Basic Sanitation Company of the State of Sao Paulo SABESP

SWB:SAJA

Earnings Call Analysis

Company Reports Robust Financial Growth

The company reported a solid operational performance this quarter, with an increase in billed water volume by 2.2% and sewage by 3.1%, amounting to a total volume increase of 4.3%. This growth was fueled by higher consumption and 44,000 new water connections alongside 48,000 new sewage connections. Financially, revenue for water supply and sanitation grew by 19%, influenced by a 9.6% tariff raise implemented this year and the residual impact of last year's 12.56% tariff increase. EBITDA soared by 47.1% to BRL 2.2 billion, with an EBITDA margin improvement from 37% to 45%. Excluding a one-off voluntary resignation program, net income increased by 76.1% to BRL 744 million. The financial outlook is bolstered by effective cost management and strategic decisions, despite a raise in personnel costs due to salary increases and a one-time natural gas payment affecting energy expenses.

A Quarter of Transformation and Progress for SABESP

At SABESP, the second quarter was marked by concerted efforts to usher in a new chapter for the company. With the incentivized dismissal program coming to a close, mirroring initial estimates with over 1,800 employees embracing this new beginning, SABESP's transition is symbolic of its broader restructuring. This shift focuses on centralizing processes and implementing a comprehensive, integrated vision for the future.

Strategic Customer Focus and Operational Improvements Shine

The company's restructuring includes establishing an executive office dedicated to customer service, aimed at enhancing relations and exploring new business opportunities through innovative services. This alignment with customer-centric efficiency is reflected in the improved financial performance, with an impressive EBITDA growth of 47.1% in Q2. These improvements are indicative of SABESP's commitment to capital discipline and strategic allocation of resources.

Financial Milestones Highlight Effective Strategy

CFO Catia Pereira reported robust growth in operational performance, with a 19% increase in water and sanitation revenue, propelled by strategic tariff adjustments and volume increases. Net income showed an incredible leap, excluding the one-time resignation program impact, revealing the meticulous approach to cost management and strategic decision-making at SABESP. This financial stewardship is steering the company towards a solid trajectory of value creation.

Investments and Efficiencies Bolster the Path Ahead

The quarter also saw a 2.8% reduction in treatment materials, thanks to improved water quality, and a strategic shift in energy consumption, with 54% of power sourced from the free market. More meticulously, a concerted reduction in staff-related expenses and general costs portrays a picture of SABESP not just growing, but growing wisely and sustainably.

Looking Beyond the Quarter

As SABESP looks beyond this quarter, their investment plan looms large, slated at BRL 56 billion through 2033. Conversations around privatization, the pursuit of additional projects within Sao Paulo, and regulatory advancements all indicate a future ripe with opportunity but grounded in careful planning and attentiveness to value creation.

Earnings Call Transcript 2023-Q2

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Good morning. Welcome to the SABESP Second Quarter Earnings Release Call. I am Tiberio, I am of Superintendent of Investor Relations. We have with us, Andre Salcedo, the CEO of the company; Catia Pereira, CFO and Investor Relations Officer; and Marcelo Miyagui, Accounting Director.

Before I give the floor to Andre Gustavo this call, I'd like to give you some information. This call has simultaneous translation into English, and it's being recorded. The presentation and recording will be available for download in the Investor Relations portal.

Questions will be asked only in writing in the chat box in this platform. Our call will last for around 1 hour and 30 minutes, and we will have 45 minutes for questions asked by the analysts and 15 minutes questions for journalists.

I would like to clarify that statements that may be made during this call related to business prospects of the company, financial goals, forecast based on premises of the Board of SABESP and information currently available to the company and they are not recommendations for investment. Forward-looking statements are not guaranteed because they involve risks, uncertainties and premises, because they refer to future events and therefore, they depend on circumstances that may occur or not. Investors should understand that general economic conditions, industry conditions and other operating factors may affect future results of the company and may lead to results that are materially different from those expressed in these forward-looking statements.

Now, I'd like to give the floor to Andre who will open this call. Andre? The floor is yours.

[Andre Salcedo, Chief Executive Officer]

Good morning. I'd like to greet the team who is here. Thank you, Tiberio, Catia, Marcelo.

