Companhia de Saneamento do Paraná - SANEPAR (SAPR4) Earnings Call Transcript & Summary

Good morning. Thank you, Yuri, for your question. Yes, indeed, this [indiscernible] brought an impact caused the impact due to do financial asset because what happens is the company has the accounting practice of discussing the financial asset is the 1 that exceeds the deadline of concession. So the assets that are part of the system of water and sewage with shelf life higher. So consequently, with this equalization of the deadline until 2048, this adds financial assets had a reduction, and consequently, has impacted on the result. So we had an amount of financial asset at the end of 2023 of BRL 708 million, considering that in November, we had a balance of about BRL 890 million. So this reduction brought an impact. And of course, there is the whole methodology of calculation considering a discount rate. And with the issue of this deadline, we had this impact of BRL 87 million, which is an expense. But during the year, as we have been doing the AVP quarterly, we had a revenue in the line of revenue in the financial revenues of about BRL 30 million. So the net -- the impact on the result was BRL 56 million impact.

So now the next question is by Leandro Aguada, an investment. Could you mention if possible, about the [indiscernible] or expectation concerning the value of [indiscernible] against the union and to obtain the amount for the [indiscernible]? Thank you for your question, Leandro, President, do you have any updates on that? Otherwise, we are expecting -- still we have no movements regarding this process, but we understand we are waiting. We are waiting for the judicial movement so that we can make other movements hit through the -- in the company. We are waiting for the last update. I think it was like of 20 days ago due to the end of the year. So we now have -- we had holidays in the Legal Department. So now we are -- we have growing expectations, but we do not have a date. We depend on the justice. We are waiting for updates, but we are continuing monitoring the process from close. Next question, question by Yuri Gular. If possible, you mention provisions, please? Recurrently, this line has been calling attention of the results of the company, one, a complementary provision of BRL 40 million in the quarter -- year against year. It seems too much given the nature -- predictable nature of the company. How has the company been looking at that? This is something that has been working internally and in your fiscal Boards. Yuri, thank you for your question. The issue of provisions. Yes, in 2023, we had a provision of -- volume provisions quite significant. In 2020, we had BRL 169 million constituted in provisions. Obviously, given the judicial decisions and the probability of losses, whether it is of these shares is that the provisions are constituted opening the [indiscernible] BRL 240 million of legal actions. And the object besides the ones I mentioned, which is the ones I mentioned, we had issues of additional over time, some issues related to salary adjustments. We had provisions of -- environmental visions in BRL 36 million, especially related to Water and Earth Institute. And we had BRL 58.1 million about civil actions, especially rebalancing of our company. We had a reduction and some [ 640 ] loss -- that reduction reduced the provisions and 67 environmental actions that were written off and other legal actions that were extinguished in an amount of BRL 1 billion. We depend on the justice for its decisions. And many times, they may -- during the process, they may have a position that sometimes is favorable or unfavorable at times. Especially, I would say that the issue of integration of the pensioners had an impact in this year's provision. Obviously, all the fiscal Board or the following of fiscal Board concerning the team is being done in the -- by the Executive Board. But obviously, from the moment you need to make provisions, you have to constitute and follow the accounting rules. Thank you. We had a question. I think it's worth reminding that we cannot predict any legal decisions. We have no control over that, especially judicial decisions, legal decisions. So it depends very much on what happens during the process. And there are situations we do not control that we have possibilities, but not certainties. So it's very difficult at some points to be sure of certain things, sure of what may happen. That's why the provisions sometimes a little bit above in some recommendations of external control to be aware of that and not to be behind of what might be possible, might happen. Now we'll have a question of -- the question of Luis Felipe, Investor. We can see that with El Nino, the levels of the reservoirs reached its limit. This -- because of this climatic events, in case this scenario of drought, extreme drought happens, is the company prepared for that? Felipe. As you have observed and maybe in that reservoir graph, at a certain point, you can see 1 of our reservoirs, [indiscernible] 2, was quite reduced -- had the volume reduced, which was exactly a maintenance work we did to better operate this. So with this example, I want to say the Sanepar, after the big drought of 2020, we are increasing our resilience, not only concerning the dams, but alternative sources for supply. As you say -- as you mentioned, the El Nino effect was very strong this year. And that is we anticipate 2024 a reduction of its