Ladies and gentlemen, welcome to Copasa's earnings conference call for the second quarter of 2024. This conference call is being recorded, and the replay can be accessed on the company's website, ri.copasa.com.br. The presentation is also available for download on the platform. Please be advised that our participants will be in listen-only mode during the presentation, and later we'll begin the question-and-answer session when further instructions will be given. This presentation is being recorded and translated simultaneously. Translation is available by clicking on the interpretation button. For those listening to the conference call in English, there is the option to mute the original audio in Portuguese by clicking on "Mute Original Audio." Before proceeding, I would like to take this opportunity to mention that forward-looking statements are based on the beliefs and assumptions of Copasa's management and the information currently available to the company.
Such statements may involve risks and uncertainties, as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors, analysts, and journalists should take into account that events related to the macroeconomic environment, the industry, and other factors may cause results to differ materially from those expressed in such forward-looking statements. Now I would like to give the floor to Mr. Carlos Augusto Botrel Berto, CFO and Investment Relations Officer, who will begin the presentation. Mr. Berto, you can continue.
[Foreign language].
Thank you, Rodrigo. Good morning, everyone. Thank you for participating with us in this conference call. I'm accompanied here by our CFO, Guilherme Duarte, Cleyson Giacomini, Director of Relations with Customers, and Pablo Andreão, IT Environment Officer. Let's now start the company's performance for the second quarter of 2024 on slide two, talking about the results in the second quarter of 2022, which reflects the company's actions in the continuous search for increased efficiency. In the next slides, we will also discuss in more detail the explanations for the main lines of the income statement. We present Copasa's financial highlights for the second quarter of 2024. Net revenue reached BRL 1.7 billion, a growth of 10.7% compared to the same period of 2023. In the cost and expenses line, the amount recorded in second Q24 was BRL 1.17 billion, whereas in second Q23 it was BRL 1.22 billion.
In relation to other net operating income and expenses, in the second quarter of 2024, the value was negative by BRL 30 million, an increase of 17.2% compared to the negative amount of BRL 26 million in the second quarter of 2023. Turning to adjusted EBITDA, it reached BRL 726 million in second Q24, a growth of 12.1% in relation to the comparative period. The margin in the second quarter of 2024 was 41.4%, one percentage point above the margin recorded in the second quarter of 2023. As for the financial result, the amount for the second quarter of 2024 was negative at BRL 119 million due to unfavorable exchange rate variation. As a consequence of the facts presented, net income reached BRL 325 million in the second quarter of this year, 30.4% higher than in the second Q23, which amounted to BRL 249 million.
We will now detail the main variations in the accounts that make up the income statement on slide three, starting with the net revenue from water, sewage, and solid waste, which in the second quarter of 2024 grew by 10.7% compared to the same period of the previous year. Revenue in the second quarter of the current year was mainly impacted by the following factors: tariff adjustment applied on January 1st of this year, with an average tariff effect of 4.21%, as approved by Arsae- MG, and an increase of 7.2% in the measured volume of water and sewage, 7.7% in sewage. On slide four, we show the evolution of manageable costs, which totaled BRL 781 million in the second quarter, corresponding to a decrease of 7.8% in relation to the comparative period.
[Foreign language].
We'll detail a little more the variations recorded. Personnel costs showed an increase of 1.8% and amounted to BRL 407 million, with a salary adjustment of 4.1% applied in November 2023 due to the collective labor agreement, plus a salary increase of 2% granted in February 2024 for around 65% of the workforce, which was offset by a reduction of around 4.5% in the number of employees due to the voluntary separation program implemented in the second quarter of 2023. This program ended in the first half of this year and involved a dismissal of around 730 employees.
The third-party services grew by 17.6% in the second quarter, a growth explained by the increase of BRL 7.4 million in expenses with maintenance of assets and systems, an increase of BRL 4.9 million in services of cleaning, surveillance, courier, and receptionists, an increase of BRL 4.5 million in IT services, and an increase of BRL 4.2 million in water truck services. PPP Rio Manso recorded an increase of 2.6% due to a contractual adjustment that took place in April 2024. The amount of impairment of accounts receivable was 8.5% higher than the previous period, mainly due to the tariff adjustments that occurred and positive variations in billed volumes. The tariff transfer to municipalities increased by 15.4% following the increase in revenue in the comparative periods and the increase in the number of municipalities qualified to receive such transfers, as defined by the regulatory body.
