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

Hi, good morning, in the name of [ Van Tuyl ] Investments and [ Van Tuyl stockers ] I would like to welcome you to this webinar. And today, we have one of the most important financial market companies, which is Aguas Andinas. For that, we have the presence of Daniel Tugues, who is the CEO of the company; Christian Torres, controlling an accounting manager; and Rachel Bernardin, Production and Resources Manager. I would also like to take this opportunity to mention that Daniel Tugues is the new CEO of the company. He is a civil engineer from the Polytechnic University of Catalonia MBA from IESE Business School and Master in Integrated Water Management. He also has more than 15 years of experience in the infrastructure and development of the utility sector. And we also have his presence so that he can present the results and so that you can share with him and make the question you may have about results of the first quarter. Thank you very much for being with us, and I give the floor to the company.

Good morning, everyone. It's a pleasure for me to be here. As you know, I took the CEO role in May 2nd after a peaceful process of transition with the previous CEO. And I didn't want to miss the opportunity to be here with you in the presentation of the results of this first Q of the year, and to greet you and share with you the messages of the most important topics of the first quarter. First of all, the climate change is with us, and it's still surprising us. When we thought that we have seen everything, the events we are facing are getting more and more complex. This first quarter, we have faced both from scarcity, really low flows. I think these are the lowest we have seen since 2020. These have been worse. And also in regards to turbidity in 2021, we had an event with more than 80 hours -- turbidity over the capability of treatment. And this year, we had 100 hours that affected the Central Valley. But the good news is that with the investment plans that the company has been developing lately, we are focused more in resilience. These events have been dealt with -- without major disruption in the city service. This first quarter, this has been the first summer, we have been able to have the Cerro Negro wells and also the work of [ Padre Hurtado ] and also the agreement with [indiscernible] that we presented and that is now working with normality. This has also had allow us to increase the reserves of the dam up to 90 cubic kilometers, which has been a record. It's the highest level that we have had since 2017 with since we had the normal rain. We're still being surprised and amazed with the climate change, but we are ready to overcome. And the second part is the transformation plan, what we have stringent and the same topics that we have been addressing the risk mitigation, the financial sustainability and most of all, better CapEx -- optimization of CapEx that gives us a very good investment rhythm to be facing the challenges of the climate change and also the new organizational culture. In this first semester regarding the last one, the commercial management has been very successful and has been restrained in certain topics as well. And so for instance, we have some decrease in the revenues, then the inflation also compared with the last year where we had 3.4%. This year, we have 1.8%. So we also have financial expenses associated with the revaluation of the CLF with respect of the same period of last year. And the new tariff indexation from last February with 1.6%. And it has been activated, the new indexation. So it's part of the increase of the revenue that the company are reporting during this semester. Another highlighted event is the distribution of the dividend where we had the profit last year, 100% of the profit and we are very satisfied that it ratifies our Andinas' solvency rating and public debt issuance as AA+ with stable outlook. So I would like to wish us a very positive seminar. And now I leave you with the team with some more details and some more information. Thank you very much.

