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

[Interpreted] First quarter 2025 for company SANEPAR. For those requiring simultaneous translation, this feature is available on the platform. [Operator Instructions]. Please note that this video conference is being recorded and will be made available on the CEO's Investor Relations website, ri.sanepar.com.br, where the full earnings release and presentation materials is available. You can download the presentation directly from the chat available in English. [Operator Instructions] Please be aware that the information provided during this presentation, including any forward-looking statements regarding SANEPAR's business outlook, projections, and financial targets, reflects management's current beliefs and assumptions as well as information available at the time. These statements are subject to risks and uncertainties and changes in circumstances that could cause actual results to differ materially. Investors should consider general economic conditions, market factors and other variables that could impact the company's performance and cause actual results to differ from those expressed in forward-looking statements. So now I'll hand it over to our Chief Financial and Investor Relations Officer, Abel Demetrio.

[Interpreted]Good morning. Good morning, everyone. Thank you. Thank you for your participation in this video conference. With me, we have the accounting manager, our Investment Director, and our environmental and social initiatives manager. I would like to hand over to our CEO, Wilson Bley, who is traveling on business. Please, the floor is yours, President.

[Interpreted]Good morning. Good morning, everyone. It's a pleasure to be here with you. I thank the participation of our directors, shareholders. It's an important day for all of us. It's a day to show and be able to celebrate some of the good results we had during this first quarter of 2025. I'm traveling. I'm visiting our units in the interior of Parana in Cascavel, an important city, where this sewage coverage exceeds 90%. It's almost universal. And in these discussions, we need to reach good results and do everything possible for that, and have -- and guarantee our company is a successful company. I would like to request everyone to bring out and visualize some of the good results that we had. Our net result exceeded 218% if compared to the first quarter of 2024. An extremely relevant fact for us was the issue of our rate of payment, which was close to BRL 4 billion in the budget within the budget law of the federal government. So it's registered, and it is individualized and formalized. So now this commitment to receive this payment is done, and it's a big gain for us. And now we have reached this final phase. Of course, we have to adopt the rules, which are the current rules. So all the accounting registers and all the other measures to find the best equation for the distribution of this result. Another important evidence is the issue of PDV. We managed to conclude our plan of voluntary dismissal. 527 employees adhere to this plan, and they are in the process. This will bring us a good result in our accounts with a payback of around 12 months, but this brings us this administrative organization, which is very healthy for these companies, companies like ours. Another issue that has to be observed is our energy. It's an expense. It's that presses our results quite a lot. And so we decided to go to the free market. This is not just turn a key and turn off another key; that is a whole process of adjustment of our points, and this is being done gradually, but it has brought results of around 25% in decrease in the expenses we had compared to 2024. An important highlight fact that has to be also highlighted and Aleor, our Director, will talk about that. It's our investments. We had an increase of over 14% in our investments. If compared to last year, this is a result of a lot of work, good management, and also Julius's work in the Environmental Board with all the licenses, giving way to these investments that are planned, 11.8% in a cycle of 5 years and 2.6% this year. So now to conclude, I think it was a very successful period. And today, on showing these numbers, we have to understand the responsibility and the transparency in SANEPAR's management. So thank you all. I count on our Board. I count the hard work of everybody, and we are available to do our best.