On slide five, we show the evolution of non-manageable costs, which increased by 20.3% in the second quarter of 2024, amounting to BRL 199 million. Let's go into detail about the main accounts that make up this group. Cost of electricity increased by 11.1% due to a 5.4% increase in the company's electricity consumption, as well as a 13.3% adjustment applied by Cemig to energy tariffs effective from June 2023. On the other hand, we had a reduction in expenses related to electrical energy due to the increase in the number of units migrated to Mercado Livre, the free market. In June 2023, there were eight units, and in June 2024, there were 21 units, and the beginning of the purchase of energy from photovoltaic sources as of January 2024, reducing such expenses.
Despite non-manageable and exogenous effects incurred in 2023, such as the adjustment of tariffs to levels higher than inflation, the return of ICMS tax charges, and the end of the tariff subsidy, a downward trend in energy expenses at the company has been observed in the last three years. That's mainly due to actions taken by the company to optimize such expenses, especially the purchase of energy from the free market in 2023, and more recently in 2024, the offsetting of energy from photovoltaic sources. The next ongoing step is the planning for preparation of studies to have energy efficiency from a quantitative perspective, which will allow significant reductions in the specific consumption of electrical energy in kilowatts per cubic meter, that is, lower energy costs per cubic meter of water distributed and sewage collected and treated.
Spending on treatment and laboratory materials decreased by 1.1%, mainly due to the reduction in the price of treatment materials in the second quarter of 2024 compared to the second quarter of 2023, despite the greater consumption of products in some locations due to the rain in the period. We also had a change in the accounting of tax credits related to depreciation, and as of the first quarter of 2024, those accounts started to show a zero balance due to the completion of the process of automatic accounting of PIS and COFINS tax credits and depreciation and amortization expenses that are now recorded directly in each expense account with the corresponding entry in the credits receivable account. Therefore, all inputs used in the company's production process began to be accounted for at the net values of these credits.
Thus, total costs and expenses of Copasa in the analyzed period reached BRL 1.17 billion, corresponding to a decrease of 3.6% compared to the second quarter of 2023. On slide six, we present other revenues, other expenses, equity pickup, and financial result. In relation to other operating income, there was a 33% drop in second quarter of 2024, this variation being explained by the reduction in the reversal of non-deductible provisions. The financial result was negative at BRL 118.7 million in the second quarter of 2024, mainly due to exchange variance expenses resulting from the 10% rise in euro compared to real in this quarter. We now move to slide seven and present data from adjusted EBITDA, adjusted EBITDA margin, and net income.
Adjusted EBITDA for non-recurring expenses related to VSP reached BRL 726 million in second quarter of 2024, whereas in the second quarter of 2023, the value was BRL 648 million. The adjusted EBITDA margin in the second quarter of 2024 was 41.4%. Net income in the second quarter of 2024 amounted to BRL 325 million due to the facts already mentioned in the previous slides. On slide eight, we present the data from the investment program of the company. In the first half of 2024, Copasa invested BRL 901 million, an increase of 33.2% compared to the same period in 2023. Of the total invested in this semester, BRL 420 million were allocated to water and BRL 353 million to sewage. Capitalizations amounted to BRL 110 million. Under the subsidiary Copanor, BRL 22.1 million were invested in the first half of 2024.
On this slide, we also present the value of investments scheduled for the five-year period 2024-2028, totaling BRL 9.8 billion for the period. Now let's go to slide nine, where I discuss the evolution of the company's debt, including data from gross debt, net debt, and leverage. Gross debt reached BRL 5.1 billion in June 2024, of which 14% is short-term debt. On the other hand, the net debt increased to BRL 4.5 billion in June 2024, while in June 2023, it amounted to BRL 3.3 billion. Finally, net debt over EBITDA ratio is 1.6. Going to slide 10, we address the weight of indexes in our funding, the average coupon, debt to equity, and rating. The CDI accounted for 29% of Copasa's debt, a reduction of 16 percentage points in relation to the comparative period.
This drop in CDI share was mainly due to amortizations carried out throughout the year. The debt linked to IPCA increased, now accounting for 28% of our debt. The increase of nine percentage points compared to the reference period was mainly due to the raising of funds through the 18th debenture issue, which took place in September 2023, in a total amount of BRL 900 million, of which BRL 786.4 million under IPCA. The debt in foreign currency refers to the German bank KfW, European Investment Bank, and the French Development Agency, and has increased, now representing around 23% of the total debt as a result of the release of loans in the last 12 months. In relation to average coupon, the percentage went to 7.9% due to the drop in interest rates.