Thank you so much, Daniel. Good morning to everyone. It's a pleasure to be sharing with you in this outcome in these results of the company's work. And I would like to talk about the first quarter. As Daniel was mentioning correctly, we are presenting, and we're maintaining growth of the EBITDA, which is very robust with an 18.9%, which is in the same line of our outcome before of the pandemic and before of the social unrest. We're growing 19.5% with the polynomial indexing and pricing of new infrastructure. And we also would like to make some remarks on the trends in terms of consumptions. To keep this growing EBITDA, still the -- one of the company's objectives to keep these plans working with efficiency and in general, growing the expenses in the operational cost and also the climate change. The summer has been very hot, very dry and also has an impact in the costs of the company. And all the management that we have been doing during the last year, we're clearly seeing a positive impact of the day-by-day management. It's very intense of terms of contingencies -- operating contingencies and also the collaborative management with the Maipo River. So we keep a service standard which has no bigger problems, no bigger issues. It's important to remark that the company keeps leading communicational campaigns associated to be -- have a responsible management of the resource water with the municipalities and the different authorities. In this context, the cash flow is another topic that we are taking care of, and where we can highlight positive aspects during the first quarter. With this decrease, we can still go further with our plan and keep the debt in restraint on the objectives that we are in line with the company's policies. Regarding this, we can deepen the evolution of the outcome. Firstly, as mentioned, we had a revenue of 18.9%, CLP [ 80,000 ] million with the exercise within rate indexations -- we had 4 indexations last year, plus 1 extra in this year. This is the base of the growth of our statutory income in the first semester, we had a 2% growth of the consumption, higher consumption, 1.4% and we have 2 main effects. One would be the temperatures during the summer very, very high -- much higher than last summer and some months, particularly where we had a temperature up to 32 degrees Celsius, and that generated a change in the behavior of consumption, and together with that, we had another behavior in the measurement in the client service to break this trend. In the income -- in the revenue, we had other services like the household services, the sanitation infrastructure, modifications and the environmental services subsidiaries. Also, we would like to highlight the growth that we had in our environmental services. In this context, in terms of EBITDA, we could observe a growth of 18.9%, which allows us to go over the level of EBITDA to overcome the previous level, and to strengthen the transformation and another positive aspect of the first semester was the bad debts, lower bad debt with 1.7% which is half of what we have registered in the same date last year. So we have the expectation that this behavior would remain stable in terms of 2%, we still need to monitor it. But the important thing is that the active management with our customers allows us to contain the debt level and to increase the behavior or to optimize the behavior. The operational cost is important to remark as one aspect of the first semester is the energy costs. Our base of production of water -- sweet water has been changing over the years. And nowadays, the big weight of the underground waters and percentage is 25% of total water that we produce and that increases the costs -- the electrical costs and associated with this with the electrical market of our country, the price and the regulated tariffs, we have important element of our management of the company. Also, as mentioned, our summer was very intense, and we had some operational costs and [ Rachel ] will let us know about it as an independent factor and some relevant things of the public life like what happened in regulator, this scenery has been critical at the earnings of last year. Another central aspect of our account is that this year, we don't have that much inflation, that's why our financial outcome is also better compared to last year because we have a lower financial debt. And as mentioned, this will leverage the first quarter with CLP 44 million, it's 44.9% of increase compared to last year. In this context, our company is recovering of their financial states comparable to 2019 and beginning of 2020. So in the next slide, we have a cash flow as one of the main objectives of our management growing importantly in almost 20% and 52.5% the FCF. So we have CLP 14 million more compared to last year. the satisfaction level of customers remains the same. And we're also paying the suppliers, we keep all the expenses. So the work capital stays in this positive line. This allows us to have this cash flow of CLP 10 million more compared to the last year, allowing us to monitor our financial state staying within the objectives of the company. This cash generation and this management of the financial debt that we can observe. Today, we have a more diversified basis between local bonds, international funding, bank loans and promissory notes, which constitute a reimbursable expenses. This has decreased our financial debt. And the result of the cash generation has been higher that -- it's part of the explanation of the variation. Our debt is focused in 80% of U.S. and 90% approximated its fixed rate. And this allows us to being able to monetize in a better way the financial indicators. As I mentioned in the beginning, the investment plans, it's still a strategic element for the company that allows us to face in a better way all the effects of the climate change, the [ drag ] to warranty and share the continuity of business. Another main focus of the strategy is to implement higher resources. These 3 main access have been part of plan and long-term focus. And this means CLP 27 million an investment a lot more than last year, and this reflects the efforts of investment of the company, always taking care of the cash generation period by period. This is confirmed in the financial indicators that we are presented. First, I would like to begin with the leverage with 1.72 by the end of March, which ratifies what we have been discussing in previous meetings in which we saw a positive behavior of this indicator also EBITDA, which closed with 7.59. This cash generation that comes along with the development of investment fund allows us to get these indicators with a good equity indicator and the robust constitution of our financial management can help us to confirm our rating, as you can see in the next slide. In AA+ for April, Fitch ratings evaluated us and confirmed our rating as an AA+. This is the continue of the financial managing of the company that allows us to face the short-term challenge, but as a long-term goal is to have a balanced -- financial balance to support the company. As I mentioned before, this is also [indiscernible] has classified as a company that has a corporate governance according to the standards of international standards. So in summary, a really good first quarter that confirms what we have been talking about in a context that is still pretty complex. It is still a challenge. And about this topic, Rachel is going to talk more, especially in the operator management of the company.

