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

[ Audip Gap ] research. I would like to thank you for your presence in the earnings call of Aguas Andinas. Miquel Sans, CFO; Mr. Torres; Mr. Sáez; and Ms. Laino, will present the results. After the results, we will have a Q&A session. [Operator Instructions] And we'll have also satisfaction survey that we would ask you to fill in, please. We also have simultaneous interpreting and you can click on your desired language at the bottom of the screen. Miquel, please, the floor is yours.

Good morning to everyone. It's a pleasure for me to be here in the first time. Today's presentation is divided in five the first two, contexts. After that, Christian Torres will speak about the financial summary of the first 9 months of the year. And before we go to the final point presented by our Territorial Director. We will also speak about climate change. So go to the slides, please. As I said before we go into the financials, I wanted to mention a couple of aspects on the current state of affairs. The first 9 months of the year, we've had at the beginning, we've had a drought with an important need to compensate for demand. And in the last part, with favorable hydrology, that have allowed us to be aligned with historical averages, so lower need for water transfers. Related to climate change, we will have later José Sáez to talk about the Bio city strategy. About our transformation line, we continue with our Avanza+ Transformation Plan, operational continuity, capturing efficiencies of CLP 3.2 billion and improving cash flow. We would add commercial actions to recover bad debt and we've improved from a couple of years ago. Finally, I'd like to highlight the ratification of our risk ratings, both locally and internationally. And more recently, the Board of Directors of Chile has awarded us. This not only supports our work, but this is the first addition -- so of the award. So it is quite important for us from meeting ESG criteria for the recognition. We'd want to show a little bit more about the calendar for this 8th tariff process that is starting soon. The permanent basis will be released at some point of November and that activate a process that should end in January 2025 with the new tariffs that will begin as of March that year. So this is an estimated calendar. There will be lots of interactions between the SISS and Aguas to establish tariffs by early 2025. And now we'll have Christian Torres, who will touch on the financial summary aspects.

Thank you, Miquel. Good morning, everyone. It's a pleasure to be with you again this third presentation of earnings of the year. As Miquel was saying, the first aspect to highlight in the third quarter is the positive evolution of cash flow and performance. We are still in a challenging environment, be it via climate change, but also economic conditions, mostly in cost pressures. In terms of revenues, this continues to be solid, 30.5% growth mostly leveraged on tariff. There is an indexation. We've already had 4 indexations since last year, and that's the basis for this growth. It's been more stable this year. The last indexation was of 1 6%, and we don't foresee any new indexations for the remainder of the year. We also highlight the overconsumption generated in high demand periods. In our case, in the summer months, that led to growth of almost 20%. Another important aspect of revenue growth, we have consumption that we highlight the measurements that the company is conducting with the change of measuring devices. In the third quarter, the increase in consumption has moderated somewhat to June. We had consumption growth of around 1.8% and at the close of September, 1.5%. We had more rain that also have had an impact on the consumption by the company. A third point, other revenues. We've had significant activity mostly in works related to Line 7 of the Metro Santiago. So we've had to conduct infrastructure modifications and it's also important to highlight the environmental services subsidiaries. We would also highlight that as of the third quarter, we are presenting interest before as financial income but these -- we are now including the management of these delayed interest payments as part of working capital. In terms of costs, we have had indexation below CPI. The cost basis has had an impact on inflation, but there's also another part related to non-sanitary income. In relative terms, the company continues working intensively on managing its networks, both on the preventive side or on the corrective side. We note that all this maintenance helps to maintain our sewage and drinking water, these 14,000 kilometers each of both networks. So we're streamlining operations and looking to reduce the corrective rate of maintenance that's related to prices as well in electricity and chemical input. We've also resumed activity on the client side after the pandemic. In the first quarter, we had contingencies related to climate events. There was issues in the Recoleta municipality and also we had intense rain towards the end of July. That, nonetheless, did not affect continuity, but this has led to incremental costs of CLP 3.8 billion, these corrective costs, but we do not expect to have insurance payments from that this year. That would, therefore, highlight the importance of efficiencies. All of this explains 9.2% growth in EBITDA that are related to the Avanza+ Program that is focused not only in terms of operational efficiency, but also cultural change. The net revenues relates mostly to the financial correction of our financial debt. Inflation this year has been much lower than last year's, and that has meant an improvement in terms of financial performance. So regarding the bottom line. We have, therefore, recorded 77.3% improvement. We can now move on to the next slide. In terms of cash flow management, the company continues to show stable management. Operational cash flow management remains stable. Cash flow is also positive. We have taxes, net debt interest, and also to face our investment plan with a free cash flow of CLP 73 billion towards the end of September 2023. Regarding our financial debt. Here is the breakdown. I won't go into too much detail here, but the important thing is to highlight management that we're doing in terms of this financial debt, mostly related to the monetary correction of the UF, but this has been compensated by the positive free cash flow generation. That has allowed our financial debt to remain stable. We have quite a diversified position in terms of local and foreign component. Investment is a key aspect of the company's activity that has led to positive results to face precisely climate change. The rainfall in June was managed positively without affecting continuity of service, thanks to investments that we had conducted in the past year. And we have continued this year with that plan focused precisely on the development plan, but also in other projects that help to mitigate climate change and increase hydrology and the availability of water, in a context of drought that we now define not as temporary but permanent. In that sense, at the close of September, we have close to CLP 6 billion in an investment plan executed with different components over the medium term to reinforce the company's resilience. All of this is framed within a strong financial structure. But have maintained these indicators to date. It's important to say that we have stabilized leverage below 1.7% and net debt to EBITDA at the close of the third quarter of 3.6x. This our guidance and we continue to manage the different needs for resources but also aiming for the company's financial stability. All of this has been viewed positively by the risk rating agencies. We have ratified our local ratings, our AA++ but also globally with Standard & Poor's A- rating. This is complemented with other recognitions and certifications on ESG that once again ratifies the work done by the company. And just as an example, Aguas Andinas was considered a leading company in ALAS 20 as a leading company in relationships with sustainability and with investors. Aside from the Avanza+ Plan, we have also been certified by A Great Place To Work, and that's an important part of cultural change in the company to adapt to climate change. And also, as mentioned before, for the first time, this award to the Board's management. So during the third quarter, both on the financial side on the investment and cash flow side, we have maintained our positive trend, recovering pre-pandemic levels, managing the impact of climate change and also the macroeconomic conditions to maintain the company's financial balance as our core financial value. Miquel, you can continue, please.