Another quarter where we are really making a great effort to make all the changes and prepare the company for this new phase, a phase of a more agile, more competitive and more modern company. And I'll start with two main items here. Conclusion of the [PDI] (ph), which is the incentivized dismissal program, and the purpose is to encourage employees who have been working for the company for a long time who have contributed a lot to build the company that we have today, this company, we are so proud of having in the state of Sao Paulo, making sure that they can have a smooth transition to their retirement. We've concluded the adherence to this voluntary resignation program and it was very much in line with what we thought originally regarding the potential of this program considering the restructuring in our company.

The restructuring of the company aims at centralizing processes, rethinking the company as a whole with a more integrated vision. And in this context, we identified a potential of reducing 2,000 jobs scattered throughout the whole company. Considering this initial estimate, the adherence was very close to what we thought it would be. It was successful. So, over 1,800 employees registered and we finished this cycle of resizing the staff. Now we have to look forward and build the foundations for this new chapter of the company with this new management, with this new vision, which is more focused on customers, the environment and with a focus on value creation, both for society, shareholders and our employees.

Also a piece of information, we have published in the release in line with what we thought in the past, the payback of these incentivized dismissal program is very much in line with the market. So, no surprise in this context.

Going back to the implementation of the new company structure, with the support of shareholders, in April, we approved the establishment of a new executive office focusing on customers. And the rationale of this focus started in two big fronts. One, making sure ready and appropriate service with this basis of 228 million customers, looking at our customers as an opportunity of a relationship that can be expanded, providing services and new businesses with an ability to innovate and also preserving the value of the company through more efficient management of accounts receivable. And this has been the focus of our management. And now we will have someone devoted to that. This will further be -- be further enhanced in managing both flow and also with more sophisticated ideas in order to try to recover what we had in the past of credits. So, we have a big expectation. And later, we will give more details, and we hope that you will be validating this because this is something really positive. This person and the profile we are adding to all the directors we already have.

Now with this office focusing on this new structure, in this new phase of our company, still in line with the message we have been communicating, we are still very much focused on capital discipline, proper management and more efficient allocation of resources. In the second quarter and by the end of July, early August, we have two very important information that really show the commitment we have with the company. First was the first time in the history of sanitation in Brazil, a state company won a contract in the city of Olímpia, a iconic municipality. They have a lot of tourism there. Water -- so it reinforces our position in an area of the state where we already have a good position. So we dilute costs there. It helps us be more efficient. And we have very high expectations that this first case, which is a symbol of this new company. It may add further contracts to our base.

And we also had the right to exercise in the context of the sales [Igua Sa] (ph) did of their assets. And two of these assets where we have a minority shares or minority interests. And one of the rights we had was to have preference to acquire interests of Igua Sa in the same conditions offered by the buyer. We deeply analyzed the assets, and our conclusion is that in this capital discipline, considering other opportunities we have, exercising this preference right wouldn't be the best choice. So, we will remain in the position where we were. And then, we will start the negotiations, so that asset management is as efficient as possible, both for SABESP and for this new partner.

In the result, we will present today or Catia will present today is the result that is according to the commitment we have had with you over this journey starting in January, the -- so we established in March, and now we have a whole team and around seven -- six -- five months of work, we managed to present the results we're looking for in the first quarter. The second quarter, we further advanced in terms of operational improvement, efficiency and reviewing processes, mapping value leverage, both short and long term, and a corporate vision, a vision of not only centralization, efficiency and change on decision-making focus, it will be more centralized, but also bring strategic topics so that they become central in corporate terms.

We have created an area which will be dealing with a strategic point, giving a direction to the company, where we're going to go, what are the goals we want to achieve. And we're also working very hard -- we have been doing it and we will continue in the third quarter of identifying opportunities and the situation the company is right now in terms of carbon footprint and the greenhouse gas balance, so that we can really show society that the role played by SABESP in the environmental and social agenda. And this is very dear to us in a vision of circular economy, integration, people who are at the margins of society. So this social vision is something very strong in our company. And we have an amazing capacity of taking basic sanitation, water supply and basic infrastructure to low-income people.