affects. Institutions, they are still discussing whether there will be more neutral phase more or dryer phase by El Nino. But for 2024, however, and for the future, Sanepar has increased its resilience using the [indiscernible] diggings. We have several new mechanisms that guarantee resilience even in drought, periods of drought. And now next question is Daniel [indiscernible], self-side analysts. He has 3 questions. Costs with third parties increased year-after-year. The current levels of cost can be considered consistent for the future. In the past, we paid 50% of payout, but that was reduced this year recently. Could you see this level being resumed in the future? And #3, in October, you announced the uniformization of the contract deadlines of 19 municipality, how that was possible within the new scope of the legal mark of the sanitation? Thank you for your question. Obviously, about third parties, outsourced services. It's about management. It's about managing the cost of the company, but the fact is that they grow also due to the increase of our volumes collected and treated and sewage treatment and the supply, [indiscernible] growth concerning water in this account of third-parties cost, we've seen some growth above inflation, especially those related to this service to the client and the issues of cuts and reconnections and billing. Once they were necessary for Sanepar to implement, all its program of recovery of credit, which brought positive result in the issue of default. So many cost executed in the third parties accounts reflect positively in other accounts -- in other costs. We've seen that there was a reversion -- important revision of other costs, exactly due to the effort made about the services hire together with the third-party. About dividends, which is something was discussed, obviously, the company, in October, have -- together with the micro visions on the 6 and 7 [indiscernible] of micro vision, what will -- was approved extensions and contractual deadlines and that was an important movement, which happened in 2023. And this brought, obviously, a series of obligations for the company. We have to remember that previously, 2 years before, after the first -- the agency, it has subscribed the capacity to 300 municipality. Now we have the capacity for 345 municipalities, which are operated by the company. So obviously, there is a volume of goals that to be reached. We have a volume of investments also disseminated of BRL 11.2 billion, which the company needs to fulfill. We have goals of intermittence, of reduction of losses. And obviously, all this component causes us to also need to look at the dividends from a perspective that it continues within a level that will not compromise the capacities and the financial sustainability of the company. So when we approve the business plan in November 2022 and 2023 for the cycle '24, '28, all the we looked at even this investment date and the possibility of our leverage and the distribution of dividends. Obviously, we always expect positive points because we always want all the parties to be well served population with water, with sewage, sanitation, the shareholders being remunerated, the employees also being well paid for their activities, so all that has to fit within our budget. So in this sense, Sanepar acts always very carefully. And that's why the levels -- the current levels are being practiced. One thing because I think -- how that was done? It was done based on the neat legal mark of the sanitation, according to the policy of the state the micro regions, so I just want to highlight that because all that is anticipated in the new Sanitation Mark, Brazilian sanitation Mark, with the publication of the decrease in June of 2023. It was possible for us to make this move, which is widely legal and allowed within the new rules of this mark, the legal mark of sanitation. So now giving continuity, [indiscernible] question investor, his question. Congratulations for the results of 2023. Could you inform the evolution of partnership with [Asia]? This model will be replicated in the third batch as mentioned by the president in the first question? These are his question. This is his question. Well, [indiscernible] which the [indiscernible] of 16 municipalities of the center, host center, it's developing its activities, obviously. It's very incipient. It's a moment of integration of knowledge, partnerships. And many times, many things have worked within the company in a different way like private partners. So I think it's a moment of adaptation, but we are doing well. We understand that, yes, this is the model that will be replicated. This is there in the public consultation, all the technical elements that are today are on the Sanepar's site for everybody to see. So we understand this is the model that will help us. We have 112 municipalities in these 3 batches that will be of the next bidding, next tender, and we understand all of this. This is the volume, relatively small of municipalities that will be in the PPP. But it's -- they are important in the volume of investment, quite significant, almost BRL 3 billion in investments and also BRL 3 billion in operations of the systems. So we understand that this was their model, an intelligent model from the part of the company to overlap what we have developed in terms of works. The works will continue just the same way. We have a big volume of work going on, over 300 investments per year. And so development, and