Maynilad Water Services, Inc. (MYNLD) Earnings Call Transcript & Summary

Thank you for joining us for Maynilad Water Services Investor and Analyst Briefing. Today, we will present operating and financial performance highlights for the first half of 2026. I am Josine Reyes, Head of Investor Relations. Before we begin, we would like to confirm that the financial results and other key information to be discussed today have already been disclosed to the PSE and are available through PSE Edge. We also confirm that no material nonpublic information will be shared during this briefing. Following the session, the presentation materials will be made available on our website. Please note that today's presentation may contain forward-looking statements based on management's current expectations and assumptions. These statements are subject to various risks and uncertainties and should not be regarded as guarantees of future performance. Following management's presentation, we will open the floor for a Q&A session. Priority will be given to questions submitted in advance and related questions will be consolidated as appropriate. Participants today are welcome to submit questions through the chat box at any time during the presentation. [Operator Instructions] So joining us today are our President and Chief Executive Officer, Mr. Ramoncito S. Fernandez; our Chief Operating Officer, Mr. Christopher Jaime T. Lichauco; our Chief Finance Officer, Mr. Ricardo S. De los Reyes. With that, I am pleased to turn the presentation over to our Chief Operating Officer, Mr. Christopher Jaime T. Lichauco, who will discuss our operational highlights for the period.

Thank you, Josine. Good afternoon to our analyst friends. Allow me to share Maynilad's first half performance, starting with a strong volume -- billed volume performance for the first half. First, our billed volume performance for the first half, we posted 2.9% growth, battered by 2 record highs in the months of May and June to the tune of 3.9% and 4.8%, respectively. This strong showing in billed volume performance is largely attributed to our success in our NRW reduction program. Because of a tighter network, we're able to channel more water to areas with higher value, thus reducing our losses as well as freeing up more water to improve service levels. So with an all-time high in billed volume, we now go to our all-time low in NRW. We are proud to share with everyone that as of end June, our NRW is at 29.7%. Indeed, our accelerated investments in NRW projects are paying off. For everyone's information, NRW is extremely important to us. For every percentage reduction in NRW, that translates to more than PHP 70 million in OpEx savings. But more importantly, the volume recovered contributes to our supply buffer. In this case, we have recovered a total of 100 MLD that translates to almost -- actually 1 treatment plant. We move on -- now move on to other service obligation targets. And across all, we are proud to share that across all service obligation targets, there is an uptick. Starting with water service coverage, an improvement to 95%, 7 psi minimum and 24 hours water availability, up 92.1% from 90%. Sewage and sanitation. Sewage range is now at 26.4%. Sanitation is at 61.9%, both improvement from previous year. We are well on track to hit our 30% sewer coverage for the year. Moving on to disbursements. We continue to invest heavily in our concession. For the first half alone of this year, we posted an 18.9% improvement or growth in disbursements. Our total disbursements to date is at PHP 12.9 billion, 18.9% higher than last year. This strong showing is really attributable to the projects we implemented through the first half of the year. It's been allocated to NRW related to the tune of PHP 2.6 billion; water-related PHP 4.9 billion; expansion, PHP 180 million; and wastewater, PHP 4.5 billion. Again, majority of these projects have already