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

Good morning. Welcome to the direct is to show the results of the first semester of Andinas. Today, we have the Finance Manager, Didac Martinez; Christian Torres, Director; the Production Resources Manager; and Rachel Bernardin, and we have the Finance and Investor Relations Manager, Ms. Denisse Labarca, and we will hear a presentation from Aguas Andinas and then we will go to the question-and-answer section. If you have any questions, you can ask the chat-box the more questions, more entertaining the presentation is. Didac, please go ahead.

Once again, it's a pleasure to present the results of the company for the pestered, I'm a company via team. And we've prepared a presentation divided in 3 sections. We'll start with an introduction of the first 6 months of the year for us for at Aguas Andinas and then we'll focus on the financial structure, and we will close by explaining what the company is doing to mitigate climate change impact. That's an impact that's here among us and that is ongoing and we'll see what we're doing to work on it and to mitigate it. So we move on to the next slide I would like to start by summarizing the first semester of the year and its impact in the company. So let's start talk about inflation. As you are aware, this is a global phenomenon that's having a macroeconomic impact around the world. It's not only exclusive of Chile or Aguas Andinas, and this has a high impact in the company in different lines of our of our income as we've seen increase in operating costs in labor, material costs, chemical input costs, staff costs and many of our lines are affected by inflation. So we have an increase in operating costs. Also, as you can see from our results, -- our financial status is linked to the U.S. that's matched to inflation. So this also has an accounting impact in our financial statements. And later on, I will explain it in detail or Christian will explain it in a little bit more detail. And also on the other hand side, inflation is having an impact on our polynomial based tariff indexations. It is updated by a higher frequency, and we are calculating additional indexations in shorter period range, having an impact on sales. That's also significant. I will explain in detail a little bit later on. If you talk about climate change, we are living a period of water stress or water scarcity. So we are trying to have a reserve, to have certain security prioritizing working transfers. And of course, we just recently opened La Mena Cerro Negro wells that provide new water surface underground order services. So they provide additional resources, but also protect us from rainfall issues linked to climate change. As you are aware, also, during the summer in Chile, the first 3 months of the year, we had a campaign to create awareness, responsible water use, and this has also had an impact on the behavior of the customers of Aguas Andinas and city inhabitants, moderating average consumption that has been reduced, and this also has an impact on sales. I would also like to summarize delinquency and bad debt in the company. If you remember, in our first presentation, for the first semester, we saw an increase that reached 3.5% over revenue. In the second semester, we see a positive trend, a recovery trend of this indicator. So now the level is around 2.6%. So it's a positive trend. We have to still see how this variable evolves. It's a variable that has caused uncertainty. In February, we have this new law for utilities that was approved that subsidized water reduction in certain situations. So this first semester has been a quarter or a semester where we've been figuring out how things settled, and now we'll see what the real trend is. Also, given the context, the company has accelerated its efficiency plan that was launched at the end of 2021, this is a global program with the objective of transforming, updating and having a more nimble company in the future, but we also try to have a more efficient operation.. Our results are already reflecting relevant efficiency achievements that we'll explain later on. And without further ado, I pass the floor to Christian Torres, so that he can explain the financial summary during this semester. Thank you very much.