Additionally, and connected to the customer strategy, we have a digital transformation area and data science area. The rationale here, these are two different areas. One, looking into the company, looking for opportunities involving data monitoring, automation, prediction of failures, leaks that may happen. We have a lot of data available in our company. And the idea is to organize the data so that it generates intelligence for our company. And on the other hand, the rationale is to look at our customer base. Looking outside the company, the amount of data we have and how we can use this data for the benefit of the company so that we can provide better services to our customers. So, we have a big potential here looking for opportunities for better recovery of credit, predicting a bad debt and also looking for new services, new products to be provided to our customers. On the left side of the slide, and I think all this information partially materializes.

In the progression of the EBITDA margin of our company in the first quarter, this was very different from the previous quarters. In the second quarter, confirmed this progress we have had in our company with a focus on operational improvement, improving management with a focus on efficiency and a focus on generating value. The contract of our company medium to long term, six months to many years, so most of the efficiency we have been generating in new contracts will be captured over time, because it's part of our nature to have long-term contracts. That's it.

Once again, I'd like to thank the whole team acknowledge the role of all directors and our coworkers really embraced this agenda of modernity, innovation, competitiveness and efficiency. We have a very nice challenge, which is to transform this company and really be at the vanguard of sanitation in our country and all directors, Catia; Sabrina; management; Bruno, Regulation, New Business; Roberval, integrating the whole operational team with his vision of one single SABESP; Paula Violante, with a long term -- medium and long-term vision, bringing together innovation with the CapEx we have to deliver. So I would like to congratulate all directors. I cannot name everyone here, but again, congratulations. This is only the beginning. We are really happy and excited with the ability we see in the company to do more and better for shareholders, employees and our customer base.

Thank you very much.

[Catia Pereira]

Good morning, everyone. I'm Catia Pereira. This is the third time I'm here talking to you. I'd like to thank Andre. Thank you, Andre, for this opportunity and for this challenge that has been presented to all directors and my financial team represented here by Tiberio, Investor Relations Officer; and Miyagui, Accounting Director. Thank you all for the great job.

Let's take a look at the numbers. I have to show you the figures, starting with operational performance. In this quarter, we had an increase in water billed volume 2.2%; sewage, 3.1%, showing our focus and the investments more for sewage, both collection and treatment, trying to reach the universalization goal so more sewage. If we put them together, we have an increase in volume of 4.3%. Looking at the graph, the main growth came from residential and ranges above the minimum, which is up to 10 cubic meters. And this brings to us a positive effect as we're going to see later when we talk about revenue, it brings a more positive effect because these are higher tariffs, after 10 cubic meter.

In addition to that, to this build volume, we had a growth in new connections. Water, 44,000 new connections in this quarter and 48,000 new connections of sewage volume growth, growth by consumption and also growth through new connections. It was a very good quarter when we look at the growth compared to the previous year and compared to the previous quarter, the first quarter 2023, showing that we are capturing improving volume through the investments that are being made by the company.

Financial highlights. The main highlights, revenue for sanitation and water supply. We had a growth of 19%. Basically, what we have here, 2.6% increase in volume, we had impact of the tariffs we had a tariff raise on May 10 this year, 9.6%, 56th raise, and we have the capture of the tariff fully after June. We still have the impact of last year's tariff 12.56%. When we look comparing quarters, we see a positive impact in terms of tariff, 11.88%. Additionally, as I said, we had the mix that contributed to the ranges where our billed volume grew. With that, our revenue goes up because the average tariff is higher.

When we look at EBITDA, which is -- reflects of increased revenue, we don't consider here the IPD, and we reached an EBITDA of BRL2.2 billion, a growth of 47.1%, a very significant growth comparing '22 to '23, the same quarter. And also margin, EBITDA margin, without construction, the second quarter 2022 was 37% and now 45%. So, increase in value. And looking at the margin, we also had an increase.

When you look at net income, we see the same increase. Net income here has the impact of this program of incentivized resignation. So, without considering this voluntary resignation program, we had an increase of 76.1%. We went from BRL422 million to BRL744 million. So, we will be talking here of an income of almost BRL1.3 billion, an increase of 200%.

