Basic Sanitation Company of the State of Sao Paulo SABESP

SWB:SAJA

Earnings Call Transcript 2022-Q1

[Mario Sampaio, executive]

Mario Sampaio and the collections director and IR Director will now open our cameras. I would like to introduce the participants, Dr. Benedito Braga, SABESP's CEO. He'll be able to attend the beginning of this call only. He'll be here for the opening of the call, and then he'll have to leave. Osvaldo and his team will remain with us. Osvaldo Garcia, the CFO and the IR Director; Marcelo Miyagui, Accounting Director; and Marcel Sanches, Regulation Director.

Before I turn over to Dr. Braga, I would like to give you some information. First, this call is being simultaneously translated into English, and it's also being recorded. We'll be speaking more slowly so that we have some leeway between the end of the answer before we begin asking the next question, so that we can have a smooth simultaneous translation. So that transition will be slower. But things will be better for those who are attending this call in English.

As I said, it's being recorded, it will be available to be downloaded at SABESP IR website, and you have already received our press release. Let me just say that any statements that can be made here related to the company's business perspectives, its projections, financial and operational goals, they're based on beliefs and premises on the part of this company's senior management as well as information currently available to the company.

Future considerations are no guarantee of performance because they involve risks, uncertainties and premises because they relate to future events that may or may not occur depending on circumstances. Investors should understand that economic conditions, industry and overall conditions and among other operational characteristics may affect future results of the company that can lead to results that are materially different from those that were expressed in these future considerations. I'll turn it over now to Dr. Braga. You have the floor now, Mr. Braga. Please unmute.

[Benedito Pinto Braga, executive]

Thank you. I thought you were going to do that. I hope you can all hear me now. I would like to thank all of you for attending this call, and I'm speaking to investors, analysts and the press. I bring good news. I'll be talking about the latest developments of Law 14,026, a new legislation that has imposed new goals for 2033 as you are all aware. We had to, therefore, adjust our contracts, over 200 of them.

We had to make some adjustments, oftentimes minor adjustments. The law stipulates that you have to have 99% drinking water. In some contracts, that number was 98.5% and things of that sort. Anyway, these adjustments had to be made. We worked hard to make these changes to contracts as fast as we could. And we have managed to do it. The situation is, therefore, very comfortable. These additions to the contracts have been signed by mayors and by our company. And this has happened in metropolitan regions. The government has already signed it because the management of these supplies is a joint service between the city and the state.

In actual fact, all our major assets are -- in a sense, these contracts, that's again according to the new water and waste treatment act, these companies had to prove they were financial and economically sound to meet these requirements. That, of course, required a lot of work especially from our economic and financial department and IR departments.

I would like to congratulate everyone led by Dr. Osvaldo Garcia. He was diligent in leading that process and submitting that requirement to the regulatory agency, which is ultimately responsible for attesting that economic financial capacity. Therefore, the company is abiding by these new regulations and prepared to meet these new requirements that have been imposed by this new regulatory act.

The National Water Agency, ANA, has indeed a very important mission, which is to regulate new indicators that must be included in these services contracts. And they have to do with losses, affluence, the consistency of service. 4 of the Board members of this agency have been recently approved by Congress, and they have taken office quite recently.

Some dates, some deadlines, such as the first semester of 2022 may not be met. We'll have to wait for further decisions on their part in order to implement these indices, these indicators, as well as some criteria. As far as payments for assets or reimbursements, once contracts are terminated or new contracts are signed, so as far as ANA or ANA is concerned, we still have to wait for some time to see how they're going to play out.

However, the company, SABESP is prepared to meet whatever requirements are determined within this framework. And this is up to the national agency, ANA, and the regional agencies will have to follow through. In our case, ARSESP is up to that challenge. As far as results on the first quarter go, figures are public. We've achieved a outstanding financial results. I'll turn over to Dr. Osvaldo to take it from here. And once again, I would like to apologize. We just had some a pressing matter and I have to address that last minute issue, but you will be in better hands with Dr. Osvaldo and the entire team. Thank you. Over to you, Osvaldo.

[Osvaldo Garcia, executive]

Good morning, Mr. President. Thank you for attending SABESP's earnings call. We'll be discussing results for Q1 of 2022. On Slide 2, we had a 0.4% drop in total collections or billings in Q1 of this year, 1% for water, an increase of 0.4% in volumes of sewage. We had milder temperatures, and that drop is directly related to the drop of 1.9% of the total volume of our systems.

Consumption profile indicates that with more people moving about as a result of better pandemic numbers and the higher vaccination penetration in the state, residential consumption was down 0.8%. And at the same time, more public consumption of 13.2%. Commercial consumption was up 1.2%, bringing that average tariff to be higher, offsetting less volumes.