been awarded. For the balance of the year, yes, we continue to track PHP 28 billion to PHP 30 billion of disbursements. Just to illustrate some of these projects, we have the Modular Treatment Plant in Molino, 5.5 MLD. Pasay NEW WATER, 12 MLD. These are very critical. We will discuss later on, on our El Nino preparedness. This will go live within the balance of the year and will add to our supply buffer. Another operational support water-related project are our reservoirs, starting with our Parada Reservoir and our 200 ml Lagoon La Mesa reservoir. On the wastewater front, we are proud to announce and to share with everyone that the largest wastewater reclamation facility will go live by the end of this year. This is the CAMANA WRF as well as the Tondo conveyance. Adding more resilience to our El Nino mitigation is our supply reliability project in Putatan, where we will replace our polymeric membranes to ceramic membranes, giving our Putatan plants more resilience in addressing turbidity. Also, as part of our road map in NRW reduction, we have the Valenzuela NRW replacement -- pipe replacement project. The target volume to be recovered here is 21 MLD. We now move on to our Maynilad's El Nino preparedness. Let me start with this slide showing how the Angat level has dropped to 150 meters last month. Thanks to the rains of recent days, there's been a drastic improvement. And true to historical fashion, it is slowly rebounding. Yes, the threat of El Nino's there. And our answer to that is Maynilad is prepared for the coming El Nino. Let me just take you back in time to 2011. Back then, our dependency on Angat was at 97%. Back in 2011, we pioneered in diversifying our sources via our first water treatment plant in Putatan. Fast forward to 2019, where we experienced the severe -- I think the most severe El Nino in recent history, we were interrupted. We were interrupted at a higher level than it is today. We were interrupted at 160 meters Angat level. Today, as you've seen in the slide, despite a low -- much lower level of Angat at 150 meters, there is no interruption in Maynilad's concession. This is largely attributable to our diversification strategy and reducing our Angat dependency. Through the years from 2019 to the present, we have reduced our dependency down to 83% via several flagship projects, foremost of which is our Putatan 2 and our Poblacion water treatment plant. Our Poblacion treatment plant is capable of 150 MLD. We also have our modular treatment plants and Paranaque NEW WATER water treatment plants and various plants. All of these have reduced our dependency on Angat. But more importantly is how I go back now to our NRW reduction program. Our success in recent years to reduce NRW has resulted in volume recovered from 2019 to the present, total volume recovered is 278 MLD. That is almost 2 treatment plants from 2019 to the present. Hence, despite the lower level of Angat today, there is no interruption in Maynilad's concession. Yes, we will continue to diversify our sources. We will continue to reduce our dependency on Angat from now till the end of the year and beyond. In our road map, we already have our Pasay NEW WATER that will go live by next month. That will contribute 12 MLD. Our Molino modular treatment plants, 5.5 MLD. More depots to come from now till the balance of -- till the end of the year to the tune of 17 MLD. And I go back again to the success of our NRW reduction efforts from now till the balance of the year. For the balance of the year or for the whole year, our target recovery is 195 MLD. All of this will serve as a buffer to mitigate El Nino effects. Should El Nino worsen, we have already coordinated with MWSS via a revised raw water sharing protocol. This will be triggered once it goes lower than what it is today. MWSS objective is to minimize, if not 0, avert any interruptions whatsoever from now until the end of El Nino. Thank you very much.