Next slide, please. So you can see after 5 years of an intense drought and the start of this year, the hydrological year that began in April this year, is -- has become a normal year, not a rainy year compared to previous, but it's a year that has shown normal figures. After lots of years of drought, this has allowed us to increase the reserves in the El Yeso Reservoir. However, to the right, we can see that in the Maipo and the Mapocho River, we have lower hydrology compared to historical averages, even though it's an improvement compared to the previous 2 years. If we go to the next slide. As we said at the close of September, the Yeso Reservoir is above 85% levels. And if we look at more recent data last week, we are even higher. This means that we will be facing the summer with a greater peace of mind. But these figures, therefore, they should allow us to confront the upcoming summer period with greater optimism. And now, José Sáez will speak a little bit about the Biociudad Program.

Good morning everyone view. Just to comment something that has occupied our efforts. This has been recognized by different players. We are focusing our work not only in delivering constant and stable service, drinking water, but also doing it with high quality. We have seen how climate change events have created different complex scenarios and to design how to face this phenomenon in Aguas Andinas, we resort always, we look in the rear view mirror, see what we have done in the past years and decades, and we can see that we have faced huge challenges that we have faced with high standards. In less than a decade this company conducted a plan, a sanitary plan, that allowed Santiago to have -- in the top 28% of the planet, with permanent water supply, 24/7 and 365 days a year, but also with repaired environment in terms of residual waters. But within these challenges of climate change, as it doesn't let up, as we've seen, we have experienced 14 years of extreme drought. We view this as an opportunity to plan or strategy to face these changes and provide the city of Santiago, the metropolitan region, with greater resilience and a way of providing certainty for this fundamental service that we provide. The different phenomenon that we have faced in recent years have been intensifying. And what happens in practice with our infrastructure is that intense climate events. We have a high rainfall in the high levels of the mountain range. We now have this terminology, convective rainfall, all of these things that prevent us to extract from rivers because of mudslides that we have. And in the recent decades, this process has been intensifying. Before, we used to have these events that meant that we could not be acting in the river for 3 or 4 hours. We had to report to communities that we had to interrupt water service. But therefore, we developed strategies to develop different infrastructure to be more autonomous in different timetables. And now, we have these reservoirs that gave us an autonomy of 37 hours for the city, allowing the city to continue having water supply despite climate events. But the latest climate events have shown that, that level of autonomy is not enough. The last event meant that we had to interrupt services under -- for 70 hours. So we have to analyze that, and we have a video to reflect on this situation. [Presentation]