On the next slide, let me take a look at the financial highlights. Revenue from water treatment was up 9.2% from BRL 3.9 billion to BRL 4.3 billion in Q1 of '22. Among others, the main drivers include 7% tariff increase in May 2021 and higher average tariff from higher volumes for both commercial and public despite that overall decrease in the total volume.

Net revenue was up 0.1% (sic) [ 4.1% ] from BRL 4.7 billion in Q1 '21 to BRL 4.9 billion in Q1 of 2022, despite construction revenue was down, a 13.2% decrease, BRL 135.1 million. General expenses, including construction costs, were up 4.3% from BRL 3.6 billion in Q1 '21 to BRL 3.7 billion in Q1 '22. When we exclude construction costs, that increase was 11%.

Adjusted EBITDA was up 5.2%, reaching BRL 1.7 billion. EBITDA margin, not including revenue and construction costs, was down from 44.2% in Q1 '21 to 42.7% in Q1 '22. That was impacted by higher costs and increase in revenue. Net revenues was BRL 975.6 million, up BRL 478 million when compared to Q1 2021, supported by positive financial results of BRL 340.1 million due to favorable foreign exchange variations in that period.

Onto costs and expenses now. They were up 11%, in other words, BRL 286 million. They reflect mostly estimate losses of doubtful collection, power, depreciation, amortization, treatment materials, salaries, benefits and welfare obligations. The estimated losses of doubtful creditors were up BRL 56.6 million or 46.7% given higher delinquency rates in Q1 '22 when compared to the first quarter of 2021.

As to the fourth quarter of 2021, there was a reduction of about BRL 80 million in this expense. Higher energy costs was 14.8%, BRL 53.1 million. The drivers were average tariff increase in regulated contracted that was 37.9% increase because we were under the water shortage alert in the first quarter of '22. Cost control measures were adopted, that was about [ 6.9% ] and partial migration to the free environment, trying to mitigate the pressure of this basic input.

Depreciation and amortization expenses were up BRL 47.6 million, 8.8% due to BRL 4.4 billion of intangible assets as a result of growing infrastructure investments. Treatment materials expenses had a substantial impact. They were up 48.9%, BRL 48.4 million. This is due to higher prices as well as more use in water treatment stations for both water and gross water, salaries, benefits and welfare obligations of BRL 46.7 million. 7.5% is below inflation levels in that period.

In other words, costs are still under pressure for higher inflation rates, be it directly or indirectly. That's why we have to control even more stringently these expenses.

Next slide, please. On to the financial performance now. This is the chart. Profit was BRL 496.8 million and these are the variations for the period. Net operational revenue was up BRL 193 million because of higher tariffs, the increase of average tariffs and more volume build in commercial and public categories and higher tariffs and smaller volumes in residential consumption.

Costs and expenses, including construction costs, were up BRL 153.2 million mainly because of higher inflation in the first quarter, as we said before. Other revenues and operational expenses, including equity, had a negative variation of BRL 10.6 million. The financial result was up BRL 694.5 million, driven mainly on foreign exchange variation on loans and foreign currencies, especially the yen. Brazilian currency was appreciated when compared to the yen of 19.5%, when compared to the dollar at 15.1%.

Income tax and social contribution were negatively down BRL 244.9 million as a consequence of better results in the first quarter of '22. So we had more income, and we had positive foreign exchange variations. Net revenues reached BRL 976 million. On April 24, we have celebrated our 20th anniversary in the new market listing. And on May 9, 20 years we've been listed at the New York Stock Exchange. Going to -- becoming -- or going public rather was key for the company to attract private and public funding and improve its services.

Investments went from BRL 1 billion a year 20 years ago to an average of BRL 5 billion a year today. That kind of investment, it accounts for about 1/3 of all total investments in water treatment in Brazil. That was only possible because we have stronger governance, which is key to attract private capital, both on the side of equity as well as the debt side. The mix of -- the excess mix of private and public capital helped us diversify sources and extend our debt profile and reduce the cost of debt and loans.

In sum, that market exposure, proven by 20 years of stock exchange listing and improving our governance, allow us to have access to capital that ensure liquidity, which is key for the company to meet our customers' needs and our commitment to society. This is the presentation. We can now start the Q&A session. Back to you, Mario.

[Mario Sampaio, executive]

Thank you. I would like to ask my colleagues to open their cameras. Before we start, let me give you some reminders. You can only submit your questions in writing. Use the chat box. And analysts and investors will ask the first questions, and then we'll have questions from journalists. This call will take about an hour. So we have 40, 45 minutes for investors. And then we'll have the generalists' questions. Given these time constraints, we may not be able to answer all questions. We just would like to remind you that you have the IR website, and we remain available to answer questions you may have. I'm speaking more slowly to help the interpretation. But at the same time, we're still sifting through the questions.