Thank you very much, Christian, for your presentation. Now I'm going to present the part of everything has to do with climate change. As Daniel and Christian mentioned, we are in the fifth year with -- in extreme drought in 2022 and 2023 was the same -- was as hard as the 4 previous years. And today, this makes us to be more robust and excellent in our operations. And the decision -- that the -- [ Deficit/Surplus ] to Maipo River, as you can see in Mapocho river on the right of the slide, if we compare the flows in these of this river in January, February, March. As we said, it's -- they have been really hard, but these are inferior to 2020, which is the highest drought year. And obviously, inferior values, if we make an average over the last 7 years and the same happens with Mapocho. If we go into rainfall in 2022 and 2023, we had 260 millimeters, which is really low. If we talk -- if we consider the average of all of these drought years, we had 700 millimeter in El Yeso dam, but now we have this value. In January, February and March, we had the specification which was superior to previous year, the rivers are not reacting that much during the melting of the snow is where we see the most presence of water, and we're still seeing river wets that are too degraded and the climate change is there. It's present. And we've seen the glaciers contributions that have been decreasing throughout the year. So if we go to the next slide, in regards to the hydrologic level. In Maipo River, we have 135 cubic meters per second. If we only take the drought in last 3 years, we have an average of 80 and an average of 2023 of 52%. And the same happens in Mapocho river in which we see we have annual average of 4.4. So this makes us to have more transfer from the river of Maipo to Mapocho and makes us take more of underground water in order to cover for the necessities. What have we done to survive on this extreme climatic conditions, we have a really ambitious plan that we try to highlight during all of these meetings. We can say that up to date, where we have presented, we have [ 1.5 ] which have been the wells that we made during the summer, this is already operative and functioning. The works in [ Padre Hurtado ] plan that helped us have a more robust resource to bring more water to the sector. The same has happened last year. The agreement with the panelists of the first section of Maipo river that we have been talking about in these sessions. This give us some peace of mind to ensure the levels of the El Yeso dam for the next year, in the site -- a hydrological cycle and the existence of -- the hydrological one during the plans of water treatments. We've had some efficiency planned for the operative plant of the drinking water plants. And now we have pretty optimistic indicators that have allowed us in 7 years to reduce the 44% of raw water to compensate for the drinking water. So this is a plan that has worked out well. We can move forward. Of course, in the management advanced management of the wells, we have 48% cubic meter second. In the systems of supply, we have been identified the places we can only supply with the underground water. We have the hydraulic efficiency plan. It's a pretty ambitious plan that's been in the company for many years in which you need to make many stages before seeing an important result. Now we also have some robust elements and also progress in the -- in the net, which has 14,000 kilometers of networks we're supplying Santiago with last up-to-date technology, also covering the leaking, well, we needed sanitary authorizations. Now we are having some good outcomes with this to manage the leakings -- the 15,000 leakings in 1 year with 23 different teams to fix. It's not only finding the leakages, it's also to fix them. Once we found a leakage, we have to fix it, reposit and sometimes we also need to put the cement on top. So this is