Thank you. Didac. First of all, thank you for joining the second presentation of results here. And we're going to talk about the evolution of business during this period, First, we want to highlight EBITDA and with revenue increase -- by showing revenue increase of 9.4% compared against the same period last year and EBITDA 7%. During the same period in the past year, we had this one-off effect due to an additional income, the company received from closing a contract. So EBITDA due to that was around 11.5%. But as Didac said, this growth is linked to this inflation and therefore our cash flow has been solid during the period. All of this has happened in a challenging context. Firstly, due to the climate change impact that I'll explain later on. And also Aguas Andinas is always thinking about the mid and the long term. We are a large company and investment planning takes time, years of planning, not only a few months. And we also have to foresee changes that are considering the climate change agenda comes hand in hand with drought. We've talked about this for a long time in depth and we have to highlight the coloration of Aguas Andinas with other users of the basin and the river trying to find initiatives that optimize water resources that are in demand right now. And something the company has started is awareness campaigns where individually and massively we've motivated responsible use so that people are aware of drought. This is not new. We've worked for 13 years with water scarcity. And that's why we have to adapt to the new offer and demand. And also, when we're talking about a challenging scenario, we have to talk about global economic context, not only internally, but also internationally that have had an impact on the company, not only due to inflation, but also due to the real cost of raw materials, labor, input, not only exchange rate or domestic economics. And therefore, as a company, we have to accelerate our efficiency plan. So we've focused on managing and expecting and forecasting change. And that's why we want to handle risk management, improved processes to see how we can mitigate the economic context and also focused on the digital transformation that's needed in every company nowadays also building organizational culture. Within this process improvement, our objective is to have more efficiencies. And by the end of the first semester, we consolidated EUR 1.5 billion derived from these efficiency plans. So in general, the company is consolidating its national results despite climate change challenges that are ongoing. And also despite the economic contract led by inflation and cost increases and that also reinforced by mid- and long-term plans and not only short-term plans. We also want to emphasize this revenue growth. As you can see, during the first semester, income increased, and this can be explained by the positive impact of polynomial tariff indexations. Our tariffs have a fully [indiscernible] index based on CPI, but it also has other indicators linked to manufacturing and import markers. Hence, we've had indexations in the last period, and this offsets the consumption reduction, as Didac said, this contract of drought and how residential consumption has been reduced 3.6% throughout the year. We've seen changes in habits or behaviors in consumption at home that represents 75% of our company's customers. On the other hand side, we've also seen how -- the commercial sector has improved and nonresidential has had an increase of 3.5%. And regarding other income, we see this impact. And when we focus on environmental services and other services, we had sustained growth in this sector. So to summarize, it's grown 12.4% and [indiscernible] of costs, we've had relevant costs that come in hand already right by CPI, as I said, labor cost in the sector and construction materials. They have an impact in our operation drought, derived from raw water transfers from the Maipo River that has also generated higher costs. And finally, network maintenance. This is relevant for us. We have approximately 13,000 kilometers of drinking water and similar amount of storage water, and we have to provide maintenance and the cost has also increased due to the raw material increase in prices. So costs having great, and this is what we are considering CLP 9.6 billion approximately. We also have the financial impact led by the impact of inflation. They are from our financial debt. We are considering the variation of this indicator of 6.8% in the year versus 2.2% for the same period last year. So this generates a high impact in the financial results that represent approximately CLP 40 million in the financial impact. So on the other hand, inflation also has a positive impact regarding for income tax basically due to deferred taxes. Aguas Andinas has high levels of fixed assets, and this have had an impact. And this is the reason why by the end of the first semester, we have a positive impact linked to the lower income tax. So in summary, our operations results increased. They are consolidated. They're stable. And also, we can balance it with economies linked to financial lower income tax, so we closed with CLP 43.7 billion. Talking about cash flow, we see positive evolution in operating cash flow, 3.8% during the period, together with collections, generating better collections and also due to optimization, improving cash flow due to taxes and optimization. So we have a cash flow, that's 1.6x higher compared against the same period last year. Also, the net financial debt has two impacts: First, what we have linked to the [indiscernible] unit and also the positive generation of the EBITDA that explains the variations that we have in terms of the net financial debt. And also 79% of the debt is linked to this [indiscernible] unit, U.S. We've diversified with banks. We have terms for sanitation and our debt is at fixed rate and only the area linked to the bank has a variable rate. So something relevant for us are investments that I'm showing next. We've been talking about how relevant investment plan is not only in the short term, but also in the mid and long term, so that we can prioritize operational continuity and face all of the climate changes -- challenges that we've already mentioned. We have CLP 51.6 billion. Here, I want to say that 21% is linked to security where we can highlight the plant expansion for water resources and also linked to water treatment, nitrate treatment and this is an area that has an additional tariff too and the tariffs were activated once the investments were executed. If we talk about water management, we have to mention the inauguration of the wells of Cerro Negro La Mena, that will reinforce the supply for 100,000 customers in the south of Santiago. And this is important regarding the engineering work it represents, and it's equivalent to a tower in depth contributed with 1.5 liters per second inflow. And also the network is very important for us. Of the CLP 51 million, we also want to invest something in networks, both for sewerage water and for drinking water. Now we will have more indicators that we will show later on. These are economic sustainability and financial indicators that help us to ratify our rating, AA+, that we've had as a company for more than 20 years. That is precisely reinforced from our solid cash flow where we can see an EBITDA higher than certain times. Invested capital over 10% and maintaining a stable EBITDA was 1.67x rate measured at the end of the month, all of these reinforced by the indicators. And our net debt to EBITDA 3.8x despite the inflation we can see in our financial guidance. As I said, this ratifies our ratings in a positive way. And we can see the report for Fitch ratings for both ratifying it with a stable outlook, providing strength, solidity and the growth that we've seen up to date. So that's it. And now I pass the floor to Rachel, our Production and Resources Manager, who will speak about the relevance of that climate change.

