crisis that continues to impact our figures. We will see this later on in my presentation. Then the second crisis is due to the impact of the water scarcity and everything that the company is doing to ensure resources for our residents, and that will definitely affect our results. And the third crisis, which is the increase on the inflation or the high inflation that we are experiencing in these first 6 months, which will impact our debt. Remember that we have great debt in [ UFs ], and so that's why we need to update our debt, and this will impact our financial resources and that will definitely impact the net results. We've been able to get ready. We had a crisis in March. We had to index, again, in August, and we see both positive and negative sides to that. Going back to the results, we can see that we have income that goes over the income in 2020. This is due to activities that are not related to the water line of business. We see a very positive trajectory in these last -- in these 6 months, but it is -- the performance is a little bit under the 2020 performance, but we are seeing great recovery. And we understand that we're closing the gap, and we are practically aligned. And we believe that in the coming months, we will be well ahead to reach the volumes that we've set forth, and that we'll prove that we are improving. And we see an increase in our operations that are related to the drought because we are buying water. So we are well underway on the net results. We see a deterioration of 6.5% precisely because we have to compensate with financial support the prices that we've already mentioned. But when we do a net result, for instance, [ ESSAL ] on the 6 first months of last year, you may remember that the first 6 months of last year have, within the results, the profit for [ ESSAL ]. So if we compare them, we see that there is a 2.4% difference. These are the [ right ] results. If we see the results by quarter, we see that the second one has been really affected by the pandemic and -- but we are well underway to the recovery. We are reaching a 22% that we got on the second quarter of last year. So as the economy recovers, we believe -- or remember that the second quarter in 2020 was still very much affected by COVID because we were completely in lockdown. So the household consumption was very low. And we need to keep an eye on it and see how things evolve. It seems that there is the ability of 3% of the provision for income in the last month. We'll have to see how this will evolve in the coming months. But it seems that 3% is the result that shows the trend. Talking about income, we see volumes that are below the ones in 2020, minus 0.9% that is related to the household -- the commercial consumption, I'm sorry. We see the household consumption has recovered. But the commercial consumption happened yet because of the pandemic. We need to keep an eye on it. We need to see how things evolve along the way, but we feel that this is a positive trend. Regarding the indexing of tariffs, we see the negative effect of the tariffs that was recorded in March 2020, which was a loss of 3% that has still -- that is still affecting our figures for 2021. And then we have 2 positive impacts, one associated to the [ PK ], and then the indexing that we have had in 2020, and the indexing on March 2021 of 2.6%. The -- regarding all activities not related to water, we see the pandemic effect because in 2020, many of the things weren't performed because of the lockdowns. And while this is changing, and we are seeing a recovery, and we are seeing -- we're recovering levels that we had in previous years, so the impact for the second quarter is very positive. Regarding EBITDA, we have, on one side, the maintenance of network, which is very important. This is negative and -- I'm sorry, I lost my screen. So network maintenance. We have the COVID effect. Many of the services that had to be done in 2020 couldn't be done because of the lockdown, but we're doing it in 2021. Then, we have the drought. So the pipe -- the water pipes really suffer when there is a drought. When it rains a lot, we need to work on inundations, then we have an increase on the -- on labor due to the COVID effect. We'll see how this will evolve in the next month. And we have yet to analyze the deterioration of the pipes to see how we can improve this and how can we increase our preventive activities to control the corrective expense, which turns out to be more expensive. Water purchase. There is an important impact on the first 6 months of the year. We want to be well ahead of any potential issue that we may face. So we've purchased water as a reserve. So the first 6 months of the year, the objective was to keep our reserves in very high levels. And like Cristian said, we have signed an agreement to ensure that we have the resource that is most needed in the time of needed. So we have higher reserves, but that is an increase in the cost because of purchase of water, as you can see in the figures that I'm showing in the slide. We see that for 2020, our debt is increasing. So we have insolvency. We are in a 2.9% today, as the last year, we were in 2.4%. And we believe that this figure will come close to the 2.4% and perhaps next year, we will recover and maybe we'll keep the 2.9% today. As you know, debt in last year went up to 4.2, and we hope that we'll have positive figures in the coming months if the economy keeps recovering. These first 6 months have seen unprecedented events as it has been mentioned already. We have been able to -- apologies, I don't know, somebody is moving this slide, and I'm a little bit lost. Give me just 1 second. Can you confirm that you can hear me?

[Interpreted] We can.

[Interpreted] Thank you. I'm experiencing some technical issues because you see that the presentation that I'm following keeps moving. So the slides move on its own They have a life of its own.

[Interpreted] If you tell me which slide you want to display, I'll just put it there.

[Interpreted] The EBITDA one.

[Interpreted] There you have it.