To summarize. The new strategy is called Biocity, Biocidudad. We have shared this with the authorities of the city to face this climate change events. Climate change is going to continue to be felt, and we simply have to face it with initiatives that's focus on greater resilience, greater water security and ensure that more than 8 million inhabitants in the Metropolitan region that they can have water. And also, future inhabitants, that they will have water security and have the basin and sustainable conditions to be able to develop all the other economic activities that require water. A number of initiatives globally have similar levels of investment that we have had in Aguas Andinas around $1 billion. These initiatives, well, we hope that regional and national authorities help with the materialization of these initiatives with the permit and provide greater resilience for Santiago. What does this mean in the practice, Biocity? We have 5 pillars of specific projects that we have grouped in these 5 groups. We want greater resilience. We want to find new sources of water supply for the complete hydrological cycle of the city. We also want to increase the natural conditions in the metropolitan region and use groundwater. And if we do that with the intensity that we want, we will have to provide nature-based solutions for citizens to be able to replace those groundwater reservoir. And obviously, not least important is the responsible use of water. This is something that we highlight everywhere with communities, with authorities. So we need responsible use from each of the players in this part of the country. I'd like to highlight 2 very important projects in terms of resilience. First of all, to increase the level of autonomy in the river and this implies a direct connection from the Yeso Reservoir to our productive plants to leave the river and prevent it, turbidity, interrupt services. The second that has to do with new sources is a project that aims to use already processed water in Biofactories. A part of that water, taken upstream, and give that water a second life, so to speak, that they flow through the river and it can be used by all the users of the basin, especially agriculture. You can see in the map, you can find this in biociudad.cl. All of these initiatives are in detail there. And from here to 2030, we hope that all of these works will be executed and, therefore, meet the challenge that we are facing to make Santiago a more resilient city and that climate change doesn't change our lives. Thank you very much. Thank you very much.

Thank you for the presentation. And now we'll move on to the Q&A session. We have a question on other tariff revenues. We had an increase of CLP 3.3 billion, mostly related to unrelated water activities and payments from clients. What are these higher interest from client debt? And how are these accounted for?

To say that referring to other non sanitary revenues. The interest from debt with clients are defined by the regulation. These are interests calculated by the superintendency. And those clients who are in debt, there is an interest added to their bills. The change in the criteria was that these were classified as financial income until June. And as from there, we now have them as other sanitary income because it's part of the management of working capital. So it makes more sense that, that is included in other sanitary more than in a financial result. That is the change that we did from an accounting perspective in this quarterly report. And these interests are established by the regulation, applied or applicable to clients that are in debt, and these rates are based on market rates based on the rules established by the superintendency of sanitary services.

Okay. Perfect. What would be the impact of the Maipo alternative gathering project when will the reuse of water project to say that bill? What would be the impact?

Good morning, everyone. The Maipo project alternative capture should have a tariff close to 9%. Those are the estimates from previous years, and there is a similar project in the upcoming tariff process.

And when will the reuse of water project being incorporated to sale or submitted to sale?

It's already been submitted last week.

Also, the investment planned for the more resilient, the $1 billion investment plan. You're going to propose this comprehensive plan for the full tariff cycle, considering that it's much higher than era investments in previous tariff cycles? And also, how would you finance this very ambitious plan considering the current environment of high interest rates?

First part. Since the $1 billion is partially being executed already, and then obviously, we have been executing a large project as part of our existing investment plans. So a part of the remainder of that $1 billion plan will be continuity. And another part -- remember that this is a proposal that we're doing in terms of projects that we consider that aren't necessary. But before the funding is decided, this is still being decided in terms of what is the tariff that will accompany these large investments. So the investments that Jose mentioned are from here to 2030. So if you're looking not at rates at the level of this year, but we understand that rates should stabilize a bit lower, and we have already seen as rates have come down, as inflation has been sterilized, should continue going down. As from then, we would define the strategy to fund these projects, always maintaining the company's financial equilibrium.

And of this $1 billion, how much has been executed so far?

I think we commented on in the presentation, 75% of EUR 250 million. So we're talking about EUR 220 million already executed from the $1 billion.

Another question regarding water rights. Revenues on water rights from Alto Maipo has that been recorded? And if not, when would you expect to record those revenues?

This is a project that is still not completed, and therefore, the project will depend on tariffs. And once we know the tariffs, we would define the level of income.

What about certification in block?

There has been conversations with the government. The government has a draft proposal. Working on some proposals, but there's still nothing concrete.