a hand work, but we also have the valves. Sometimes the valves, we need to change them, repair them, without cutting the service, so it's a whole management. We're working with the meters as well. All of this action plan helps us to have stabilize the indicator. And in midterm, we would like to diminish the indicator to find it in a lower position without further ado. A lot of energy in this part of the work and some other topics are the wells Antonio Varas is one of the emblematic projects of the company. Alto Maipo also where we're going to have the transfer of the waters from -- we're bringing the water from the Maipo river for drinking water. And given the water back to the Mapocho Riverbed. So our will is to balance both riverbeds to have 3,000 cubic meter per second from the Mapocho to the first section of the Maipo and to have a bigger disposal of waters for the sanitary use. These are slow projects. A lot of work is behind the scenes, environmental work, the rains, engineering, a lot of things that we need to address in high-speed work, but we need some years before we're going to have the plan completely executed. What we can show in the lower part is that our management are giving some results. If you look at 2019, we had a big drought and also the year 2019 where we had the situation getting much worse. Each moment, we had less disposal of waters of our rights, we had about 49% and 18% of waters from the underground and the rest were transfers from users to the sanitary infrastructure. 2021, we signed this agreement with the users -- with other users. And in 2022, with all the situations that I already mentioned. In terms of underground waters, we went from 18% of underground waters in 2019 to '24 and '22, and we're not depending so much on the other uses and 48% to an 18%. So the result is positive. We are progressing in the right way with our indicators. Now to strengthen what I've been mentioning, 2017 -- during the summer of 2017, our reservoir of El Yeso, we could fill it and then we have this mega drought where we're living through. And the last years, they have been very complicated, but we still can see with the sign of the agreement of the Maipo section allowed us to keep the levels of El Yeso dam very high. And also at the end of March of 1,923 HM3 to face the autumn and this challenge. And to finish my presentation, I would like to say that not only part of a very, very big drought, the worst in the last 7 to 8 years. but also, we're having some events, which are very complicated. Each decade, we are facing big challenges. 2020, we had 45. And now we have more than 55 turbidity events. And these events are each time much, much longer. As you can see on the right-hand side, I'll show you 2 events where we had to cut the water supply. We had one in 2013 with 20 years of -- 20 hours of turbidity, and we had to cut the water in 2017 as well 44 hours, and then we have this atmospheric river more than 80 hours with this indicator. We didn't have to cut the water supply, the weight outage. We had some events without further complications. And we thought we were all right. But in this summer, there was no risk of water supply for the city, but we have 130 hours with this average turbidity where we had the treatment system. They are designed to work with the water and then they stopped working. We maintained them working even though we had this turbidity conditions. Another problem that we're just seeing with the climate change is the amount of stones that the river is bringing. It's something that we started to see during the last 2 and 3 years. A lot of sand, a lot of stones, now a lot of stones. It's another problem in operational level because the plants are not designed, but we are adapting, of course, to these changes in order to ensure the service and the water supply for the city. Now I would like to give the floor to Christian.