The debt to equity ratio measured by net debt over shareholders' equity went from 43.9% in June 2023 to 59.4% in June 2024. As for ratings, in June this year, Fitch published a report in which the outlook for corporate rating was revised from stable to positive. The company's long-term domestic rating and its debenture issues were maintained at AAA+. On slide 11 of this presentation, we talk about shareholders' compensation. The current dividend policy was approved at a special general meeting held on April 28, 2023. With regard to regular dividends, the percentage of net income distributed varies from 25%-50%. Payments are made within 60 days of approval, with the exception of amounts for the last quarter. These payments are defined in the shareholders' meeting.
Regarding extraordinary dividends, policy provides that there may be distributions subject to the guidelines provided and as analyzed by the board of directors and approved by a special shareholders' meeting. For the current fiscal year of 2024, the payout will be 50% of adjusted net income. With the declaration of regular dividends on June 25 this year, the total amount approved for the first half of 2024 totaled BRL 318 million, of which 75% in the form of interest on equity and the remainder in dividends. It should be noted that at the special meeting held on April 26, BRL 300 million were approved as extraordinary dividends. After the presentation, we now talk on slide 12 about concession agreements and the closing date for 2024. Copasa and Copanor jointly own 337 water concessions, of which 632 are in operation. Sewage, there are 308 concessions, 273 in operation.
As a result, the company serves 11.7 million inhabitants with water and 8.6 million with sewage. On the table on the right, we show 10 main Copasa concessions, which together account for 49% of the company's total revenue. In June 2024, Copasa had 38 expired concessions and one concession whose contract is considered void in court. All these concessions together account for 4.8% of revenues. On slide 13, we show some of our operational data. The ratio between the number of employees per thousand water and sewage connections was reduced from 1.32 in the second Q2 of 2023 to 1.25 in the second Q2 of 2024 due to the voluntary separation programs implemented in 2023, in which 730 employees were terminated, the VSP.
In turn, the loss index measured by the difference between the volume distributed and the measured volume divided by the volume distributed in the last 12 months slightly dropped and went from 38.9% in the second Q2 of 2023 to 38.7% in the second Q2 of 2024. Finally, the delinquency rate corresponding to the ratio between the balance of accounts receivable overdue between 90 and 359 days and the total volume billed in the last 12 months continued to decrease compared to previous periods, reaching 2.97% in June 2024. Closing our presentation, we show the robustness of our water sources used in the metropolitan region of Belo Horizonte. The levels of the reservoirs that make up the Paraopeba system, that is, Rio Manso, Vargem das Flores and Serra Azul, which jointly are responsible for supplying 52% of the metropolitan area, are in aggregate at 75.1%.
With that, we conclude the presentation of the operating financial results for the second quarter of 2024. I turn the floor over to the operator, Rodrigo.
Thank you, Carlos. We now will start the Q&A session for investors and analysts. Please click raise hand if you want to ask a question, and you can click on lower hand if your question has been answered. To ask a question by text, use the Q&A informing name and company. Please hold while we collect the questions. [audio distortion] . Once again, to ask a question using the audio, please click on raise hand. If you ask a question in writing, use the Q&A and send the question with your name and company name. [audio distortion] .
Once again, to ask a question through the microphone, click on raise hand. If your question has been answered, you can lower your hand to leave the queue. To send a question in writing, send it through the Q&A icon informing your name and company name. Please hold while we collect the questions. Nossa primeira pergunta vem de. Our first question comes from Luca Di Bernardi from M8 Partners. Your microphone is open.
Good morning, everyone. Thank you for the call. I have a question regarding the company's debt in foreign currency. We noticed that year-on-year, there has been a large percentage variation. My question is whether the company intends to take more loans in foreign currency. In reading the releases, the company did not have hedge contracts for this type of loans. I would like to understand it from you. Thank you.
Good morning, Lucas.
Actually, the company doesn't have any new plan to take loans in foreign currency. This exposure regarding foreign debt currency will be decreased when we get the funds from BRL 1.3 billion from the 19th debenture issue. So we believe that this exposure is small when compared to the total gross debt. Confirming, we do not have any debt in foreign currency hedged. We are assessing the market for the next months to have a more detailed study about hedge contracts. Thank you.
[audio distortion]. Once again, to ask a question, click on raise hand. If you want to send a question in writing, send it through the Q&A and with your name and company name. [audio distortion] . Our next question comes from Ryan Casagrande. Ryan Casagrande from Vida de Acionista.
Good morning, everyone. My question is about indebtedness.
In the release, we see that there is still BRL 1.5 billion to be released to the company, which corresponds to 33% of the current net debt amount. What are the plans of the company to maintain this indebtedness and the control since we noticed an increase in the leverage?