We have 4 questions, Osvaldo. Can I ask the first one?

[Osvaldo Garcia, executive]

Yes, go ahead.

[Mario Sampaio, executive]

All right. Let's go. We have 4 questions. The first one comes from [ Eduardo Lazareti ]. Here's his question. ADA was up almost 50% year-over-year from BRL 177 million to BRL 121 million in Q1 of last year. So here's his question. What is the dynamics playing out in terms of collection with higher tariffs, plus inflation, plus less purchasing power in the population? What's your take? ADA behavior this quarter and in the quarters to come. This is the first question.

[Osvaldo Garcia, executive]

Let me try to address that one. ADA, allowance for doubtful accounts, is higher when we compare to the first quarter of 2021. But it's significantly smaller than Q4. We are now intensifying these collection efforts, and we hope to bring these numbers back to the standards or levels we had even before the pandemic. The country's economic scenario, as you put it, it is something to be taken into account. We believe we're going to reach that goal and we're working to intensify these initiatives. And we've seen that in the last quarter results are beginning to show.

[Mario Sampaio, executive]

Okay. On to the next question. That's [ Marcelo Gonçalves ] question. There was an improvement in average tariffs in the first quarter when compared to Q4 2021. Could you give us more details as to what the drivers were for that improvement in the average tariff?

[Marcelo Miyagui, executive]

What helped that improvement from Q4 of last year to Q1 is due to better pandemic results. People began to move about more often. Residential consumption was down. However, nonresidential consumption, commercial and public consumptions were up. Since they have higher tariffs, the mix for the segment was higher than what we had in the past. And we believe that this mix should remain in the quarters to come. Next question, Mario.

[Mario Sampaio, executive]

There are actually 2 questions from [ Julia Zanielo ]. The second question is about ADA, and I think we've addressed that. I'll be reading just the first question that deals with something else. What are your expectations as to cost increase for the next months? Is it getting any harder to sign longer contracts with suppliers? That's the question.

[Osvaldo Garcia, executive]

Just like I said in the presentation, higher inflation rates pose challenges. We have the issue of inflation itself and the inflation in our industry, which again under this new legislation, will put even more pressure in the years to come. Electricity was a significant component. We expect that growth rate to come down, but other inputs are under a lot of pressure. Labor should reflect inflation rates of last year. This agreement will be on [ EMENA ]. Part of that imbalance is now being captured by our tariffs. That took place on May 10, and it should be implemented fully as of the third quarter of this year. These price increases are across the board.

And yes, we have been having a hard time signing longer-term contracts. That has to do with the inflation rate. So it is a challenging scenario. We are doing everything we can to bring costs down or at least trying to mitigate this cost increase caused by inflation -- higher inflation rates.

[Mario Sampaio, executive]

Thank you, Osvaldo. [ Marcelo Sundry ] is next. He asks 2 questions. It's a compliment. First off, I would like to congratulate the company for its results. My question is about the work in Pinheiros River de-pollution. What are the KPIs? What are the landmarks you've already accomplished? Would you like to address this one? Now you are muted.

[Osvaldo Garcia, executive]

We believe that the Rio Pinheiros cleaning project, we deem -- we believe it's been very successful. We have to do basic treatment and that has to do with the number of connections we've had. So we are pleased with the number of connections, 538,000 households, 1% above our target. So we are very hopeful that all our goals will be met by year's end. 1.2 million people, that means dignity, clean water, ESG being treated responsibly. Back to you, Mario.

[Mario Sampaio, executive]

Question number two. The question is about the migration of consumption from ACR to the free market or to distributed generation projects. What has been done along those lines? And how much of the migration should we expect and -- as far as reduction of energy costs in 2022?

[Osvaldo Garcia, executive]

As to electricity management is one of our main inputs, we've been migrating between the 2 systems, depending on the tariffs themselves. We'll be trying to mitigate these costs as much as possible. Auctions and the way we contracted out this electricity, we have been expanding as much as we can. Ultimately, we would like to have a more predictable, more concrete mix. As to generation, this is true. We've been trying to invest in energy generation, both in our stations as well as reduction of consumption. Just recently, we have introduced a solar energy generation system, a photovoltaic system. And we are in the process of choosing partners that can help us join this market. We can become a major supplier there. Again, it's not only -- it not only requires an engineering effort in the acquisition portion but at the same time, technical improvements that will reduce energy consumption. Back to Mario.