in the future years are very promising. Until 2028, at least, we have a lot of work to develop and for us to reach the contract -- contractual goals that were -- that had the deadlines extended and also meeting the compliance that the environment has also imprinted a big volume of demands. Now the next question is Julian [indiscernible]. There are 2 questions. The first was answered. The second question is about the PPPs, the growth of the company via PPP cannot reduce the rentability of the company in the mid long term. So the value will be paid to PPP. Actually, we seek to recognize all the old installment that is paid of OpEx and CapEx together with the price rate. So we do not see this mismatch. So on the contrary, I believe once we are giving agility to invest, we have currently over 300 developments going on. We have goals to be reached. And 1 of the ways is the combination of public and private efforts in the sense of reaching what the [indiscernible]. The [indiscernible] term is that we have [indiscernible] -- we have all the municipalities with 90% of sanitation. So we do not see a drop in the income of the company. We will receive, at the end of the system, the -- I think we will have -- we will even be able to continue the operations. So continuing, the next question is by [indiscernible], investor. Since 2021, the expenses have been growing with third parties. Can you mention this increase? Do you have any plan to reduce these expenses? This is Jose Luca's question. Yes, indeed, the third-party service growth, but for the reasons we mentioned, for example, the issue of removal of residues, sewage residues. We have a lot of investment compliance and environment. We saw expenses with chemical products growing the company, given that the quality of the launch of the affluence of -- due to the -- all these dumpings, they are bigger and bigger. We have an increase due to the vegetation and also due to the universalization of sewage, as I said at the beginning, we collect 7.5% more in '23. So obviously, this is reflected in the cost of third party, which is the removal of sewage and the removal of cost. The company obviously has not stopped just looking at the costs growing. This is something constant. I think the management of these costs is -- we work on that. We have a lot of initiatives for that whether to reduce the losses. With less losses, you can use less chemical products or to lose treated water. For example, we have -- in electricity. It's not third parties, but we have -- we try to reduce costs significantly due to the free market entrants, we have actions to fight losses. And new technology is being applied via satellite to locate these losses and fight them beforehand. So these are the plans for the -- of the company to reduce. This is then on daily basis with operational systems, systems of investments, which is a more intelligent search. Many of them electronically done and not manually to improve the production, to improve productivity. And this is what the company is trying to do. Sound is not clear. the sound is very unclear. So they are talking that the entrance of this free market will cause a saving of BRL 640 million in 5 years. Now continuing, the next question is by Debora Christian, Analyst by side. In the PPP contracts, default is 100% with Sanepar, how does it work? Thank you for your question, Debora. In the PPP contracts, the company is obliged to pay the counter installment that the service to the user. All the commercial issue is done by the company. The company continues serving the -- charging the municipality Besides the sanitation, we have the water. Commercially the water continues working and of course, if you pay to the PPP person for the services rendered. So all the cost of this service will be paid for the PPP. And so the company has to take care of the defaults as well. Next question is [indiscernible], investor. Congratulations for the results. Could you comment on the reservoir -- [indiscernible] reservoir is [indiscernible] question. Good morning. The dam, the structure of the dam was concluded some months ago when it is complete. And we are still discussing with the environmental licensing of [indiscernible]. We understand that a precaution on the part of the governmental -- and it may be a little exaggerated, but these are legal obligations we have to fulfill, executing studies, additional studies. These studies have started. We are right now concluding the last phase of calculation, and we expect to deliver the results of [indiscernible] in April, the most, maximum to be able to make this analysis. And it coincides the final phase [indiscernible] needs. And we understand this. It will be the best moment to make this suppression, which would be wintertime. As mentioned, it's a period of less rain, which allows us to work in that area -- in the forest areas with more assertivity and faster for them and to be able to enjoy the rainy seasons to fill the reservoirs. Next question is by [indiscernible], investor. Congratulations for the results. Is the deposition related to [indiscernible]. It's [indiscernible] question. Thank you, [indiscernible], for your question. The company awaits the municipality manifestation or concerning the evolution of the judicial process. We do not have any alteration. We don't have updates in the landscape. Next question. Daniel [indiscernible], sell-side [indiscernible] analyst. Daniel will ask his questions via audio.