Good morning, everyone. As Didac and Christian have said, the challenge that we have as a company on the technical side is to adapt to climate change. Due to 2 things. First, due to droughts that have worsened and also what we see on the screen that is this water deficit. So if we see what has happened in the metropolitan area in the last 70 years, we can see that on the right side, during the last 12 years, we've had a major deficit. And it's also worsened because if we see the last 4 years, we are in extreme dry years, extreme deficit. Hence we faced water issues in both reverse, but our main supply. One is the Maipo River that has a minus 60% target. And if we see the water balance midyear compared against the curve the red one, that is the average of the last 60 years. We can see now that the flow in Maipo and Mapocho Rivers, the chart underneath, are way below the expectations. This has been a problem to obtain resources and supply the city. As Didac also mentioned in the beginning, our main reservoir water is El Yeso reservoir with a total capacity of 220 cubic meters. And due to the agreement that we signed with associations of -- that work in the first section of the Maipo river, we've secured two targets in El Yeso reservoir. By the end of winter, that's by the end of October, where we must have a minimum of 100 million of cubic meters and a minimum of the icing season, that is at the end of March, where we need [ 117 ] million cubic meters. So we have these two objectives that are very specific. And that's what we need to secure a minimum level of the reservoir so that we can have certain stability for upcoming months. So this agreement was entered mid last year. And since 2021, the reservoir has had a smaller fluctuation that is due to the agreement that I've just mentioned. On the slide, you can see volume of the El Yeso reservoir by the end of June, that was around 146 million cubic meters, and we are today close to 158 million cubic meters. Here, I would like to focus on specifications. There is this false sense of tranquility due to the snow we have in recent months, of course, we feel there is more water there, there is more snow. It's kind of true, of course, if we compare it against last year. But if we show the chart and we measure the water in millimeter of rainfall. We can see that in 2022, that's when we started the year. We are at 226 millimeters of rainfall. So if we compare it against the average historic data, average is 406. So we have a deficit of over 45% in water in the reservoir. So we are still in a year of drought. We are not out of there yet. It's true that it's better than last year for sure than 2020 and then 2019. Yes, of course, but it's not as good as other good years, if we want to speak about good years, but it provides certain stability. It's not as critical as last year, but also, we are not in a position where we can feel fully comfortable. Because as I also said on the first slide, we have 4 years of extreme drought. This would be the fifth year, and we have problems in the basin. Talking about the hydrologic response our rivers, the glaciers are melting. So all of the models that we had also at the level of hydrology has stopped working. So now we have to also adapt and use our knowledge on the basins. Here, we see a summary. All of the water flow of the rivers, the Maipo River, it would take the average of 2021, 2022. It's around 40 meters and it should be around 100. And if we go on the Mapocho River side, 1.4 cubic meters per second versus 5.8 that we had before. So therefore, we see a drop, a significant drop in the amount of water that we can have in the surface water. So what we have done in terms of investment adapting ourselves to the climate change and find solutions that gives us some certainty for the years ahead. There are many actions once -- you can see them in this slide, like, for example, the project that Didac mentioned already, the Mena wells, 1.5 cubic meters per second, providing to the system underground water being provided at water that we don't have to take from the river from the Maipo river. And we have several initiatives on the way, like optimization of the function of the wells and also the optimization of raw water that we need in order to supply our plants and also the operational losses since 2016. Today, for example, we are saving 40 million cubic meters per year. And because of this management to limit the losses of raw water. And the progress has been made also in hydraulic efficiency, and we are working also very strongly in the transfer or continuing -- making it flexible, the management of the Mapocho Basin. As you see, we have less water in the Mapocho River. So it is important to supply from the Maipo instead of Mapocho. And there are other projects also, the Antonio Varas Wells and another flagship project reduced of Waters in the biofactory to go from 3 cubic meters per second from the biofactory to the Maipo Basin because of the deficit in the Maipo regarding agricultural use mainly. And I would like to conclude with the agreement that we have with the Canal Association, we signed this agreement last year in August last year with the Camel associations in the Maipo River. And there are three fields of action in this case. The first one, the levels in the El Yeso basin, 170 at the end of the summer, so as to have continuity of operations. And a second action in the midterm on a daily basis, we have a table of technicians of all these associations and with the management of Maipo and we see what is the -- what's available. One can be in maintenance or localized the rainfall, for example, in the southwest of the city, and there are some canals set to operate in that area. And we immediately take advantage of that water supply. And to give you an idea, we've optimized 13 million cubic meters this year. 13 million cubic meters that are stored in the mountain range and have not gone to the sea. So that's the second item. The short-term actions -- and the third item are the mid- long-term actions. These are within the framework of a master plan, where we have carried out a study or the different canal associations to define the actions that will allow us to contribute water to the basin or to the systems per se and be able to adapt ourselves to climate change in a better way. The plan that we have is that by the year 2030, we may be able to increase the availability of water to more than 300 million cubic meters with all the plans that are underway. That is what I wanted to comment. Thank you very much.