Okay. Thank you for that very comprehensive presentation. We will now move to our financial performance discussion. Please join me in welcoming our Chief Financial Officer, Mr. Ricardo F. De los Reyes, who will present our financial highlights.

Thank you, Josine. Good afternoon to everyone. We were able to implement a modest tariff increase of 2.85% at the start of this year. As Chris discussed, our billed volume grew 2.9% year-on-year. The growth in billed volume, however, was unevenly distributed between domestic and nondomestic customers, owing to work-from-home policies implemented by both government and private organizations for the first half of the year. Nevertheless, operating revenue grew by 4.1% year-on-year to PHP 19.1 billion. Operating expenses increased by 8.9%, more than half of that increase or 4.9% is due to incremental spending attributable to our operation of new facilities introduced in the past year. Beginning April, we were confronted by rapidly increased rising fuel costs arising from the Iran war. Nevertheless, through our aggressive control of discretionary spending, we were able to limit the growth of recurring OpEx to 4% only. As a result, our EBITDA grew by 7.5% to PHP 13.7 billion. Just as importantly, we delivered an improvement in our EBITDA margin from 69.4% to 71.7% as we continue to reduce nonrevenue water and implement various cost efficiency initiatives. While our depreciation and amortization costs will inevitably grow as we complete new CapEx projects for improving infrastructure and services, we were able, nevertheless, to increase our accounting net income by 14% to PHP 8.5 billion. Our capital investment in the concession represented by the opening cash position or OCP, was established by the regulatory office at PHP 100 billion at the start of 2023. That balance is reliably estimated to have grown to PHP 184 billion today. Now remember, this is the balance against which we are able to earn an allowable rate of return. Also worth noting is that the interim cash position well exceeds our long-term debt of PHP 103 billion. Next slide, please. The debt profile shows that our borrowing is largely insulated from FX risk. We also have plenty of headroom within our loan covenants to fund our substantial CapEx program. Our present D/E ratio is only at 0.9x, relative to loan covenant maximum of 2.33x, debt-to-EBITDA of 3.8x, well below our internal policy of 5.5x. And finally, our 5.3x DSCR ratio is well above the minimum 1.2x requirement. We have not fully deployed -- next slide, please. We have not fully deployed our proceeds from the Blue Bond issuance 2 years ago in the IPO late last year. These proceeds are fully intended for CapEx spending on specific projects. We expect full deployment by the end of this year or early next year at the latest. Next slide, please. So Maynilad is now included in the PSE or Philippines Stock Exchange Index on the basis of our strong market capitalization and robust trading liquidity. We expect that this inclusion will result in increasing visibility among domestic and international investors as well as broader appeal among institutional and retail investors. We are especially proud of this development coming only 6 months after our IPO. We're grateful to the Philippines Stock Exchange for the early review and inclusion. We recognize and accept our responsibilities as one of the leading members of the exchange. Thank you.

Thank you for your very insightful presentation. So we will now proceed to the Q&A portion of today's briefing. We will begin with the questions that were submitted in advance, followed by questions received through the online chat as time permits.

So the first set of questions are called consolidated questions, and this comes from several organizations, BPI Securities, China Bank, DragonFi Securities, STMicroelectronics, Tribeca Investment Partners, Shareholders' Association of the Philippines, Regis Partners and RCBC Securities. So this is the question. Is there an updated supply and demand outlook given El Nino. What are the actions the company's -- what are the actions the company is doing to ensure sufficient water supply in the upcoming El Nino? What are the current projects? And what is the impact to the bottom line?

Let me answer this as a start. One is that the supply and demand situation is moving positively. In fact, the rainy season has arrived and has started. And secondly, the demand is seasonally low during the second half of the year. Let me pass on to you to Chris Lichauco, who will discuss further the actions that we've done also and are currently doing.

Good afternoon. Yes, as earlier reported, part of our strategy is really to wean ourselves away from Angat, to reduce our dependency on Angat. In our road map from now until the end of the year, as earlier reported, we have several projects that will go live, our Pasay NEW WATER, our Molino Modular Treatment Plant and our deep wells. But more importantly, is our NRW reduction efforts for the balance of the year. This will actually create more supply buffer for us. And lastly, I mentioned earlier, we have on stream our Poblacion water treatment plant of 150 MLD in the South. We will further maximize this. We are currently building our conveyance in the South to convey more water from the south to the north so as to mitigate any El Nino effects and to reduce further our allocation. If you are concerned about our year-end full year outlook, let me answer this space that by saying this. It's -- in case of any severe El Nino effects, the effects will really be limited to the last 4 months of the year because July is done, July build volumes are done and billed. August is already predictable basing on July supply. And actually, we can't wait to report on our July and August build volume figures. But yes, so yes, if ever there will be any El Nino effects, it will be limited to the last 4 months of the year. But again, let me say this, we are prepared and we will mitigate El Nino effects.

Right. Josine, with respect to the bottom line, in response again to the rapid increase of fuel costs earlier this year, we embarked on a campaign to control our discretionary spending. The results of that campaign are reflected in our first half results. We will continue to exercise strong -- strict cost discipline for the balance of the year. Given the comments shared by Ramon and Chris here, we see no reason to change our guidance and commitment to our Board of Directors concerning net income and adjusted net income, both being the basis for our next dividend payout next year according to our well-defined dividend policy.