Actually, I would like to make a follow-up of the question I asked previously about uniformization of the contract that lies. I would like to understand why in this case that you -- where you made this extension? Why wasn't it mandatory for you to privatize? Like, according to my understanding, the legal [indiscernible] would be mandatory. In your case, why didn't it happen? And another additional thing about. Abel, you mentioned that there were some obligations in this process of contractual extension. Just to understand these obligations that this extension contract brought, is it related to CapEx you have to make in order to reach universalization? Or were there -- or was there any other obligation related to this process of extension, of contractual extension?

I would like to see the video first. This is a policy of the controller shareholder. So one, it would be PPPs or privatizing. So this is what the accountant thought it was better because the company is an efficient company. So having a prive part together with the company, we move faster, and we can have universalization faster just like we manage in a unique way, the universalization of water in 100% of coverage. So that was our understanding. I think there is no need of privatization. We are doing PPPs, and we will reach, certainly reach before the legal deadline the universalization, Abel, you can add.

Daniel, I would just -- the previous decrease of the federal decrease of sanitation, they prohibited the extension of contractual deadlines because actually, this is against the law. Because you have an imbalance brought by the new [indiscernible] that imposed new goals of payments of contracts, which we didn't have before. With a new decrease issued by the federal government, this rule dropped and the contract was extended it for you to preserve the fee and make the necessary investments for the universalization. So we will comply with the laws strictly. We do what is strictly allowed by the law. Obviously, when you do all the negotiation of contractual extensions, the [indiscernible] imposes some issues of rules of investments. So we have to continue with 100% of treated water in the municipalities, drinkable water, portable water. We have to reach 95% of the goals by 2032, we intend to accelerate this movement. We have the issues of intermittence, which are deposits of supply, reduction of losses. This is a rate which is also in the contractual goals, and the company is committed to that, obviously proving the capacity and including these investments, obviously, the cost of OpEx are necessary to the operation of the system. So in this sense, Daniel.

The next question is [indiscernible], analyst, buy side. How do you expect to move from a company from big capital investments to our cash flow generation company considering the company needs huge investments to increase its revenues and net results. Well, [indiscernible], this is a difficult question, let's say, but obviously, the company has a comfortable position at the moment. There are a few companies already have water universalized that have 80.2% of sewage collected and 100% treated. So our level to see investment for universalization are very well addressed whether it's through PPPs, whether it's through access to credit that we have. We just had an own operation in the capital market, very well succeeded. So we have elements so that within the deadline, we can move from a company that invest massively currently, but we understand that this cycle, we have the issue of universalization well organized and the reposition of assets, which is a smaller effort. And we then we can -- allowing us to choose other forms of investments and actions. The next question is [indiscernible], investor. First of all, I would like to congratulate you for the excellent results. Concerning dividends, any news about the deadlines. This is something that every investor has doubts about.

Thank you for your question. The deadline of payment, although there are doubts, but we even included this information. All the payments done in 2019, it's always in the month of June. Why June? Because [indiscernible], which is the proof of the financial statements happen in April, and the payment is always 60 days, up to 60 days after the deliberation of [indiscernible]. So we have the history of payment, always made in June. And depending on the final decision of the shareholders. which is the approval of the accounts that happened in April. So we predicted to happen in June after everything being approved in the [indiscernible] of April. Next question, Leandro [indiscernible]. Lastly, I would like to comment on the advancements in the study of operational improvements to reverted costs and accessory revenues. I think I had a question -- just a moment. Federico you are reprocessing. Yes, I just ask for some seconds, please. Apparently, we had a problem with the last question. So we finish the Q&A session and the Financial Director has the word about the [indiscernible] for the final considerations of the company. On behalf of Sanepar, I thank you -- the participation of all of you in this video confidence and wish you all a very nice weekend and excellent holiday. Thank you all.

So the video confidence of earnings confidence of forth quarter is concluded. Have a nice day.