[Interpreted] Thank you, President. Now starting our presentation for these are the slides. So let's start with talking about the highlights of first quarter 2025. So in the operational context, it was a very positive quarter with an increase in billed water in 3% and sewage in 4.8% compared to the same period of 2024. We had in the period of 12 months, a growth of 1.1% in water connections and 2.7% in sewage. And we highlighted the water is 100% universalized. In sewage, we are almost universal. Now we have 81.5% of sewage collected, out of which 100% is treated. This is a goal of the company to get universalization, and we are on this path. About financial highlights, our net revenue reached BRL 1.8 billion in the quarter, an increase of 6.3%. Our EBITDA was BRL 1.1 billion, an increase of 44.1%. And of course, with the rate of payment reflection, part of this that is not financial with an impact in the EBITDA. The EBITDA margin, 61.8%, and net profit increasing 218%, like our President mentioned, reaching BRL 1.2 billion in the first quarter. About efficiency, our loss per connection is BRL 221 per day, a decrease of 0.9%. And the default was 2.8%. We had an increase of 0.8%. As we said, the President mentioned, the PDV is something important in the people's management. We had -- we are in the phase of implementation payback with the people who have been disconnected. We started the process in March. In April, we had more people who disconnected from the company. And so these people have been very important to the company. So the investments were BRL 457 million, the CapEx. And of course, the financial covenants always met. In the next slide, we are talking about the operating results. Concerning the water measured volume and billed volume, we had an increase of 3.4% in the first quarter of 2025 if compared to the first quarter of 2024. And the volume billed increased 3%. We saw a good increase last year, 7.9%. So we are growing in the water. In the sewage measured volume is an increase of 5.1% and in the billed volume, 4.8%. It was -- operationally speaking, it was a very good quarter. On the right-hand side of the slide, we have the issue of the connections of water and sewage. And we had an increase in water connections in 12 months of 38,743 new connections of water, which is a reasonable increase for the company that is universalized for many years since 2007, 2008, we were universalized. And in this period, in the quarter, an increase of 11,000 connections. Concerning economies, there was 16,000 new economies of water, an increase in 12 months of 50,973 economies, an increase of 1.2%. And of course, the connection, making a distinction, sometimes that is a unit that has one connection and an economy, a different economy. This prevents us to have connection. Sometimes you have several apartments, and they are measured in economies, for example, 10 apartments, 10 economies, just for you to understand. Concerning the sewage, an increase -- naturally, there was an increase because there is a lack of -- we have not reached universalization, but the number of connections of sewage increased 2.7% in 12 months, plus 68,139 new connections, sewage connections in the period of the quarter, 11,237 and economies, 18,000, an increase of 94,000 new economies of sewage with a growth of 2.8%. So we are on the path of investment, seeking universalization of sewage and maintenance, and good service related to water. Next slide. Let's talk about reservoir levels. In the first quarter, our reservoir making up Irai, which is all the system, we were quite comfortable. Irai, one of the reservoirs, is 97%, then 99%, Piracona 1, and 200%. Obviously, the reservoirs are not built to be always in the maximum level of capacity. So in a season of a drier season in winter in Curitiba, I think we have less rain. And obviously, these levels may fall, may drop, but they are always important to keep production of water at levels to meet all the population's needs. Next slide, we have the financial indicators in details. Let's talk about the default. We -- in the first quarter of 2023, we had a default of negative given the high program of recovery of credit. We had 4.7% default in the first quarter 2024 is 2%, and now in 2.8%. So we are working with the commercial area, adopting some measures aiming at reduction of this default in a more active position in the company to charge and get this resource -- obtain these resources, which are important to maintain the company, the cash flow, and the investments program. The loss for connections, there was a decrease at the end of '24 that was 223 liters at the end of -- it was BRL 121 of losses per liter per connection per day in 2025. Speaking about margin, EBITDA was 68%, as we saw with a history of 2 years in the first quarter, around 45%. And it's important to highlight that taking out the of payment, which is not recurring item in the first quarter of 2025, we would have EBITDA around 45%. So this shows how solid the operational performance is in terms of stability of the index and the maintenance of its operations. ROI annualized is 20.8%, and ROIC annualized 14.3% with an impact of the registers. Now next slide, the quarter results. So the issues related to financial aspects. So we had an increase of 6.8% in our net revenue. It's important we reached BRL 1.8 billion in the first quarter of 2020 -- above the 2024. In the expense, we had a cost of BRL 689 million in expenses with a decrease of 25.4% compared to the same period of last year, and influenced by other operational revenues on the part of payment that is impacted positively compared to the cost and expenses. EBITDA of company reached a 53.4% increase, and below with an EBITDA margin of 53% with an increase of 15.7%. EBITDA, we have an EBITDA of around BRL 600 million, BRL 700 million. And this year at BRL 1.16 billion, quite an important increase, and the margin we saw in the previous slide, with a history in the past quarters of 45%, we are still around 45%. But with all the registers, we reached 61.8%, an increase of 16.2%. And likewise, the net liquid at the end on the right side of the slide, we were like BRL 300 million in this period, it was BRL 1.208 billion, an increase of 218% with a net margin from 22% in the previous quarters to 66.9%, so an increase of 44.6%. Now we're talking about net revenue, let's go through each one of the items. This month, we have several events not recurrent, which makes the comparative analysis more difficult. That's why we are going to go through one by one so that we can go to the main topics. As we saw the net