Okay. Thank you. So for the next question, again, this is from Regis Partners. What factors would trigger cross-border water purchases from Maynilad Water during this El Nino. Could you elaborate on the negotiation process in terms of pricing and purchase volumes? And are these purchases allowable recoverable expenses under the concession.

To answer that, I would -- MWSS has worked closely with the 2 concessionaires in ensuring that the 2 concessionaires have a coordinated effort to address El Nino. Secondly, we would -- our position is that the cross-border is our last option on a worst-case scenario. But as mentioned already by Chris, we are better prepared to address the El Nino relatively versus the last worst El Nino, we are very far off from that. And as evidence that we still have not interrupted even at a very low level of 150 meters.

If I can just add. In the present revised concession agreement, there is a provision there that would trigger cross-border supply in case of emergencies. That obligation applies to both concessionaires. And the obligation consists of our providing as much as 5% of our production volume for the benefit of the other concession in case of emergency. The formula for setting the price or cost of that cross-border supply is also predetermined in the revised concession agreement, and it will be up to MWSS to trigger the cross-border supply, if necessary.

Okay. The next question is also from Regis Partners. It's CapEx has historically been back-end loaded. Do you still expect this pattern to hold this year so you can achieve your PHP 28 billion to PHP 30 billion CapEx guidance.

Admittedly, CapEx disbursement had been backloaded in previous years. But if you will see our performance for the first half at PHP 12.9 billion, it is not as backloaded as previous years. And yes, we are still on track to hit our PHP 28 billion to PHP 30 billion disbursement for the year.

Okay. Thank you. We're checking if there's more questions from those online. Okay. So we have one question here. Why is the NRW of Manila Water much lower than Maynilad?

We cannot really answer for them. But firstly, comparing the NRW of Manila Water and Maynilad is not apple-to-apple. You should understand that there is a historical context to this. Firstly, the new -- the current owners of Maynilad only started in 2006, thereby having a -- Manila Water having a 10-year head start. Secondly, the Maynilad Concession inherited aging and old pipelines as long as 4,576 kilometers in 2006 versus the 2,497 kilometers inherited by Manila Water. The other difference is that our concession has a different demographics as well as geographical context. The area of Maynilad is more dense in population, has narrower streets as well as its pipelines are nearer the coastline. Ergo, the more prone to deterioration aside from the fact that the 4,500 kilometers have really been laid by pre-Hispanic and even American Times. So that is the initial comparison that we're starting from the different frame. The other fact is that when we started in 2006, our first priority was provide water to the waterless. An example -- concrete example is BF Paranaque and then improving the services to 24/7 because a lot of our customers then in 2006 were not receiving 24/7. So it was only in the second phase of our investment program that was focused on the NRW reduction. And as you've seen the story, the journey of Maynilad has been a very successful journey as far as NRW reduction is concerned.

Josine, I'd like to add just a couple of points. The first is that if you total up or you aggregate the length of our pipelines that we maintain and manage in the West zone, it is approximately 40-plus percent longer than the East zone. And then secondly, as Ramon emphasized, when the regulator instituted nonrevenue water as a service obligation in 2023, then you've seen the rapid decrease in our nonrevenue water percentages since then. I think we started the rate rebasing period at 42%. It is now down to 29%.

Okay. For the next question, this is from F. Yap Securities. What is your take on possible spillover of systems loss issue on NRW for water utilities.

I'd like to clarify that NRW reduction is a regulatory and a contractual obligation of Maynilad. We only charge our consumer what the water that they consume, the water that passes through their water meters. Secondly, NRW reduction targets are embedded in our MWSS approved business plan, which includes the costs and the CapEx that are necessary for us to meet these service obligations, including also the penalties that are embedded if we don't -- we miss our service obligation. So that's the difference -- main difference that I see versus the systems loss.

Okay. So this question is from ST Microelectronics. Is there any participation of Maynilad in a Pax Silica initiative.