[Interpreted] Great. We've been able to get additional savings because of a lesser activity but also because we have limited the expenses, and we want to compensate the cost and maybe find a balance in the cost. Also, the inflation and the increase in the activity are impacting our cost structure. We also want to talk about the impact of COVID on EBITDA 2021. The results have been greatly impacted by the pandemic. So what we're trying to see is to study the first 6 months in 2019. We can call this prepandemic year, and we want to compare these results to the first 6 months on 2021, which are pandemic months. We can see the impact on COVID on this year. We are talking about CLP 17 million that are associated to the loss of volume. This loss of volume is almost CLP 11 million, which is linked to the industrial consumption. And we have also the effect of morosity, which before the pandemic or default -- before the pandemic wasn't as high as before and also because of all of the expenses that we had to incur into -- for the safety protocols. This is something that we did not consider and did not use in 2019. And then also, there is an impact on the activities that we're not able to perform, which definitely is affecting our activities today, and we have to mention them because we need to take these into account. Regarding provisions, we have a 3% of nonpaid -- so we've been -- several years with this percentage of uncollectibles. The low doesn't help much. So the leverage that we had to make payment compulsory is not working. So we have been able to find other campaigns or activities to be able to collect these payments. Regarding last year, we see that from March 2020, we see an increase on this ratio. We reach a 4.2 in 2020. This year, we have been able to control this percentage and even reduce it. And we need to see how the economy will evolve to see how this variable will continue. It's important also to see that the debt portfolio has been stabilized, and we see that the items that are lower than 8 -- while we see that the clients that still have debt are under control, they are not getting new debt, but they haven't been able to pay off their debt. So we don't have new clients, but we see that the debt is getting out. If we see the evolution of the net profit, which is the result of the last line, we'll see that the evaluation of EBITDA, and then we have the 2 great effects that have to do with the inflation. For -- on the one side, the stabilization of the debt linked to the UBS, we have an evolution of 1.4, which has a very important impact on the first month, and then we have an impact on the taxes. And then the correction of the capital, which has a positive effect in our rate, which allow us to compensate the negative impact on the finances. And on the last line, finally, we can see that it is impact of USD 3,000 million, which is the impact associated to the benefit of the -- the profit of [ ESSAL ] that was in 2020. We don't see it in 2021, but it still has an impact that is important in the results for 2021. At the level of net financial debt, we see that we have CLP 49.2 billion. And it is important to emphasize here the impact coming from inflation, basically CLP 20 billion, which is more than the inflationary value. Likewise, we have the dividend payments in May in order to increase our net financial gain. And in this way, we will be able to continue funding the CapEx and continue paying off our financial debt and our tax obligation. We can see that the debt is still under control. We will look at some indicators later on. We also have the increase of the UFs and the dividend payments during this last quarter, which has been as well quite relevant. Let's talk about investments now. The accrued investments that we have had so far go to CLP 188 billion. If we see this investment, we have 35% of it are going to ensuring water resources and the company's operations, which is a priority for us. And that is why a good deal of our CapEx is done, is oriented towards ensuring that water reaches our users. Likewise, 18% goes to maintenance, 20% to providing the water resource. And in investments, we see other types of investments in terms of improving quality of the customers, the [ visualization ] of the company and to ensure self-sufficiency. At the level of a balance, we see that the balance of Aguas Andinas is robust. Compared to 2020, the valuation is practically now 0.1%. So one of the main impacts that we currently have is the flow of cash for the dividend payment. So during the following months, we will see a recovery there. In terms of assets, we are trying to control the debt. So, so far, there is no red flags here. We are quite stable. The only 2 movements that are being witnessed here in terms of equity is dividend payment in May 2021, which can be compensated by the accumulated net value. As I would say, in terms of financial ratio, these are ratios that are evidence of the robustness of the company. We have a value of 7% and 7.9% of assets, net EBITDA under 4, and liquidity ratios that are quite relevant, over 1%, which shows the robustness of this company and the fact that the company has the resources to face contingencies such as COVID and the drought, which allow us to provide an efficient response. So we have very solid ratios in this quarter.