revenue this is not a recurrent point. It's okay. So 6.3%, the growth reached BRL 1.80 billion. And the important thing is that last year in the same period, there was an increase of 16.8% compared to the first quarter of 2023. So naturally, we start from a high base, which was last year, but still, we kept a growth quite favorable net revenue. The first account you're going to observe is the personnel account with an increase of 80%, and here, we start to have 2 points that are not recurring that I would like to detail. The first one is the provision in February in the first quarter of the program of voluntary dismissals, with BRL 171 million provision that will be paid to the employees when they are disconnected and in some installments. So this is a movement of a nonrecurrent item in the period. Besides that, we had an increase of some labor loss in BRL 608 million, so we have a reduction of provisions. This impacted the account of personnel. But I would say that it's a net close to 0 due to the reversal of provisions in the item of provisions. So these are the 2 main reasons why the personnel account shows the variation in the period. And the 2 movements are important movements because one adjusts the issue of voluntary dismissals, and the other one brings all the work that is being done since 2024. In this quarter, it was, let's say, gained more body, became more robust to leave all the labor lawsuits updated as required by our independent audit. The second item is PPR. Obviously, it has an increase, the increase of profit. It's a provision that is done based on the results, and it increases due to that. Materials increased 7.3%. I would say that the account of materials is in line with the growth of the volumes because the volume produced of water increased 2% in the period, and the volume of sewage treated increased 5.1%. So in terms of actual increase of volumes produced and treated, we have something around, on average, 4.5%, considering that we have an inflation in the period of 5.5% IPCA in 12 months. So the material account is within what is expected and what was predicted by the company. The main account of material, which is treatment material, represented 63%, and it had an increase of 2% compared to the same period of last year. Energy, electricity is the third item here, as we mentioned by the President, there was a decrease in the cost around BRL 37 million, BRL 36 million. In the first quarter of 2024, we spent BRL 144,370 million with energy. And in this quarter, it is BRL 108,94000. So those who follow the teleconferences for some time, remember that our prediction of reduction of cost in electricity for 2025 was around BRL 150 million. And in this first quarter, we have a result around BRL 36 million, BRL 37 million due to the migration to the free market. So it was an account that was quite favorable to us. We have to remember that this reflects in the future in less tariffs for the population, lower tariffs. Outsourced services or third-party services, an important growth, 71.4%. So the main points are in the issue of technical services, we had the provision for law expenses related to the lawsuit, the rates of payments. We have provision for that. This payment obviously is done from the moment the company receives these resources, when we receive the money, when we benefit from the rates of payment. But the provision for this payment is already done due to contract issues, and due to contracts, we cannot reveal the amount, but it was very well negotiated when we hired these law firms. But due to the volume of the rate of payment, any percentage is quite relevant. And in the issue of service of third parties, we could highlight the issues of vigilance or security. We had a significant increase in the period compared to the same period last year. And the justification is the new contract scope in security monitored. We have cameras and in 1,500 addresses, and the control center adopted by the company with an additional cost, but the results means better security impacting the quality of the services rendered to the population. We had 2 years ago, several robberies of cables, copper, and the investment here and this bigger expense in vigilance in security is not to interrupt the supply of water and the sewage treatment to guarantee that. And for sure, this reflects in the better billing of the company because we do not stop. We do not have this -- so the issue of alarms that we replaced to alarm plus cameras with -- and it was an important item and increased a lot of -- improved the service very much. We had some increase, relevant increase in the issue of operation and maintenance building services. It's still third-party services, aiming to leave the commercial units, operational units of the company, always in a condition more suitable in terms of functioning. These were some items that were spent in our management of regional sewage service, some payments for in Curitiba with the implementation of the supply system of CSB. And we had some other services, the data processing services, there was an increase of expense due to some expenses with software aiming at maintenance of ambient my frame, which is important for corporate -- for the corporation. Now next account is general services with an increase of 51.6%. And here we just like in the labor issue of personnel, we have some indemnization for third parties and some payments for labor lawsuits, and we have an increase in this period due to all this work of updates and judicial loss payments. And we have the program of social partnerships headed by Julio, so we have the Siterranean monitoring of water, which was an expense in the period and some new contracts for the environmental education, monitoring of visits of space visits and so chairs that we utilized, it was a summer operation where we had an increase and that was very well accepted and the research performance was very good in the people on the calls in the months when it happened. Now next account is the provisions. We have an increase, a significant increase. It was BRL 1.193 billion. And we have here the issue of the rate of payment once we made a provision for the regulatory payable of BRL 1 billion for the payment in the description in the union. And part of this action, the fees, we had a provision for the regulatory passive in this amount. This account is over BRL 1 billion. And the difference is the reversions of updates due to this -- we had 1,000 ends of lawsuits totaling and some civil lawsuits and environmental lawsuits, so reaching over BRL 3 million. So this impacted our provisions. Besides