Basic Sanitation Company of the State of Sao Paulo SABESP

SWB:SAJA

Earnings Call Transcript 2020-Q2

[Mario Sampaio, executive]

Okay. Good afternoon, everybody. Welcome to SABESP's video conferencing to discuss the results for the second quarter of 2020. My name is Mario Sampaio. I'm the Head of Capital Markets and Investor Relation. We will inform all participants that this video conferencing is being recorded. The presentation accompanied with the slides are being broadcasted in the Internet through the company's website and the MZiQ platform. The presentation and earnings release will be available for download on the same portal. Questions made to speakers will be accepted through the videocast platform only.

But before we proceed, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of SABESP's management and on information currently available to the company. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of SABESP and could cause results to differ materially from those expressed in such forward-looking statements.

Let me -- let's move and introduce everybody that we have with us. Let's start with Mr. Rui Affonso, he is the Chief Financial Officer and Investor Relation Officer. We also have with us Mr. Agnaldo Pacheco, he is the Controller, Company Controller; Mr. Marcelo Miyagui, Head of Accounting; and also Mr. [ Luis Chivario ], Head of Costs and Tariffs.

Now I will present the highlights for the second quarter, starting with some initial highlights. Let's start saying that this was a typical quarter, with the most intense month of social isolation due to the pandemic, which aggravated by the economic context or -- of high stability brought adverse effects for the company. The effect of exchange rate devaluation on foreign currency debt and a relevant impact -- had a relevant impact in the result. The consumption of commercial, industrial and public customers, categories that have a higher tariff, decreased and delinquency increased. These facts added to the bill payment exemption for customers in the Residential Social and the Residential Favela categories, along with the postponement of the tariff adjustment made this scenario even more challenging for us.

We didn't stand still during this time and kept things moving. On the operational side, we reduced cost, secured markets by signing contracts, 13 municipalities in the quarter and concluded the important negotiation with the municipality of Mauá, which was previously served on a wholesale basis and which had a historic bad debt with SABESP.

From a financial point of view, we concluded the 25th and the 26th debenture local bond issuance, adding them up sums to -- close to BRL 2.5 billion in capital raising. We also reduced from last quarter -- previous quarter to this quarter our FX exposure from 55% to 34%. And we have advanced in negotiations with other institutions that can provide funding for the company's strategic projects and debt refinancing.

So let's go now to the numbers, starting on Slide 3. We will begin on Slide 3, where you can see a 2% reduction in total billed volume, 2.1% in water and 2% in sewage, including -- excluding the volumes in the recently included municipality of Mauá and Santo André, the volume from the wholesale and also from the customers in the Residential Social and Residential Favela categories. However, as expected, the consumption mix changed among the categories. Volume in the residential category increased by 0.7%, while the commercial, industrial and public categories were strongly impacted by the new dynamics arising from the COVID-19 crisis. Volumes fell by 18.4% in the commercial category, 16.7% in the industrial category, and 24.5% in the public category when compared to the second quarter of '19. The migration of consumption of the categories with the higher tariffs, the commercial, industrial and public, impacts directly, obviously, the average tariff prices and consequently, our financial results.

Let's move now to Slide 4. Here, let's talk about financial highlights. Income totaled BRL 378.2 million in the second quarter of '20 compared to BRL 454.4 million in the second quarter of '19. Although being heavily impacted by the COVID crisis and consequently, by the worsening of the global economic scenario, the expense containment measures implemented in the first quarter, together with the agreement signed with the municipality of Mauá resulted in a positive bottom line in the period. Adjusted EBITDA increased by 28.4% from BRL 1.23 billion in Q -- second quarter '19 to 1.8 -- BRL 1.58 billion this quarter -- last quarter. Net operating revenue grew by 10.9% from BRL 4 billion in second quarter '19 to BRL 4.43 billion in second quarter '20. The agreement signed with the municipality of Mauá led to positive [Technical Difficulty]

BRL 193.6 million. As for cost, administrative and selling expenses and construction costs, the increase was 4.9%. Excluding construction cost effect, expenses fell actually 6.6%, contributing to an increase in the operating margin.