So again, when we look at each indicator will impact the next one, but the message is very positive, both growth in revenue, capturing volume with the position of the mix, tariffs, considering our base of assets and also EBITDA, and the care we have been taking with cost management, trying to achieve efficiency and integration of processes so that we are able to see the whole thus being able to make strategic decisions and net income go in the same direction.

So comparing income second quarter '22 comparing with this quarter, results of construction, in our statement, we still have that information. So we are putting it together here to neutralize the effect. The effect is almost nil and bringing here costs and expenses for the voluntary resignation program.

When we look at the impact, the negative impact in this quarter when compared to last year, we see an increase in costs, BRL150 million. And BRL530 million, which is this voluntary resignation program, which is not a recurring event. It is highlighted here because it's not a recurring effect. So, this will not happen later when we really close this process in this period, when these employees will leave the company as has been scheduled for one year. Other revenues and expenses, here, we have penalties to suppliers. This is basically what we have in this item.

When we look at net financial results, here, we had a very positive contribution in the formation of our net income, which was BRL373 million coming from exchange rate variation, which we had in this quarter. We had a devaluation of the U.S. dollar around 5% and yen to above 12%. That contributed so that the share of our debt that is around 3% generates this positive exchange rate variation. So out of the BRL310 million, BRL373 come from exchange rate variation. Some of our contracts also had monetary variations, so we have that impact.

From the point of view of financial expenses, and revenue, we also had impact because we had new loans, two entries of new loans starting in the second quarter '22, did invest on July '22 and the other one, May '23. So both totaling BRL140 million. So, we had an increase in the basis, and we have this increase in financial expenses. And when comparing interest rates, we also have an effect from the interest rate. Second quarter '22 compared to second quarter '23, went from 12.88% to 13.5%. So we had a significant variation in interest rate and also considering our contracts in U.S. dollar from a level of rate of 1.5% to 5.1%. So, on the one hand, this net financial item, we had this effect of BRL372 million of monetary and exchange rate variation and BRL73 million of financial expenses.

When we look at social security community contribution and income tax, well, as a result, we have increased income leading to more taxation and more social security payment, neutralized by this program of voluntary or incentivized resignation program, leading to the BRL744 million, which I showed you before. This was one of the highlights in this quarter.

Now talking more about expenses. Expenses with staff personnel. In the second quarter '22, it was BRL776 million and now a total expense of BRL1.347 billion. But if we remove the voluntary resignation program, looking at the recurring expenses with staff, we had an increase of 5.4%. So, from BRL776 million to BRL818 million and this is explained by the salary raise. And 1% of raise in salaries in jobs would happen every year in February. So when we compare second quarter '22 to '23, we have that. So the annual salary raise and also raise in salary plans that happened in February, leading to higher expenses with personnel.

We had a reduction of 1.5% in the number of employees, 220 employees less comparing June '22 to June '23. No impact of this voluntary resignation program. So the employees that joined this resignation program, they start -- so it will happen from July '23 to July '24.

General material expenses, we had a reduction of 17.4%. Basically, less expenses with maintenance or maintenance materials, maintenance and conservation of buildings and fuel and lubricants. Here, we had a reduction because we had a reduction in our fleet. So, we start capturing the benefit in terms of consumption.

Treatment materials, I think this is the first time after some quarters that it went down. So basically, we had this drop, 2.8%. This is related to reduction in consumption. We had a reduction in consumption and the reduction in consumption of treatment materials has to do with the level of the quality of the water. With that, we have less consumption of materials used for water treatment and also some impact related to price. We start to see a reduction in prices when compared to the same quarter in 2022.

Services, we had an increase of 7.3%. Basically, these are professional services, part of services are related to technology. We are talking here about improvements in the communication channel, digital channels to communicate with our customers, also improvement in our billing system that enables us to have information help in the collections -- actions trying to stop or improve unpaid bills and also data security and also including maintenance and installation costs related to connections. This is all part of the 7.3% increase in services.