that, we had 56% lawsuits, which were filed which -- and other lawsuits with environmental around BRL 400,000. The next item the issue of expenses and revenues. We had a revenue above the financial expense. And we had 2 big -- 3 big launches, which is the revenue of interest due to the rate of payment in over BRL 2 billion and in proportion, a provision for the regulatory pass of over BRL 1 billion, reducing the account. And besides that, as a result of our accountability, we had to make adjustments to the amount of the rate of payment, which cost over BRL 290 and measuring the current amount and the expectation of receiving this amount -- so the last item, other costs and expenses, we had the operational revenue of the of payment about the main amount of BRL 2.55 billion. So this account had an important reversion of BRL 1.80 billion. And only the operational revenue was very important because it was around BRL 2.55 billion. So with all that, we reached the final result of BRL 1.2 billion at the end of the quarter. Next slide. Let's talk about CapEx. Investments. As we can see in the graph, we have been growing in terms of investments, first quarter, BRL 403 last year in the first quarter, BRL 425 million and this year, BRL 487, and the composition of CapEx 38% in water, 61% in sewage, and 7% in others. The origin of resources, 78% in this quarter with own resources and 22% with outsourced resources. Next slide, capital. We have net debt and coverage. So we have 712 debt and long-term, BRL 5.89 billion, totaling BRL 6.69 billion of total debt. At the end of March, we had a cash flow of BRL 1.849 billion, which results in a net debt of BRL 4.76 billion, an increase of 6.3% compared to the net, but with a leverage of 1.5x the net debt by EBITDA. Below the cash generation, BRL with quite a growth, 15.5%, and here with an impact of the of payment, you have to remember that right now, there is an accounting impact, and we do -- still do not have the money in our accounts. That's why the conversion of EBITDA had a drop to 65.7% in the period. The cost of the weighted average cost of debt was 11.1%, in line with the first quarter of 2024, which was 11% and we managed to maintain despite the increase of the interest rate in the last few months, an increase of inflation, but we kept our cost of capital quite stable. This is important because it guarantees that the financial expense does not have a strong impact on our results. So this is a result of a debt that is allocated 34% in Tear. It's a variation that obviously benefits us because it does not increase in the same pace as a [indiscernible], for example, inflation, 28%, DI 23%, impacted by the increase of the interest in this part of the debt. We have 5% corrected by EPC, which is allocation of assets, TJLT 4%, euro 2%. Remember that in terms of euro, we have about 80% exchange rate, which is our hedge without 3% without correction. So this is our profile of debt that the company has the debt breakdown. In the next slide, speaking of the covenants with all our financial agents, we have in terms of [indiscernible], which are the contracts -- debentures fourth and seventh issues, the covenants of net bank debt by EPI has a condition that has to be lower or equal to 3. In the first quarter of 2025, we are with 1.5 in this -- in terms of -- so in the average, we are comfortable in this regard. Next covenant is EBITDA by the debt service coverage has to be equal or bigger to 1.5 is the minimum condition. At the end of the first quarter, we have 1.7x in this relation. Another other onerous debt equal to equal or less to 1. And adjusted EBITDA, we have a covenant, which is EBITDA adjusted by the financial liquid expense, net expense, we have more revenue than expenses in the period. This rate has to be went 122x because it has to be equal or -- and the bank debt by adjusted EBITDA has to be equal or less to 3 with 1.1 at the end of first quarter. And other onerous debt adjusted EBITDA equal or less to 1, we have 0.27. And now speaking of the 9, 10, 11, 12, 13 and 14 debenture issues, we have the covenants of Medbank adjusted 11%, equal to what we saw previously. EBITDA debt service coverage ratio equal to the Caixa. And concerning the KfW contracts, we have a different covenant, which is the level of debt. It has to be equal/less than 6%. This quarter, we closed with 51.6% against the same period, 48.9% last year. The level of debt suffers an increase due to the rate of payment because we understand that out of this BRL 4 billion, BRL 3 billion go to PR, go to the passive. So there is -- the passive is higher than the asset, speaking of big numbers. Now next slide, let's talk about the balance sheet. Our net debt at the end of 2024 fell 1.4% to over BRL 5 billion. So our financial investments were BRL 1.8 billion. The loan, BRL 6 billion over BRL 6 billion and dividends and interest and equity, BRL 318 million. The operating working capital, a decrease of 33.5%, and the main account of variation was the salaries and social payments due to the provision made for the payment of the PDB. So it ends up impacting salaries and social taxes. Obviously, from the moment we pay the workers, we go back to the normal levels, which was around BRL 288 million, BRL 285 million. Other assets and liabilities, an increase of 37% with other assets and liabilities with an increase of 37%. Our PL of over BRL 200 million, BRL 2 billion with cash flow turnover when we do the issue of payments and salaries and taxes, this turnover goes back -- tends to go back to more days compared to what happened in the previous years. Finally, speaking about the cash flow in the first quarter of 2025, we had of the operating activities being 15% increase of generation of cash flow reaching -- in investment, we had additional expense of 14.3%, reaching BRL 485 million, and the financing activities consuming over BRL 200 million. We had a result lower than last year in the first quarter, given that last year, we had the debentures. But at the end of the day, if you add up all these items, there was an increase in the cash flow of BRL 47 million from BRL 1.8 billion to BRL 1.44 billion in cash. If compared to the first quarter of '24, a reduction of 3.4%. So this is the presentation about the results of the first quarter. I would like to also hand over to Leon, if she wants to talk about to the investments, which is a relevant issue. We have several works being executed. If you are interested to ask questions, then I will answer. So I hand over to you. This was the end of the presentation. So now we will start our Q&A session.