Thanks so much for the presentation. I would like now to point out something important. Didac and Rachel are new members in the team of Aguas Andinas they have a lot of experience, especially Didac. He is an economist of the University of Barcelona, with an MBA more than 18 years of experience managing financial operations in Spain, France and Mexico. And Rachel, she is hydraulic civil engineer from the School of engineers in Rennes in France. She has more than 20 years of experience in sanitary companies. So welcome to this team and hope you have an excellent experience in Aguas Andinas. I'm also a hydraulic civil engineers. So I'm delighted to talk with you in the future regarding water and all those matters that are of interest to us.

I would like to comment also that we are starting our Q&A. If you have a question, please write it in the chat. And on my side, I would like to ask a few questions. I'm particularly start with Rachel. The projects that are being implemented the wells of Cerro Negro, Lo Mena and other wells, what was the tariff for that project, which is operational right now and should generate more income for the third semester? And what would be the future projects that you mentioned in your presentation, some of them, can you give us more details about them and the rents associated to those projects and when are those projects going to be operational in the short term, long term?

Tomas, I can answer to the rate associated to the wells of Lo Mena, 0.6%. And it will start operating very soon. Rachel, you can answer about the investment plans.

Yes. Concerning the investment plans, we are -- we have several points in which we're working. The main project, as I mentioned, is a reuse of the water from the biofactory that will allow us to use appropriate water -- very good quality water and transfer it to the Maipo Basin. That allows us a bad water that the canal associations that are in the lower part of the River Maipo liberty water so that those cubic meters, we can capture them in the independent intake. Another project that we are developing is the filtration of water in the aquifers. In the metropolitan region the aquifers are overexploited. So we have to think in the future, right now, there is water availability. But if we don't consider the future that the underground rest of reservoirs. I'm not very clear their supply. That is something that is worrying for sure. And we have a pilot project right now to check and see what the results of this first test of water infiltration may give us as a result. And development of wells also in -- along the city in flood in this city, we invest district, we can also develop wells. There's water availability, underground water. And this is within the master plan that I mentioned, we are at a pre-study level, there are many factors to be taken into account when you implement those projects from the technical feasibility and the environmental impact adjustment and the negotiations that we have to have regarding these projects. On a tariff basis, I'm not an expert. So I think that all new projects are not very well developed yet to talk about that. I understand that there was a project also that was being studied and under discussion with the regulators. It now that would use the discharge waters in the Maipo central plants, taking it to the treatment planning and is that project, how is this progress [indiscernible] project. This project is within the other the drought and the availability side of the project. The capacity that we have as a company to be able to have autonomy vis-a-vis a climate phenomenon that allows us to capture water. So with the setup of the Lo Mena wells, we are -- we have strategic power of autonomy. And the idea is to have 2 days, 48 hours of autonomy, thanks to this connection at the outlet of the discharge that water that will come from the El Yeso Basin by tubes. And that water is discharged now. The idea is to have from there a duct that leads the water to our independent intake, and that was -- we were evaluating this, we are in a pre-study in the design space and environmental impact assessments as well because it is important to involve the community as well, and you see all the elements involved. This project is going forth with lots of energy and with the goals that we have in mind.