Power, 2.8% increase explained basically by an event, a single event, which is payment of BRL11 million of natural gas, which is in contract we signed in 2021 that expired in the second quarter '23, which is related to a gas for pumping from reservoirs. With the level of water we have in our reservoirs, we didn't use this contract fully. This was signed in a take-or-pay conditions. So at the end of the contract, we measured and assessed what it would be. And when we closed, we closed the contract then we have to pay this BRL11 million, which is the variation of the energy bill. We see movements of migrating from the regulator to the free power market. When we talk about values, 54% in the free energy market and 46% in the regulated energy market. When you talk about power kilowatts hour, 65% vis-a-vis 35%. We are also advancing this agenda to increase our share of free market for energy, but the event that happened this quarter was the closing of this contract with the water level we have today, around 73%, this is very recent information from August, so 73% of water level with Cantareira systems, 77%. When you compare with the same period last year in August '22, the level of Cantareira was 33%. So this is when we had a major drought. So if you compare both years, we see this helps also with treatment materials, and it helps us not having the need of using different energy or power sources.

Overhead expenses, we have here something that -- well, many of our investors or shareholders ask us to open that general expenses or overhead. So we broke it down. So if you look here, the first bit of this column is the so-called city or municipal fund of the BRL357 million in the second quarter, '22, BRL172 million refers to transfer of municipal funds and BRL184 million are overhead, general expenses. In the second quarter '23, we have BRL207 million transfer for the municipal funds and general expenses BRL189 million. So basically, virtually no change looking at general expenses or overhead. The big variation is related to the municipal funds. And this variation follows the increase in revenue it's paid depending on the revenue. So this increase is around 20%, where basically 17% is municipal funds for the city, for the municipality of Sao Paulo.

Looking at depreciation and amortization, we had an increase of 12.2%, which basically reflects our volume of investments. In the past year from July '23 to now -- from July -- sorry, from July '22 to July '23, we had addition of immobilization, BRL5.9 billion, representing an increase of 12.2% in depreciation expenses.

Looking at bad allowance for bad debt, we had a drop comparing '22, 14% drop in allowance for bad debt.

And if you look on the graph on top, in the first quarter of this year, we had 3.3%, a significant drop in the first quarter in allowance for bad debt. We didn't do anything in a strict fashion to have a reduction in this allowance for bad debt, and now 4.2%. And it got worse. And what does that mean? This was in the second quarter '23. We have really looked at bad debt on our company and delinquency rates and what we could possibly do, so that we went back to the delinquency levels we had before the pandemic. And we did that system, having the billing system and the billing system entered during the pandemic, we had the full go-live in October '21. We started to look at everything the system could provide us in terms of information and continuity in the collection process, we made some improvements. We identified the opportunity to reconnect previous contracts that were broke, but do something so that our collection options followed what was designed. So between May and June, we had this process of -- we looked at the results of this action, looking at broken contracts. But on the other hand, we had compensation of that with new agreements that were broke. So agreements made in the first quarter were broken in the second quarter. And those who broke from previous years, we recovered some of them, but the net effect was really an increase in the delinquency rates in this quarter, second quarter '23.

What we also did and something we started doing in June, everything that was in our roadmap of bills that were due and that were -- so we try to have them paid. So now in July, we had a significant number of unpaid bills paid. And in addition to that, we bought that together, try getting this paid bills, we also had a special action for payment of unpaid bills, and this will take place until September to try to capture this the paid bills we had now in July, but also actions of disconnection, which we're having for the agreements that were broken. So, we are extending this so that we have time for these bills to be paid. So disconnection actions we are coordinating with the operation team is also a lever to bring our customers to this negotiation program.

We have a very attractive condition for cash payment so that we no longer have this endless cycle of agreement, because when we have an agreement, they will not be disconnected, but sometimes they don't -- and in the end, they have no money and they break the agreement. So we gave a 100% discount in interest rates for cash payments, so that we can collect as much as possible, trying to remove the risk of having agreements that in the end, they were not fulfilled. And they can also pay in installment, with a smaller number of installments and with a higher cash payment.

So what we learned in the second quarter was how do customers behave? We look at the customers' behavior so that we could build this payment negotiation program. So structuring actions will provide results or bring results in the second half of this year because we are building this road. And now with this new customers director, the focus will be on that, and we will effectively see these results being delivered in the second half of the year.