The adjusted EBITDA margin was 35.7% compared to 30.8% in '19. The adjusted EBITDA margin was 42% in the last 12 months. With the write-offs of revenue and construction costs, that is disconsidering them, the adjusted EBITDA margin was 45.7% in second quarter '20 compared to BRL 36.7% in second quarter '19 and 50.2% in the last 12 months.

Now let's go to Slide 5. Here, we will analyze costs. Compared to the previous year, costs, administrative and selling expenses and construction costs increased BRL 157.6 million or 4.9%, as already mentioned. However, excluding construction costs, and also, as mentioned, cost and expenses fell 6.6% from BRL 2.52 billion to BRL 2.36 billion. Compared to the previous year, nearly all expenses, as you can see, fell.

Some of the most significant decreases were the BRL 113.3 million or 14.7% in salaries and payroll charges and pension plan obligations, mostly and mainly by the reduction in medical expenses and of the consent for the retirees and the fact that the salaries were not adjusted this year.

The drop in general expenses also contributed significantly with the reduction of BRL 134.7 million or 39.7% due to lower provision for payments of lawsuits. Closing of lawsuits with the municipality of São Paulo in the second quarter of '19 due to the agreement signed and reduction also in the transfer to the municipality fund of São Paulo, as the municipality revenues fell during the period. It's worth noting that 45% or BRL 36.4 million year-over-year increase in the expenses with allowance for doubtful accounts for the quarter. However, it is less than what we provisioned actually in the first quarter of this year.

Let's quickly then go to Slide 6. Let's analyze the changes in the results. Net income fell by BRL 76.2 million. Net operating revenue increased by BRL 434.6 million. Costs and expenses, including construction costs, grew by BRL 157.6 million. Other operating expenses and -- revenues and expenses [Technical Difficulty]

a positive BRL 111 million. Financial results fell by BRL 519.9 million [Technical Difficulty]

of the real payout against the dollar and the yen. Finally, income tax and social contribution fell by BRL 55.5 million in the view of lower taxable income recorded in the quarter when compared to the same period in '19.

Let's now move to Slide 7. On this slide, we will update on the company's initiative to guarantee the execution of investments and refinance of debt during this year. As we mentioned in the call for the first quarter of 2020, BNDES opened a program that provides for the suspension of debt service for a period of up to 6 months. [Technical Difficulty]

We managed to suspend the debt service for 5 months, which is equivalent to a total of BRL 130 million that will not have to be disbursed this year and that will be added to the principal of the debt that will be paid in the remaining terms of the contract. So something very attractive. Also in relation to BNDES, we obtained an advancement [Technical Difficulty]

12-month period, that will go into our cash immediately now in July -- it went in July, actually.

In the case of the program, the same similar program that provides for the suspension of debt services with Caixa Econômica Federal, the social bank, we have already requested and are actually waiting for a statement from the bank. With regards to the IDB, Inter-American Development Bank and the World Bank also, both multilateral institutions, we requested advances in reframing of project that, in case they are approved, involves anticipation of disbursements that could reach almost BRL 500 million. And now we are actually waiting for them to come back to us with their appraisal on what is possible or not to move on for this year. We will have something, but we want to know how much this year.

On the side of funding from the capital markets, on July 10, the 26th debenture issuance -- we issued the 26th debenture in the amount of BRL 1.045 billion. This debenture was structured according to Law 12,431, in this case then being classified as an incentive or an infrastructure debenture, as you can see by the terms we obtained. So being a specific [Technical Difficulty]

first series is in the amount of BRL 600 million with interest rate at IPCA plus 4.65% per year, 7-year bullet maturity. The second series was issued in the amount of BRL 445 million with interest of IPCA plus 4.95% per year and maturity in 10 years with amortization in the 8th, 9th and 10th year.

