Basic Sanitation Company of the State of Sao Paulo SABESP

SWB:SAJA

Earnings Call Transcript 2021-Q1

[Mario Sampaio, executive]

Good afternoon, everyone, and welcome to the SABESP video conference to discuss the results for the first quarter of 2021. My name is Mario Sampaio. I'm Head of Capital Markets and Investor Relations for SABESP.

Let me start by informing all participants that this video conference is being recorded. Presentation, followed by the slides are being transmitted over the Internet through the website -- SABESP website and through the MZiQ platform. The presentation will be available for download on the same portal as well as the results for the release. We remind you that the questions will be accepted to the speakers only through the videocast platform.

And before proceeding, we would like to clarify that any statements that may be made during this conference relating to the company's business prospects, projections and operational and financial goals constitute the beliefs and assumptions of SABESP management as well as information currently available for the company. Future considerations are not guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not occur, that is. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future results of the company and may lead to results that differ materially from those expressed in such forward-looking statements.

Let me present today's speakers. We have with us Mr. Rui Affonso, Chief Financial and Investor Relations Officer; Mr. Marcelo Miyagui, Accountant -- Head of Accounting; Agnaldo Pacheco, our Head of Controlship; and Luiz Tiberio, Head of Costs and Tariffs.

Let me now start with some considerations. SABESP reversed a loss of BRL 658 million in the first quarter of 2020 into a profit of close to BRL 500 million in the first quarter of 2021. This almost BRL 500 million in profit was generated in a quarter in which revenue was strongly marked by the economic effects of the COVID-19 crisis. This is particularly positive when we compare to the first quarter of 2020 when these effects were relatively mild. This result demonstrates that the measures taken by management in the past year to mitigate the drop in revenue from nonresidential customers and exchange rate volatility were in the right direction.

Our expense control and management efforts, in which we highlight positive effect from the 8.5% decrease in headcount; the transactions we carried out to reduce our debt in foreign currency, which fell from 55% in the first quarter of '20 to 21% in this quarter; and other measures taken last year to preserve the company's liquidity laid the foundations for us to continue to finance our investments and roll over upcoming debt maturities.

Investments made by the company totaled BRL 1.2 billion on an accounting basis for the first quarter of 2021. That is 63% higher than the same quarter last year. This amount was possible due to the Novo Pinheiros project and also the water loss production program, both of which are hired, contracted based on performance, so they're performance contract, that incentivizes the contractor to accelerate the execution of works.

The positive results obtained by the company's financial management, which is focused on facing the double crisis of 2020, in addition to the outcome of the tariff review process, were recognized by Fitch rating agency, which attributed the maximum national rating to SABESP in May this year. This AAA rating, which is also signed to SABESP by Standard & Poor's in 2008, will allow us to face relevant needs of requirements for 2021 in better conditions, maintaining our liquidity and the pace of investments.

In April, we concluded the third ordinary tariff review process, which approved an 8% real increase to the 4-year cycle. In addition, the current tariff structure, which has been in force for 40 years, also changed and will allow a better distribution of the tariff load to retain and recover markets, subsidize the most vulnerable population and reduce delinquency.

The economic impact of the pandemic are still being felt on the company's results, and the business horizon remains marked by uncertainty and practically -- in practically all the markets. However, the results achieved by SABESP in this first quarter show that our operations are returning to our pre-crisis conditions.

Let's move now to our slides and numbers. Let's -- here in Slide 3. We can see that the total billed volume increased by 2.3% in the first quarter of 2021 over the same period of last year, of which 2.2% was from water services and 2.3% was from sewage services.

Excluding the municipality of Mauá, this increase was 2.6%. We remind you that Mauá's water supply was previously provided on a wholesale basis and shifted to retail in November last year. Note that in Mauá, the same dynamics occur during the transition from the wholesale to retail services with that of the municipality of Guarulhos and Santo André, in which case, billed water volumes drop when compared to the previous volumes provided by the wholesale operation, and this is mainly due to the water loss we found in these regions.