Looking at tax expenses, it's virtually neutral, the increase. Looking at all the costs and expenses of our company, except this non-recurring event, which is voluntary resignation, we had an increase of 2.7%.

Next one. Talking now a little bit about investments. We're still at a fast pace to deliver what we have in our investment plan in the second quarter. We had BRL1.3 billion invested and cash disbursed BRL945 million. Out of those investments we made, 57% were in sewage 56% or 57%. Again, the commitment of balancing really reaching a balance regarding sewage treatment. We are -- we have 92% of sewage system. Looking at all municipalities on average and regarding sewage, we have 90% sewage collection, but sewage treatment, 84%. And we look at the timeline, our investment plan from 2022 to 2027, we see that amount which we have been talking about that has been approved. And again, a focus on sewage treatment, increase in sewage treatment and also sewage collection, so that we can reach our sewage services universalization, which is our target.

Talking a little bit about our debt. When we look at net debt versus adjusted EBITDA, our covenant 3.50. When we look from the second quarter '22 to now, we basically have a very comfortable indicator, 2.2. Our net debt in the second quarter of '22 was BRL15.115 billion to [BRL16.049] (ph) billion. Basically, this is the entry of the two in [indiscernible] loan in July '22, and now May '23, increases the net debt and additionally, the positive effect of the exchange rate variation. When you look at adjusted EBITDA versus financial expenses, we have the covenant 2.80 and 4.1, that's the level, also very comfortable considering all the covenants we have. That's it regarding the debt composition. Basically 87% debt in national currency, foreign currency debt around 13%. So no new entry regarding what we had been reporting in terms of foreign debt -- foreign currency debt. This is due to exchange rate variation and also amortization of the debt over the past year.

When we talk about costs, just to highlight that, look at average of our debt in national currency BRL12.85 billion, when we look at foreign currency, 3.56%, total our debt BRL11.53 billion, meaning that today, we have over 50% of our debt in local currency is related to DI. So basically, this effect of a greater debt in local currency is pulled by an increase in DI.

I think this is it for the numbers. And now I give the floor to Tiberio to open the floor to questions to be asked by our investors. Thank you all.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Thank you, Catia. Thank you, Andre. We already have a few questions here. We start answering the questions by the investors, and then we will answer the questions asked by journalists.

The first question we have comes from [Carolina Crunero] (ph). I have two questions. In addition to PDI, which is the voluntary resignation program, what else have you done in terms of personnel costs to reduce the regulatory gap? Is our [SASB] (ph) being involved in the discussion so that you don't lose this efficiency in the next revision cycle? Second question, with the privatization process launched, we know that the company did not make decisions, but should be listened regarding relevant points. But the topics that in your opinion should be the focus to improve contracts or what are the agendas or topics that should be addressed. Andre?

[Andre Salcedo, Chief Executive Officer]

Thank you, Tiberio. Carol, thank you for your questions. Regarding the regulatory gap, there are many initiatives underway, particularly regarding personnel expenses, we were already better than what regulations enable us to have. So the relationship between personnel expenses and contractor expenses, if you reduce one, we will need more contractor services. Even if we improve the contracts of a service, there is a trend or room of migrating everything that was done by our own employees, part of it will be done by contractors.

We have been talking to the agency and our -- and the new regulatory executive office led by Bruno has been discussing with the agency, and they have this agenda, and they are talking to the agency, telling them about our concerns regarding the sustainability of our company and the focus we all have, not only the company, but the state and the agency to have better quality services to as many people as possible.

So this is the agenda we have been discussing with the agency, and they have been very receptive. And we understand that this tariff cycle will be very positive on the company side. We're doing our homework, trying to be more efficient, reducing this regulatory gap. And on the side of the agency really understanding our point, telling them how we operate and how regulations can help us provide better services.

Regarding the privatization process, as I have been talking to you, this is led by the government. It's a decision by the state government and the governor is the main leader here and this is being negotiated with the team led by Rafael and Natalia and the Department of Environment with the state. And they contact AFC as legal, consulting, strategic consulting to support the whole project. We have been participating at all levels, providing this group with information from our company, information regarding our vision in terms of what is more efficient and what can create more value, not only for investors but also more value for society so that we can provide better services and turning the services universal.