As a reminder, the company has already mandated IDB Invest for a loan in reals of up to BRL 600 million. The structuring process is advanced and once completed, will add resources for CapEx and to support the company's liquidity. Adding up all the funding efforts so far, we understand that we have already secured a volume of funds that allow us to redeem the main debts due by December of this year in advance.

Let's now move to the next slide for matters related to regulation. We have recently had very important definitions. In July, on the 15th, ARSESP published Resolution 1,021 authorizing the application of the tariff adjustment index of 3.4026%, which reflects the annual adjustment of 2.4924% and the compensatory adjustment for the [Technical Difficulty]

0.888%. The latter actually refers only to the compensation for the postponement of the application of the [Technical Difficulty]

exemption from payments of the Residential Social and Residential Favela categories. [ ARSESP ] has said that it will treat this matter together with the discussions on the third tariff review. Still regarding the clients on Residential Social and Residential Favela, the ARSESP's Resolution 1,038 was published on the last 14th, extending the actually the exemption under the same conditions as the previous exemptions, but this time until September 15.

Regarding the tariff review, we have concluded the public consultation on methodology and WACC. There was acceptance by ARSESP of relevant contributions from SABESP for both topics. It is our view that so far, the process is evolving in a technical, transparent and a very balanced way.

Some highlights of the response are, the consideration of effects of the COVID-19 crisis on consumption history, the level of initial [Technical Difficulty]

proposed is not feasible to be achieved compared to the current ones. So that's an issue that will be discussed in public [Technical Difficulty]

Related to the exemption from the residential tariffs that will be dealt with -- in a specific [Technical Difficulty].

With respect to the regulatory asset base, the inclusion of investments until December of 2020, an old claim from the company, ARSESP open the possibility to evaluate exclusions made in the first tariff review, and that is scheduled for the second quarter -- second half, sorry, of 2020. In addition, the new tariff structure, which is under preparation, it is scheduled for completion in December. [Technical Difficulty]

issue of fundamental [Technical Difficulty]

is related to the WACC. The final result reached 8.10%, representing an increase of 72 bps over the preliminary number of 7.38%.

In addition, as can be seen from the slide, cost of equity was significantly above the preliminary proposal, even above current levels.

Let's finalize with our comment, a final remark. On July 15, Law 2020 -- sorry, July 15, 2020, Law 14,026 was sanctioned by the President, which extinguishes the figure of the program contract, increasing compensation -- competition in the sanitation sector. In addition, it imposes transparency in setting the service targets, encouraging operators to act more efficiently. Additionally, by creating conditions for the national water and basic sanitation, an agency [Technical Difficulty]

to establish guidelines for the performance of state and municipal regulatory agencies. The law minimizes regulatory uncertainties, creating an attractive environment for investments in the sector. However, the final assessments of the changes actually introduced in the Brazilian sanitation will only be possible after deliberation and approval by the National Congress on the maintenance of the lifting of the 11 Presidential vetoes, which Law 14,026 was enacted.

The company understands to have competitive advantages in this scenario, either because its contracts already contemplate goals that meet or even anticipate those contained in the new regulatory framework or because of the access it has to public and private capital in the financing of its projects or due to its high level of governance. The great exposure to the market that has characterized its performance in recent date -- decades shows SABESP is prepared to compete in expanding its participation in this sector.

Well, these are our comments. Now let's move to the Q&A session. So let me see here if we have questions. Do we have questions?

Okay. Sure no questions? Let's give you guys a minute. Okay. Rui, you want to take the word here and -- for the closing remarks.

[Rui Affonso, executive]

Okay. We would like to thank everybody to join us in this conference call. I believe that the silence from your side is due to the great participation in the conference call we have had in this morning. And -- but we are open 24 hours a day, well, 24-hour days, Mario and his team, to ask any kind of concerns you may have, I'm sure you have, and to continue our discussion anytime you want. Again, thank you very much for your participation. And we will be together in the next quarter. Thank you very much.