In terms of total billed volume by category, the residential segment was responsible for a 4.5% growth. The industrial, commercial and public categories, on the other hand, had significant decreases of 7.7%, 9.2%, 16.6%, respectively, a situation that is still quite affected by the pandemic, with impacts on our average tariff.

Let's move now to the next slide and go over our financial highlights. First, net income totaled BRL 496 million in the first quarter of 2021 compared to the net loss of BRL 657 million in the first quarter of '20, strongly impacted by currency devaluation and the effects of the health crisis in the economy.

Revenue from sanitation services increased by 3.5% from BRL 3.8 billion to BRL 3.9 billion and reflects the 3.4% tariff adjustment in August 2020 combined with the increase in billed volume. Net revenue grew by 15.7% as a result of construction revenues, which increased substantially in the period from BRL 521 million to BRL 1 billion this year.

Costs, administrative and selling expenses, excluding construction costs, increased by 2.1% and remained lower than the variation of inflation during the same period. As a result, adjusted EBITDA increased by 10.3% from BRL 1.48 billion to BRL 1.64 billion, signaling a return to pre-pandemic levels of EBITDA.

Moving on to Slide 5. Our cost and expenses, excluding construction costs, increased by 2.1%, which was again less than the inflation in the period, as I already mentioned. If we exclude the effects of provisions for doubtful accounts and depreciation, the variation in cost and expenses was even smaller. That is 1.7%, and again, this is a result of the company's management efforts. This result was also influenced by the 8.3% reduction in personnel expenses due to the 8.5% decrease in the company's headcount driven in the last 2 years by the -- what we call here the Knowledge Retention Program, which is necessarily a plant retirement and people replacement program that was concluded in 2020.

General expenses decreased by 11.5% as a result of the lower number of lawsuits compared to the same quarter of 2020. On the other hand, we highlight the 18.8% increase in expenses with services. This is mostly due to the street paving and sidewalk replacement, reading of water meters and maintenance of networks and connection. We also highlight 9.9% increase in electricity expenses. This is mostly triggered by higher prices. And last, depreciation increase of 12.11%, with the operational start-up of assets in the amount of BRL 4.1 billion.

Now let's go to Slide 6, talk about the financial performance. We started off -- we started off with a loss of BRL 657 million in the first quarter of '20, which was strongly impacted by the exchange rate variation, as mentioned. Net operating revenues grew by BRL 635 million, mainly due to construction revenue, which was 96.3% higher as a result of the increased investments.

Cost and expenses, including construction costs, increased by BRL 545 million. Other operating expenses -- revenue and expenses, including equity result, was positive in BRL 12 million. Our financial results showed a positive variation of BRL 1.6 billion, mainly due to the strong currency depreciation in the first quarter of '20. Income tax and social contribution had a negative variation of BRL 573 million due to the increase in taxable income. And last, the result is a net income of BRL 496 million in the first quarter this year.

Let's go to our next slide. In this slide, we provide a view on our managerial indicators for revenue from sanitation services, operating expenses and EBITDA, all this per cubic meter. Other indicators were calculated with the average values for the first quarter of 2021, excluding nonrecurring items and adjusted -- all of that adjusted according to the Brazilian consumer price index, we call EPCA.

As expected, because of the pandemic and the overall economic scenario, the revenue indicator did not recover when compared to the same quarter of 2020. On the other hand, the operating expense indicated decrease in the comparison period, a clear sign that our management efforts have reached expected results. The level of this indicator, as you can see, since the second quarter of 2020, is below the average level observed in the historical series we're presenting to you. Finally, the EBITDA indicator was approximately 2% higher compared to the first quarter of 2020, mainly due to our control of the operating expenses.

Now let's go to our Slide 8 regarding regulation. On April 8, ARSESP, our regulatory agency, disclosed the final technical note with the calculation for P0, maximum average tariff and X factor, in addition also disclosed the new tariff structure, making the beginning of a 4-year -- new 4-year cycle.