So these are very technical discussions. And we have been working with this group and specifically, Carolina, regarding your question in regulations, and you have been making that very clear, both investors and analysts, and we do think this is the way to go. So if we can really reduce uncertainties in this tariff process, well, in other words, the more predictable this process is so much of the better. So the governor has been mentioning this in events related to privatization. He too understands that improving predictability is something that they are aiming at.

So this is a positive agenda. We have been working on this agenda so that this really happens so that we can really reduce the subjectivity in tariff cycles. Again, Natalia, Rafael, and the governor and the agency, they have been working on this agenda. So it's a matter of time. We cannot anticipate decisions that haven't been made yet, but this agenda is being taken care of by all participants and stakeholders in this process.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Thank you, Andre. I'd like to remind investors, if you want to ask questions please ask the questions in the Q&A box. [indiscernible] asks the following question. What revenue mix with water and sewage in the ex-construction revenue?

[Catia Pereira]

I can answer that. The mix, 53% is water in our revenue and 47% sewage. This is the revenue mix we had in the second quarter '23. Thank you for the question.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Question by [Gillam Lima] (ph), Santander. Even though the quarter PDD increased to 4.2% in this quarter, looking to a longer period, past 12 months, we see an improvement that is indicated. We went from 4% the first quarter '23 to 3.7% in the second quarter '23. Do you think that we can expect a further improvement for the second half? Or we may have problem? What level of PDD you think is feasible to reach.

And the other question is, could you please talk about the interest of the company to go on growing in assets in the state of Sao Paulo, like in the city of Olímpia? Do you have any project in the pipeline today?

[Catia Pereira]

I can start answering and then I'll give the floor to Andre. Regarding PDD, we really expect to have an improvement in the second half. So PDD is allowance for bad debt. So right now, we have a structured action paving the way so that we can start collecting the fruits. I cannot still tell you what will be the reduction we will have in the third and fourth quarter in terms of bad debt, but this trend of decrease will happen, and we hope that it will continue so that we don't really generate any volatility in the results, as we had good results of the first quarter and worst result in the second quarter. But on average, look, we have 3.8% first quarter compared to the end of last year, where we had 4.2% allowance for bad debts. We have had an improvement. We identify points that will lead to volatility. We are looking at it, so agreements and the debt negotiation program we have and the actions we are taking in terms of disconnections considering that some customers are not really fulfilling the agreements, but the trend is a downward trend so that we won't have many impacts in terms of allowance for bad debt. Thank you for your question.

[Andre Salcedo, Chief Executive Officer]

I don't know if I could add anything to that.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Other projects similar to the one you have in Olímpia, is there anything else in the pipeline?

[Andre Salcedo, Chief Executive Officer]

Okay. We are looking at all projects underway in the state of Sao Paulo. We have around five projects, Igarapava and Ourinhos, not all of them have the same level of traction and robustness in the construction of the bidding as was the case in Olímpia, but well-structured projects with vision aligned leading to economic attractiveness in the state of Sao Paulo. We will closely look at them. We understand that we have financial technical capacity to that in our state. This is the commitment of SABESP with the people of the state of Sao Paulo. These are five projects, Igarapava, Ourinhos are still open. And Bauru, Marilia and Brodowski, they are suspended today. And we are tracking and looking at all of them. And obviously, our participating will depend on our analysis to see if it's really feasible and if they will generate value. So we are checking that.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Thank you, Andre. Next question is by Luiza Candiota, Itau BBA. The first part has to do with allowance for bad debt. I'll read her question. Good morning. My question is related to delinquency. Considering the initiatives you have right now focused on reducing the delinquency rates, I like to know what is the expected level for the next quarters? And when we will have a normalization in terms of allowance for bad debt? My second question is related to a deduction in gross revenue and a drop compared to other quarters. Could you give us any further details, any one-off effect?

[Catia Pereira]

Thank you for your question, Luiza. I think the question related to allowance for bad debt, I think I answered already in the previous question. We will go on working, so that we have further -- consistent reductions in bad debt. We cannot really say how we will be in the third or fourth quarter, but the actions are underway. And this area was structured and was structured basically now in August, this new area, an executive office for billing. So, we will have teams that will be devoted to that and doing this topic in a centralized fashion and taking all actions necessary.