Thank you, Rachel. Didac, a question for you. A significant issue in the last few years as a result of the drought has been the purchase of water to third parties and the increase in the electricity cost due to pumping. Do you have any information on how this has evolved historically. This purchase of water to third parties and the electricity costs -- we have a better hydrological year now. So towards the end that purchase of water and cost of electricity should diminish or increase do you think to accumulate water in the El Yeso reservoir.

Well, as I said, the priority that we have is to make sure that the city will have water enough for operating and that everybody can have water at home. And last year, we increased the water supply. And this year, we have continue with this level in terms of volume, it has been similar to last year, slightly dropping compared to last year, but at safety levels for sure. And there has been a price associated to the new agreement. And additionally, there has been the inflation in terms of the transfers that has affected. What will happen in the second semester? Well, we have to see how the rainfall evolves and the melting of the snow. And then we will review it and plan this strategy for transfers -- and where can we feel comfortable in terms of transfers, but we have to keep the certainty at the El Yeso Reservoir. In the energy costs, well, they have gone up for sure. And we also have sources of water, deeper and deeper resources. So that will increase the energy cost. And based on the superficial water, if we have to go and look for more underground water, but if the superficial water allows us to drop the amount of water underground, we can reduce the costs. But anyways, the objective is to ensure a level of supply and that the water resource can reach all homes in Santiago.

Along these same lines, in 2023, do you see rationing of water supply in the Eastern part of the city. That was a matter of discussion. And is there a water rationing plan to ensure water supply in the reservoir and the company took some measures recommending to take care in the use of water and to take care of it or source. Do you see this risk in 2023 of rationing of water?

Well, what we can say to date, as I said in my presentation, is that we are in a better position than last year, we have more rainfall. So that's good. But at the same time, the basins are degraded. We have used reserves of the glaciers. So don't know how they will be reacting. We cannot give a false sense of security in that regard. We all do all efforts with transfers and the necessary investments to go from water from the Maipo to the Mapocho. And we work with the basins in the districts in the Eastern part, but there are more than 40 districts in Santiago that are working in terms of water efficiency and working with green areas mainly, so as to reduce the consumption and to continue awareness, but we don't have -- and going back to the rationing, it's not something that we can assure 100%, but we don't have clarity on the snow melts. If there's high temperatures, for example, during the spring, all the water accumulated goes down in November and December. The water will not be in the Mapocho in March. So the critical month in terms of the eastern part of the city is the end of the summer because at that time, we have in Mapocho River with very little water, last 700 liters per second of water in the Mapocho River and 5.9 cubic meters per second in the average. And during the last few years, 1.6. So very degraded, that is something that we haven't seen before. So we don't know how this year will evolve, and we are working, therefore in this, but we cannot assure 100%.

Yes. Thank you, Rachel. Didac, you mentioned it in your presentation, can you give us an update on the delinquency and the banking services 3.4 to 2.6 was a drop. What do you expect for the future that it will be kept in 2.6 or that it will go to more reasonable levels? And along those lines, can you tell us if there is a chance that part of the provisions that you already carried out can be reversed in the past to mitigate these efforts -- this effect?

Thank you for your question. As I said, we started the year with a rise in delinquency or the law on basic services. And based on that, since March, it has been positive. And since the pandemic started, we have been working in the area of clients very strongly. So as to give them all the facilities available for them to pay and the basic services lower the old one, cutting the supply. So Aguas Andinas in order to improve payment, we didn't have that lever anymore, but there is a change in law and gives us subsidy to those clients who are delinquent in terms of paying their debt. And the adherence to our clients to this law has been low. And we have continued to approach the client, give them the possibility before cutting this supply if they can pay. And what we have seen in this second semester is a positive trend. From 3.5, we are 2.6 in delinquency rate, and we have to continue working so that this delinquency may tend to become normal. And if you remember, before the pandemic, it was 1% approximately. And there is a lot of uncertainty for the next few months, we will see how everything will evolve the economic global context and so forth. And we have to work along those lines to improve the rate of delinquency and -- or stabilize it at a lower rate or normal rate.