The final P0 was set at 5.12 cubic meters -- BRL 5.12 per cubic meter based on prices for February '21. As for the regulatory asset base, the final amount set -- was set at BRL 55.9 billion, which included the municipality of Santo André in the amount of BRL 1 billion, which, if you recall, was not included in the preliminary technical note, and also the reversal of BRL 3.2 billion in the net assets that were disregarded in our long-time discussion related to the first tariff review. Also note that this value sums up to the BRL 1 billion that had already been recognized in the second ordinary tariff review, which then we recovered, BRL 4.2 billion.

We received approval for tariff adjustments in 2020 as follows: 7.6% for the residential and nonresidential segment, minus 1% for the social residential segment and 5.45% increase for the wholesale segment, all of which became effective as of May 10. This is just about a week ago.

In addition, the real adjustment, that is the adjustment above inflation for those categories -- for the residential category, for '22, '23 and 24, were set at 1.5%, 3% and 4.6%, respectively, along with an increase in the number of beneficiaries in the vulnerable residential category and the resources earmarked to promote commercial programs to attract more customers on the commercial categories.

As for the new tariff structure, ARSESP redefined customer groups, changed the billing structure by introducing a fixed portion to the tariff, unified tariff tablets -- charts to partially reduce subsidies between regions and segregated tariffs according to the service provided for water, sewage collection and sewage treatment.

ARSESP also established maximum and minimum limits for variation in revenue. The limit was established at a range of plus or minus 2% of the permitted revenue. Amounts that eventually exceed these limits will be compensated in the next annual tariff adjustment, what brings good security against the lack of revenue predictability, especially with the structural changes that will come effective in 2022. This is because this year, '21, tariff will still be based on the current tariff structure but will include the mechanism anyway that we just mentioned.

Finally, it's also worth remembering that X factor was set at 0.21 per year for this cycle, where in the last cycle, it was set at 0.69.

Now we don't have more slides, but we do have more comments. So let's -- let me -- first of all, regarding the water situation. On our last call, we discussed how rainfall indices are below the historical average, a situation that probably will not be reversed in the coming months given that this is the dry season. From the month of January to March this year, rainfall and affluences, meaning the water that flows into the reservoirs, were below the historical average.

Even so, the water availability in the metro region of São Paulo for metro region water systems are at what we consider adequate levels to cross during this dry period until the beginning of the -- what we call the rainy period as of October. And the reasons, as we mentioned before, are the big investments we made that have significantly increased the water security levels since the last big water crisis of '14 and '15.

Another comment refers to the submission on April 21 by the state of São Paulo executive branch to the state of São Paulo legislative branch Bill Number 251 that deals with the regionalization of basic sanitation in the state of São Paulo, that is breaking down the state into regions to be operated by service operators.

The bill proposed by the government contains 4 regions called units for the supply of drinking water and sewage service. In Portuguese, it's U-R-A-E, it's called URAEs, in which unit 1, it's called Southeast region, is composed of all the municipalities operated by SABESP that already have contract signs or that are located in the greater metropolitan region. There are more than one metro region in São Paulo. So essentially, unit 1 is SABESP today.

The company is monitoring the proposal, which is being conducted on an urgent basis to meet the deadline that was defined by the law. This is the Sanitation Law 14,026, which is not far from now, that is July 15. There are currently 12 proposed amendments to the bill, one of which is questioning the criteria for the formation of these URAEs, in specific case, because it did not take into consideration the limits of high geographic basins.

In addition, you have to remember that other regulations derived from the new sanitation law should follow in the coming months. They are key to the process. And we will clarify issues such as the rules of transition from municipalities operated without contracts; the definition of the methodology for operators to certify economic and financial capacity to provide the service; and third, the rules for the identity of assets not depreciated or amortized, among others. This is very key to the sector.

Our last comment refers to the 2 material facts released on May 2 and 5, referring to the possibility of SABESP participating in a special purpose vehicle to be formed by Igua Saneamento to explore CEDAE's block 2 concession. As disclosed, SABESP had no cost option to join -- the option to join at no cost with a minority stake, the special on the -- the minority stake on the special purpose vehicle controlling this block.