[Mario Sampaio, executive]

A question from [ Daniel Olmeida ]. Very straight to the point. Could you talk about the indicator net debt over EBITDA? That's the question. Can you elaborate on that ratio?

[Osvaldo Garcia, executive]

I can't recall that off the top of my head, Miyagui, can help me. I think it's 2.69, right? Our current ratio is 2.69, and our limit is below 3.65. Yes, for net debt, it's 3.5. Yes, 3.5. And we are at 2.69. In all budget projections, both for this year as to the multi-annual budget, that ratio has been similar, which is healthy, the way we see it. Would you like to comment on that, Miyagui?

[Marcelo Miyagui, executive]

When we compare it to the first quarter, it is within comfortable levels.

[Mario Sampaio, executive]

The next question comes from [ Victor Burke ]. Congratulations on your results. Good morning. You have talked about additions to SABESP contracts and the proof of financial capacity for the new legislation. Other Brazilian capitals could not prove that financial capacity and should be auctioned off. What is SABESP's appetite to operate water and waste treatment facility or concessions in other states?

[Osvaldo Garcia, executive]

Our strategic planning states that the company should make good use of any opportunity available, especially in our water and waste treatment business, which is our core business. Some companies did not prove that financial health based on ANA's publications in its own website. Some cities could not make that claim or not prove their financial soundness. And these cities will have to take action as far as these suppliers are concerned. These cities will have to come up with some sort of procedure, be it an auction or maybe hiring somebody else's services. Within SABESP, we are monitoring these processes. We're paying close attention and if we can participate, some that can contribute to our results, they will be considered. However, given our logistics constraints, we'll be paying closer attention to opportunities within the state of São Paulo. Marcelo, would you like to say something? Or Marcel, would you like to say something?

[Marcel Sanches, executive]

No, that's clear. We have to do our homework just like both of you have said. We are fully compliant to the new regulations. Almost all our contracts, just 0.5% of our revenues are within that irregular category, just 9 cases. These contracts haven't been signed. We are favorably positioned when we compare to the market. As you said it, we're paying close attention to the marketplace.

[Mario Sampaio, executive]

Very good. On to the next question. [ Edgar Perloti ] is next. Can we expect tariff changes this year or any other adjustments will be transferred over to the next tariff cycle? That's the $1 million question, right?

[Osvaldo Garcia, executive]

That will depend upon the regulators. That is up to ARSESP. That's the state's regulator. They ultimately determine how these implementations will take place, if so. The company was getting ready for that gradual implementation right now at the beginning of the year. But we were forced to postpone that. As soon as that approval is given, the company will be ready to meet. So the company changed its commercial system to be prepared for this new phase. And we're still adjusting to this new system to be able to implement it as soon as the agency approves it.

[Mario Sampaio, executive]

Next question from [ Marcelo Gonçalves ], but it's been addressed in [ Edgar Perloti's ] question. I think your question has been answered already. I don't see any other questions from analysts. I think we can open up for journalists now. Yes, go ahead. Now, it's up to you. Journalists, of course, analysts and investors can ask further questions if they so wish. Let's wait for a couple of seconds for the journalists to submit their questions.

I think we have our first question. That is from [ Juliana Estigarribia ]. So here's her question. What are the collection alternatives vis-a-vis higher interest rates in a more challenging global environment?

[Osvaldo Garcia, executive]

I think you can answer that question or feel free to jump in. Our collection plan is prepared ahead of time, and we do that with our institutions -- with institutions that support us. Since our matrix is very diversified, we don't have just one source of revenue or financial sources. We haven't seen any major difficulties deriving from that. And the amount we have collected are according to the budget according to our plans. And this has been included in those reports in which we proved we are financially and economically sound. And we detailed those financial plans. Of course, this is confidential. But I can tell you that everything has been addressed. As to the future environment. We are paying close attention to [ OESG ]. We've been to New York. Investors are demanding. Those that have available funds, since SABESP is a company that has ESG in its core, in its DNA, this is a market we'll be taking -- we'll be paying close attention and benefit from it.

[Mario Sampaio, executive]

I think you've covered it. I wouldn't have anything else to say. I just would like to ask journalists whether they have any other questions. Let's hold for a second.

[Osvaldo Garcia, executive]

Mario, I think we don't have any more questions.

[Mario Sampaio, executive]

I think we can call it a day then. You have the floor for your final remarks, Osvaldo.

[Osvaldo Garcia, executive]

Once again, I would like to thank everyone for attending. I once again would like to say that we are committed to control costs, especially. We believe that this next period, still having higher inflation rates, this is going to be very challenging. However, the company is well prepared. It has governance and it has a well-structured strategic planning, and we can foresee these difficulties along the road. Thank you, and we remain optimistic as far as the company goes.