The impact of -- the quarterly impact of these income from interest from clients, what do you estimate this impact to be reflected on EBITDA?

At the close of the third quarter. We're talking of CLP 5 billion in income, which account for an additional CLP 2 billion relative to last year. In the normal volume is of around CLP 3 billion a year.

Regarding costs. You mentioned that water purchase came down, but if you give us a bit more detail to understand the impact on rainfall on water purchases, as we think that this is the first quarter in which we have favorable hydrology. And we want to understand that impact on water purchasing.

Yes. One of the positive aspects of rainfall is that it has increased the flow of the Rio Maipo. We saw that improvement in the third quarter, where we had an increase of CLP 1.7 billion compared to last year at the close of June. This was more or less in line with last year. But as of the third quarter, we have had this improvement and we think this trend will continue in the final quarter of the year.

And this would allow less -- lower water purchases up to the fourth quarter or beyond?

Considering cumulative snow and reservoir levels based on the hydrological cycle and we have positive evolution for the rest of the year, and we look at this, we think that we'll have the same trend through the summer. So we think we will have our reservoirs at the top level, which would allow us to have a favorable outlook for the first quarter next year as well.

Question about cost reduction opportunities. What have you seen in terms of cost reductions for 2024? What have you planned?

Additional to the efficiency plans that we are developing in the Avanza+ Program, we have centered on several items. One is network management but also energy consumption. Energy consumption is a priority for the company. And in terms of managing energy consumption, we have important projects. One is advanced well management. In the context of a drought, we always have to be resorting to groundwater and that has a larger impact on energy consumption. So there are initiatives to improve this. Digitalization, monitoring on well management that will allow us to reduce consumption levels. Also at the level of biofactories, we're developing important improvements in operational management. And the outlook for the summer considering these hydrological improvements in the basin. Well, we also hope -- or we expect to resort in less measured to the wells, and that should also mean less energy consumption. And as a third point, I would add that debt management is also key for the company. Remember that during the pandemic, we had very high levels because of the global situation and the country didn't escape that. Today, we are returning gradually to improving the unrecoverable debt or default accounts and so on. So our perspective is that this is going to continue improving. There's an important level of debt after COVID, but we have stabilized the situation and now we hope to gradually reduce that debt level.

Now about this debt, do you expect an improvement in working capital? Not as accounts payable , but in terms of working capital?

Yes. A part of this is going to be managed as working capital. We have to consider that there are people that stopped paying their bills for 2 years. So this is going to be a gradual improvement of these accounts.

In terms of biosolids. Are these generating -- are these projects generating income or not yet?

Yes. We have an initiative that won an innovation prize last year that precisely relates to trading and generating value from biosolids, and this is from the sewage network side of things. We have generated revenues, not much. We're not talking of more than CLP 500 million, CLP 600 million in the year. But we are finding some value in the subproducts as part of our philosophy within the circular economy.

There were several impacts this quarter. They were, obviously, the prioritization of works because of the metro. This had a positive impact on the side of services to the works, but the negative impact to consumption. But what was the net impact?

The impact was a net positive because of the consumption levels and the engineering services related to these services were close to CLP 6 billion in the year.

Regarding the tariff cycle. The preliminary terms, based on what is return on capital calculated on? Before, in terms of knowing that we have the floor level of 7%, but capital returns required for the cycle. When is it calculated?

I'm not clear. If I'm clear on the question, and will the report be published on the returns on capital that will be valid during the tariff cycle. The basis terms should be published in the coming days, the Superintendency [ published ] said the sixth of November. There's been some delay, but that should be imminent.

The base year for all type of calculation is going to be December 2023. Now regarding the rate of return used for the tariff cycle. I would mention a couple of things. First, this is based on long-term bonds by the Central Bank more than 8 years. So the floor there is 7%. That hasn't changed. We're probably going to be around the floor levels, but we need to remember that this rate is used as a parameter in model companies. It's not based on real returns on a company. So it's -- and this is a model new company, so to speak. So it's not comparable to an incumbent company. I don't know if that answered your question or not.

So yes, my question was if this information is the terms, the basis of the tariff cycles.

So yes, this is a predefined methodology and all the parameters are estimated based on December this year. And in particular, the cost of capital rate is based on a number of averages that is basically the average of the last -- of the rate of the last 3 years. That's more or less. So it's plus the 3% with the minimum of the floor of 7%.

There are no more questions. So with that, we would close our presentation of the Agua Andinas 9M2023 Results. Please answer the survey for satisfaction. Thank you very much.

Thank you very much for being with us.