Note that if we had exercised the option, we would have had to participate in the payment of capital and other resources needs required by the project in proportion to our state and under the same terms as Igua. However, after confirming Igua's victory in block 2 auction and analyzing the final terms of the auction, we decided not to exercise this option.

As everyone knows, SABESP continues to evaluate opportunities to participate in sanitations auctions in Brazil and informs that it has not signed any exclusivity agreement with any operator and/or investor, a condition that leaves the company free to choose the best participation model, entry model, et cetera.

Well, this concludes our comments and presentations. We all like to open now for questions and answers. Let me check here. See how we are.

[Mario Sampaio, executive]

Okay. Seems no questions so far. Let me check in. Just checking. Any questions? Okay. Still nothing. Let's give everybody a little bit more time.

Rui, I think your microphone is off.

[Rui Affonso, executive]

Yes?

[Mario Sampaio, executive]

Should we wait a little bit more, Rui? Or would you already take over? [Foreign Language]

[Technical Difficulty]

I think Mr. Affonso has freezed. Let me see. He disconnected. I think he hit the wrong button, guys. Must be showing up. In the meantime, we wait to see if anybody wants to make some questions.

Okay. I think we have one question. Let me check why Mr. Affonso has not rejoined us. I asked my colleagues to maybe call him, see if there's anything happening.

[Benedito Pinto Braga, executive]

I can call him.

[Mario Sampaio, executive]

Okay. Great. Okay. I see there are question. Let me -- there's one question. Rui, you're back.

[Rui Affonso, executive]

I'm back. I'm back.

[Mario Sampaio, executive]

Okay. In the meantime, we have a question, okay?

[Rui Affonso, executive]

All right.

[Mario Sampaio, executive]

Okay. Let me go to the question. Essentially, it's [ Emanuel Griffin ] from [ Griffin Music -- Many Griffin Music. ]

The question is, what's the most recent growth opportunity that you find most valuable in the coming months?

[Rui Affonso, executive]

Good question. In the coming -- a month is a very short time for businesses like water and sanitation. For us, short term is something up to 1, 2 years, 3 years. It's not a really fantastic opportunity in a 1-month time period.

In the next few years, we find that so many big opportunities are ahead of us, especially in increasing our productivity related to water losses reduction, automatization of our plants, automatization and integrating to cell phones, using WhatsApp and other web devices to pay, to receive, to make our connection of our bills and things like that.

Basically, automatizations are huge opportunities for us to grow. And always, we are looking and take a good valuation on the new concessions opportunities. But this takes time. As I said, in water and sanitation, it's nothing to be a huge growth opportunity in just 1 or 2 months.

[Mario Sampaio, executive]

Okay. Let me see if we have another question, guys, check if we go for yes or no. Let me see if there's enough -- a new question. Rui?

[Rui Affonso, executive]

Two questions. I cannot see the...

[Mario Sampaio, executive]

Okay. Look, there's a question here. It seems a simple question. Let's see if we can address it. Maybe it is -- the question comes from [ Dashaw Jennings ] from [ Robinhood. ]

The question is, is the water also being filtered and cleaned through the water lines you're using? How can we answer that? Okay. What we...

[Rui Affonso, executive]

Water, it's cleaned in our water treatment plants, not in our distribution systems. So we clean our wholesale water in our water treatment plants with cleaning material, chemicals. And we distribute it cleaned. So you can drink potable water from -- direct through our taps here in São Paulo. That's to be very straight to the point answer to your question.

[Mario Sampaio, executive]

Okay. Good. For example, like right now.

[Rui Affonso, executive]

Exactly.

[Mario Sampaio, executive]

Okay. It seems no more question. Mr. Affonso, word is on you.

[Rui Affonso, executive]

All right. If there's no more questions, I believe that the IR team has been doing a very good job in order to clarify on time all the questions you had in the past or you may have right now. So we are ready to help you and to discuss with you all the questions you have with Mario, Angela, Juliana, our team of IR here in SABESP.

Thank you very much to join us in this first quarter conference call of results, and hope to see you all soon, hopefully in person after this pandemic crisis. Thank you very much.