[Interpreted] Good afternoon, everyone. Thank you very much for your attention. I will talk about the water code reform. I believe that this reform is, no doubt, a good reform. It is still not enacted or approved. We are still in the third stage of the process. This is a code created considering an abundance of the resource. And also, we are making the amendments that need to be adjusted to the realities of climate change and drought season. So it is very important as well to mention and to take into consideration the rural and urban populations, which are the ones in -- the rural populations are the ones that have less coverage. That is why this code has some provisions that are quite important for this effect. For example, the prioritization of water for human consumption and subsistence, which is fundamental. The current code does not have this critical principle, which we believe is fundamental to ensure, by the state, access to what to its population. So this new code or this amendment takes into consideration guaranteeing the rights and access to water. It is important for language in the code to establish the facts. Likewise, the protection to the sources -- to water sources, and this is extremely important. And all of this needs to be done in order to guarantee water supply to the population. That is why this reform -- this amendment provides for a number of tools to protect and to provide water and protect its sources. Also, certain measures and prohibitions around the use of water and water management, specifically for the prioritization of human consumption. So in this specific sense, we hope for this code to be accepted, to be approved so that we can also incorporate it to further discussions down the line. Could we move on to the next slide, please? I would like to also talk about an announcement that was recently made. The project of the water resource office. This announcement basically helps us to complement the reform to the water code because it provides greater responsibility to the authorities in order to have a more robust water authority and management. So in this sense, these resources are given a greater relevance at a state level. Now there is a minister's commission created around decision-making with a public and private investment, likewise, a consultation that the President can implement. And by law now, it is established by means this new provision that we expect to be approved, a legal -- a water resources management and a basin management system. And all of this should be under the code -- the water code that we have been discussing with the prioritization of human consumption and the system in such a way that the state can guarantee access to drinking water to the population. So in this way, that's how we are looking at all of the various modifications and amendments to the water code. Next slide, please. Now regarding the constitutional amendment, we see that it's underway. We are just entering a period of procedure definition that will allow the convention to operate with some predetermined rules, either taking into consideration the themes that by September or October, hope, we know further for all of the parties to enter fully into the discussion so that it can move forward. We are paying close attention to what's happening, and we are providing a permanent follow-up to what's happening in the constitution. Some of the constitutional amendments touched upon issues that required further discussion in a plenary session. So we are ready to provide our input to this discussion, not only from the urban sanitary point of view but also for the benefit of all people that require access to water for their health and dignity. So this applies not only for the urban areas but also for the rural areas particularly. So we are not only going to support this, but we are also eager to do it. So we hope for the good of the country to have the convention approve the amendments and that's as far as my presentation goes. Thank you very much, everyone. Now we have the Q&A. If you have a question, please write it down on the chat.

[Interpreted] I have a couple of questions that I would like a clarification on. So this is a question for Didac. We have seen an improvement in regulated income due to the impact of the pandemic and the lower demand. So how the income of the different sectors have played out? And how do you see the evolution of this income in the following quarters?

[Interpreted] Thank you very much for that question. So yes, the evolution of the income related to residential clients is positive in recent months compared to last year. It is not fully normalized, but we need to consider that this pandemic has still had a big impact on the numbers. However, we are indeed seeing a recovery in residential clients, which is also emphasized in this recent months of July and August. We see that the consumption has improved significantly. As I always say, we want to be prudent because this is a variable that needs to be followed up month by month. Now in terms of nonresidential consumption, we see a relevant impact as well with minus 7.2% compared to last year. As you remember that last month had a 3 COVID -- 3 COVID-free months. So that is also a factor. And there is recovery on sight. So as the situation improves in the country, we will see the opening of the economy also improving the numbers in this specific area, and it will get its pre-pandemic numbers. But we need to be patient. We need to see how month by month this will behave. But definitely, in the last month, we do see an improvement that we'll have to confirm in the following months also improve as well.

[Interpreted] Okay. Didac, another question. In terms of the income, this year, we saw an extraordinary income of the [ El Trebal ] Mapocho factory or plant. What is the reason of this increase? And is this relevant?

[Interpreted] No, actually, this is not recurrent income. So during the construction phase of this plant, Aguas Andinas invested quite a bit that we shouldn't have invested. Like, these were costs that were not really our responsibility. So that's why we saw an impact in terms of our income because these are regularized with the further expenditures that we have. And we have also an investment for additional work done in the plant. So we do have a positive effect on income after that at greater CapEx. And then we will see a normalization that will not be reflecting negatively in the balance sheet. So to answer your question, this is indeed a one-off. This will not be a recurrent situation.

[Interpreted] Okay. Very clear. Another question for you, Didac. In this first half of the year, we saw an increase in fares, but these fares are also adjusted by inflation. So do you remember when was the last fare adjustment in Aguas Andinas? And looking at the level of inflation that we currently have, is it possible to see perhaps another fare adjustment from hereon until the end of the year?

[Interpreted] So in March 2021, we had an index linked to inflation. So let's recall that in Aguas Andinas, we are considering the inflation weighted with income. So due to high inflation, we have also in this month of August indexed our numbers. So we will see that reflect in the following months. During 2021, we'll see things that have been changing. So we will reindex in March and reindex in August. So in August, it will be above 2.6%. So this really will have a relevant impact in the following months.

[Interpreted] Okay. Yes. Actually, I was thinking that a fare adjustment was coming. Okay. Another question. Now regarding future investments that will have to be done, do you see any restriction for not paying the 100% of the dividend? Are you still thinking about paying dividends?