Thank you. Thank you so much for your presentation. And before we continue with the Q&A I would like to remind you that you can send your questions through the chat box, and then we will address them to the company. And I would like to remind you that at the end, we will send a survey with a link in the chat box for you to answer these questions. It's very important for a feedback for further presentations of the company, and we will be very thankful if you could answer the survey. So we can start with the question. The first question, if you could give us a vision or how are you viewing the issue of water rights?

Can you hear me? Could we go down -- could we stop sharing the screen so we can see the people? Just one second, please. Alberto, would you mind to repeat the question, please?

Of course, what is your vision? Or how are you viewing the issue of the water rights?

As you know in the first proposal of constitutional draft, it was one of the main things that could impact the company, the water rights. But now with the concessions done of the political power, it's reject of this constitutional proposal. So we need to see the new constitutional draft, but consider that the risk that this could have a negative impact on the company is very, very low. So we need to see the final draft at the end of this year, but we consider that the risk is very low.

Let's continue with the next question about the drought, it has been a problem for the sector for years now. So what do you expect for this year? What are you doing to face the drought? And is there any new project in this line? Rachel, do you take that question, Rachel?

I think that -- you need to mute yourself. I think I answered with the presentation. What do we expect for this winter. It's a good question. We have done it a lot of times to the meteorologists. They say that we should have a bigger rainfall because we have a El Nino year. And in the Pacific Ocean, we're going to have a higher temperature. So we are expecting a higher rainfall. We had rain last week. We hope to have more rain over Chile and not only in Santiago. So we are optimistic that we're going to have higher rainfall, but it's not a fact. We know that the climate change crashed all the different models about El Nino, La Nina, nothing is working as it used to do in the past according to the ecological models. So we have the El Yeso dam very high volume of water. And we also transferring voluntary the water from users. They finished their harvest. So they have a lot of water that they can transfer us if they are not using it in this moment, this is what we are doing in our management. And we will see, at this moment, the level of the dam. From the last week, now we have 25 millimeters that fall with the rain last week the -- and the last year at this date we had 41 millimeters of rainfall in the same period. So it's a little bit worse than last year's, but it's recently May 26th. So most of the rainfall is usually concentrated in June or in July. So we're still on time.

How much was the transfer of water in terms of volume in the quarter. And what's -- according to the current level of El Yeso, given the current level of El Yeso how do you foresee water transfer for the second and third quarters?

This would also be my question. Should I answer?

I will answer in terms of volumes. In the first quarter 63 hectometers, very similar what we transferred in the first quarter 2022.

And about what we're expecting for the second semester will depend on what going to fall a snow during the winter. What we do with other users of the Rio Maipo association is that there is an agreement of transfer. And strictly, we updated according to what we have in our reservoir in the mountains, so we can assess that in terms of available cubic meters according to the period of spring and summer, as we have 2 important objectives to fulfill in October to have a minimum in the -- minimum benchmark in the El Yeso dam and 160 in March. So we regulate according to this, if we had a high rainfall or snowfall or start to reduce the transfers during the second semester depending on the will of the other users as well, the agricultural -- and their agricultural activities, the harvest. We're trying to have as much water as possible. And afterwards, we have enough water for the users in their agricultural activities.

Excellent Very, very good. Let's go with the next question, which has to do with the first question a little bit in terms of investments in the new project, if looking forward, does the company feels comfortable with the plans and the policies regarding the future? How do you see the evolution of the company?

In terms of investment, what we are seeing in the midterm, is a high -- it's a very similar level of investment like during 2022, very similar 2022 to '23, a similar level of investment. In terms of revenue, we maximize the distribution in function of the context, in which we are in. So we need to assess the scenery every once in a while and then determine -- not only determine each milestone, not only the management but also the different stakeholders of the company, and then we will see the level of distribution. We maximize the distribution as much as possible. And then currently, we feel very comfortable with the level of investment.

Perfect next question. In this -- good hydrology with the phenomenon of El Nino and La Nina as competition mix reference is the purchase of water to third parties is are according to the availability of resources should it be less pressured the availability of the dam?

I can answer this and the part of the technical and after that the economic part. I need to think that by the moment, there are no water in the river. We still don't have any water. So right now -- we are likely [indiscernible] per second. We need 18 or 19. So if we have the order of magnitude of what we are sending right now in thinner situation is complex because if we don't have the minimum, we will have a quick -- so we will going to purchase the water even priority of the voluntary passes. Those are the -- these expensive ones because the other users will have the necessity right now. They are still willing to transfer it to us, and later, effectively, when we have the down at an important level, if we have an important qualification, we're going to minimize the water transfer in the peak of the second semester. But that is going to depend on -- how are we doing with the rainfall. And, we always have to ensure something in the El Yeso dam because I was mentioning that we can surpass the limits at least not 100 because if we reach a level of 100 in the dam, this will make us -- it will make us but make many purchases in the second semester if we don't have rainfall. So we always have to keep a balance to a level that gave us ease of mind for looking at the next year.

I think the answer really complete. I have nothing else to add.