Hi, Ryan. The leverage went from 1.5 to 1.6 times, and there is still room if you consider the cap, which is three and can reach even four. And this indebtedness is fully aligned with the company's investment plan for future years.
Okay, thank you. This is what I wanted to know.
[audio distortion] . I remind you that if you have a question, you can click on raise hand. You can lower your hand if your answer has been answered.
If you want to ask a question in writing, send it through the Q&A along with your name and company name. Please hold while we collect the questions. [audio distortion] . Managers will now read the questions in writing and answer them. Okay, so we have received a question from Rafael Correia from Ibiúna Investimentos. Good morning, thank you. Congratulations on the results. I would like to have an update on the negotiation processes with municipalities along the negotiation made with Patos de Minas. What is the regulatory impact you expect for OpEx coverage for the municipalities that are under discretionary regulation?
This is Guilherme Duarte speaking. Rafael, thank you for your question. What happened in Patos de Minas and that we have under advanced negotiations with other municipalities expected to be signed this week will be duly communicated to the market.
But these were renegotiations with municipalities that did not agree to the permanence of the company in the municipality and some including a takeover process which was annulled. The companies started agreements not only including a better agreement spoke with commitments and goals from both sides, but especially changing the regulation of these municipalities from discretionary to a contractual regulation with a change in the regulatory agency. Now these municipalities will have their tariff adjusted year on year according to IPCA inflation rate, so they're subject to the regular tariff adjustments as imposed by Arsae. The next one is for January 2026. So the base date for implementation of tariff review are the costs and investments of 2025. So these municipalities will be separate and will not suffer the effects of the tariff review.
What we expect that a total impact for municipalities under discretionary regulations is a positive for the company because except for Patos de Minas and a few others that will announce this week, these are very crowded municipalities that still in the discretionary regulation contributed in the composition of costs of the concession as a whole, especially those that are not self-sustainable. So these municipalities now carry for them or for the company the absorption of all the operational efficiency we've achieved. We do not return it to them in the next tariff review. And for the remaining municipalities that remain under the discretionary regulation, they need the required revenue to be provided by the regulator Arsae in the next tariff review to cover the excess, the exceeding costs that are under the discretionary law and will no longer be offset by such municipalities.
So we see a double positive effect as these municipalities will leave and we'll have a gain of efficiency. And those that remain that were not were under subsidy, the regulatory agency will have enough revenue to cover the costs that used to be subsidized by these municipalities. And this will have a lower residual impact on the tariff review. I hope I made myself clear, but this is the answer. So just to complement the two, there are two municipalities that will announce this week and that will make us with almost 4% of our revenue coming from discretionary regulation to contractual regulations.
A question from Adolfo Braga. Are there good prospects from new concessions in the state of Minas Gerais?
Good morning, Adolfo. This is Guilherme Duarte speaking. Thank you for your question and for attending the call.
Adolfo, yes, if we observe Copasa covers 638 municipalities out of 856 municipalities in the state of Minas Gerais, approximately 12 million inhabitants in total, close to 21 million inhabitants. So Minas Gerais provides a very good scenario so that municipalities can make the invitation to bid for their services and engage a service provider. The company is paying attention to such municipalities, not only in the bidding processes of the municipalities. We participated, we don't have any answers, but we participated in ongoing processes. And the company is getting ready to be very competitive at future bidding processes that will soon be available.
The next question is from João Fagundes from Bradesco BBI. Good morning. Could you comment on the dynamic of volume for the remainder of the year?
Good morning, João. This is Guilherme Duarte speaking.
Thank you for attending and for your question. Yes, if we look on the previous year's historical data, the trend is for the company to have an improved involvement in the second half of the year, especially if we consider the paradigm of the year of 2023 parameter in which there was a high increase of temperature between October and November. If this is confirmed again this year, it's likely for the company to have higher volumes resulting from weather conditions. In addition, for this quarter, there has been an increase in volume of 7.7% that results from commercial actions, improvement in metering and bringing new customers to our customer base, improvement of reconnection processes, and reduction of losses.
Since this is a continuous improvement process in the company, this plus the weather conditions that are likely to take place in the second half of this year, we have a positive outlook for the second half of the year.
A question from Vladimir Pinto from XP. Good morning. Could you talk about the tariff review process and the prospective investments that were not included in the last cycle?
Good morning, Vladimir. This is Guilherme Duarte speaking. Thank you for attending and for your question. Vladimir, the tariff review has been opened by the regulatory agency with its first public hearing. The company has a strategy and initiative to revert some points in which we felt that our questions were not met, including the possible change in the criteria to analyze the asset base of the company.