[Interpreted] [Operator Instructions] So he wants to congratulate SANEPAR for its results, and he wants to know more details about [indiscernible] the labor indemnization or compensations.

Thank you, Marcelo, for your questions. In this regard, I will send over to Ozires, our accounting manager. He will talk about all the issues related to provisions and to the dismissals.

Thank you, Marcelo, for your question. Concerning compensations, the company has been doing some work related to the labor suits. It happened in 2024. And during the first quarter, we intensified this work together with our legal department exactly to verify all the lawsuits that were concluded and that might be, let's say, written off. So as you can see in the results, we had an impact, a significant impact. So we paid around BRL 170 million in lawsuits that were concluded. We had a provision for that, and it was legally deposited and it was registered in the assets. So this was paid in terms of legal actions, we had BRL 170 million of compensation to third parties, around BRL 22 million as well to third parties, which brought an impact in these 2 accounts. And -- so the net, if you look at the result, practically was no because we refer to the provision and constituted an expense in personnel in the group of general and taxes. So this brought a benefit -- fiscal benefit for the company because until then, these provisions were -- they were deferred. So we were not using this as a deductible expense. So the moment we paid all these lawsuits, we ended up -- we then calculated the actual profit, and we had a benefit. We deducted an expense that reduced our taxes. So basically, that's it.

[Interpreted] Now continuing next question from João Schmidt, analyst by side.

Could you give more details about the increase of default? And what is the perspective of the company for the future of this indicator?

[Interpreted] Joao [indiscernible], thank you for your question. Speaking of perspectives for default, besides being a projection, which is not usual from the -- on the part of the company, we have macroeconomic factors that influence this issue. But I can say -- I can assure you that several measures are being adopted for the company to go back to what we consider suitable for default. Some actions like, for example, a new program of installments -- of payment of installments in the -- we have not felt the effects of this in the first quarter, but we expect that in the second quarter, as a result of these measures, we can -- we will be able to see the results. We are seeking some changes, technological changes in the sense that allows the client more availability of payments, more ways to pay like credit card, using the special machine payments to avoid cards so that the client -- this is being tested, in the final phases of the test. So finding different means of payment for the users, preventing them -- for the client to have the services [cut] and also to pay any debt and pending paying bills, which sometimes they are not -- so the best moment is after you don't pay the bill for too long, it's more difficult to settle all these accounts. And the second thing is another action to be more proactive in terms of charges of the late bill. So several actions, and these are ongoing measures and a great part of them started in the second quarter and some are starting now in May, and we expect to see the results. It's not in the third quarter, but in the fourth quarter. So let's wait and let's see if there will be enough if we will be able to bring this to a better level than what we consider in terms of default. We have to remember that [CPA] concluded the first tariff review in the [indiscernible], -- we had an increase from 0.44% to 0.62%. Obviously, this brings for the company a better revenue in terms of the recognition by the agency of this default. But it's not -- the objective is not that one pays for the others. The objective is to have a controlled default and our levels are always historically speaking, very much under control.

Next question comes from [indiscernible] analyst by side, Future Investments. He would like you to detail the rates of payment. What are the dealings with the regulated and how the company interprets the -- what are the measures for the distribution of this amount? What will be the treatment, the legal treatment, the tax treatment? So it would be important to give you more details to the stakeholders, please.