We'll send a suggestion in due time with a suggestion of a, instead of a base that looks towards the past, but rather a base that looks in the future cash flows of the company with the recovery of BRL 700 and some million reais that were not duly recognized in the last tariff review. This is some in-house work that the regulatory area of the company under Clayson Giacomini is working on.
The next question from Gustavo, individual investor. Has there been any advance regarding the federalization of the company?
Good morning, Gustavo. This is Guilherme Duarte speaking. Thank you for attending and for your question. As for the company's management, we have information that were given to the market by communications sent to CVM and the market. The government of Minas Gerais has not informed the company formally about including Copasa in the federalization process.
We don't have anything new other than the news that has been published. In the event there's anything new, the company will answer on a timely basis, communicating the market by the proper ways as a material fact, in a material fact, or as an announcement made to the market.
A question from Renato Luiz. What is the dividend policy for the next few years? Will investments increase?
As I said, the payout of the company is currently at 50%, and for the next five years, 2024-2028, we estimate investments of around almost BRL 9 billion.
Question from Lisandro Braga, individual investor. Good morning. Congratulations on the results of the quarter. I would like to know more about the outsourcing costs. Has this increase in the quarter been punctual? If you could clarify on what you expect for the next quarters, I would like to know.
Thank you and have a good week.
Good morning, Lisandro. Thank you for the question. This is Guilherme Duarte again. It's important to clarify about outsourced services or third-party services. When you look at a comparison year-on-year, it seems a large percentage amount, but when you look at the absolute values, this is fully under control according to the company's budget plan because part of it corresponds to a migration of services that were in-house and now are provided by third parties. So when you look at the decrease in or the cost that the company did not have in labor and the increase in these outsourced services, you see that there is no such high increase. But when you look at the absolute values that we saved in labor costs with the absolute value increased in third-party services, we see that it was positive for the company.
And also, the third-party services have impacts that are not resulting from outsourcing, but other factors such as agreement adjustment values. As I mentioned in the last conference call, the improvement of our call center, for example. We doubled the number of positions in the call center that we already have with improved customer service, with a resolution rate from 50% to more than 90%, with an increase that was not equivalent to the doubled efforts. So year on year, if you look at third-party amounts, it seems too high, but if you consider the quarters, you see a new dynamic in third-party services that is remaining at the same level, and we are keeping close control of that.
This is offset either by the improvement of the services provided with the factor X, that is a bonus for the company on year factors, as well as for reduction in labor costs.
Next question from Mário Bobato from Banco Safra. Could you talk about the contracts profile of energy for the company? What percentage do you have in contracts in the free market? Prices, BRL per megawatt, duration of such agreements, and how these profiles should evolve in the midterm.
This is Guilherme again, Mario. Thank you for your question. I'll try to translate your question by showing the company's energy scenario. We have an average demand of 110-115 MW average of energy that are distributed, 50 MW average MW in high voltage that are covered by free market contracts. We have advanced considerably in migrating to the free market.
There is an amount of low voltage, 8-20 average MW that we started migrating to distributed generation in the beginning of 2024, with a ramp-up to be finished shortly. Going back to free market, our agreements with an average duration of five years, and the company is paying attention to new opportunities given the windows of opportunities brought in the migration to distributed generation, with a reduction of expenses that is above the average observed by the market. Our contracts estimate a reduction of 16%-17% compared to the distribution company tariff. When you have distributed generation, since it's not a self-generation, there is a discount obtained as compared to the distribution company tariff. We have 25-35 average MW in the retail market, which are units connected to average voltage or middle voltage, but which are not eligible for the free market.
We are negotiating the migration of such units to a self-generation system from the company with no equity because the regulator does not consider investment in energy for the asset base, so it wouldn't be paid out for the company. So we expect a significant reduction in the energy consumption in these loads when compared to the tariff of the distribution company. We are in advanced negotiations. We expect to sign this agreement still in the second half of 2024. For the free market, the current ones will remain in place until the end of 2028.
Next question from Lucas Rocha. Congratulations for the results of the company. About profit reserves, we expect that this year, 2024, the reserves will exceed the capital. What do you plan to do?
The answer is yes, Lucas. We estimate that the profit reserve will exceed the capital stock.
According to the rule, there are two possibilities. We can either capitalize reserves or pay out dividends. We'll make this study towards the end of the year with an impact likely to happen in 2025.
[audio distortion] . Ladies and gentlemen, the conference call of Copasa has now ended. We thank you all for attending and have a great day.