Regarding the reduction, looking at the net, we had a reduction of -- we had an increase of 19% in net revenue. We really had a one-off effect. We had a credit recovery from [indiscernible] BRL81 million. This BRL81 million contributed. When we look at the growth in net revenue, it grew 19% when gross sanitation grew around 16%. So it was a one-off event, BRL81 million recovering credits from [indiscernible] tax.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Thank you, Catia. Next question by Hugo Gomes from Safra. Could you please tell us something about the investment schedule payment per year, considering the expectation of accelerating CapEx if we have privatization?

[Andre Salcedo, Chief Executive Officer]

Thank you for your question. These details and these analysis, they have been produced by our company. What we have today is our investment plan until '23. This plan in current values totaled BRL56 billion and its programmed to happen until 2033. Simulations by the consultants showed that if we have privatization, maybe the schedule is anticipated to 2029. So -- and there is an addition of investments that was standardized by the government of BRL10 billion. So this level of details of the schedule for this investment, how it will take place, this will be better clarify to the company doing phase number one of the project when we will start designing while that is this privatization all about. This phase that started in August and will go into January next year. We have audits and details about investments, what has to be done. So we don't have the answer right now.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Next question by [indiscernible], Navi Capital. Congratulations for the results. Could you give more details regarding the regulatory initiatives to bridge the gap between net revenue reported by the company and the regulatory ban? What are the initiatives to reduce contractors' costs mainly and also cost with materials? So the CSC, is it being implemented? Could you please talk more about this initiative to reduce costs and gain efficiency?

[Catia Pereira]

I can start and you can complement later. Look at regulatory gap what we have is that the regulation area, which we created. We have a new structure. Now we have an area for regulation. So they're very close to the agency when we have the tariff -- so when the tariff rate of 9 -- 56th was approved, there were some points that were addressed with ARSESP related basically to [indiscernible] taxes, this was a extent that the regulation area did after approval of the tariff raise approved for this year regarding commercial programs.

The area today, well, some work is being done between the regulation area and the commercial area sales area where we are revisiting all our commercial customers' level of price and level of discount we have, what is part of a profile, which we think makes sense for the company. We are organizing this information. And the idea is that we submit this to ARSESP. So this work is being done already by the customer team and by the regulation team, the financial area is also participating where we are building this rationale to submit to ARSESP. I think with that, we can address one important point, which is one of the discussions that always shows of this regulatory revenue gap recognition of the discounts given by the company in the commercial programs.

When we talk about reducing costs, let's start with the implementation of CSC, the Shared Services Center. The design is ready. We are working on the migration phases. It was totally -- well, migration will officially start next week with some activities, some processes will start being migrated. And we already had a structure in place to serve some business units of the metropolitan. So, we are capitalizing and speeding up what is more at hand. We are already doing that movement. And this is a process that will take -- well, think about a full transition until the end of the year, we will have the transition of our activities but the maturity will happen within nine months. And we also have technology actions that will help speed up this process of migration and integration and centralization of processes.

As Andre mentioned, our contracts, we have different maturity contracts. And since we have contracts that go from six months to one year, three years and even beyond, we will have to respect the maturity of the exploration date of these contracts. And when they expire, we have to bring this to one single model or a centralized contract. So the capture of this gain will come over time. It will not come right after this is implemented. It will come as these contracts expire.

I don't know if I really answered your question. Andre would like to add something.

[Andre Salcedo, Chief Executive Officer]

Well, generally speaking, this is a big company with a well-established contract structure. As we became aware of the demands and renewal of contracts, we have tried to rationalize contracts or maybe alternative modes of contracting to become more efficient, but this happens over time, so that we avoid risk of discontinuity. We see that these gains will be consistent over time. We have some restructuring initiatives we have been taking in order to review the way we contract these different services. We have services today that are being -- that maybe it makes -- that are being done together, that should be done separately. And the other way around. Services that are separated that maybe should be centralized. I have examples for all of them.

In another opportunity, I can give you further details, but like collection. A disconnection is with the collection company, but the collection company has a greater affinity to perform remote activities. Field activities are very expensive effectiveness of disconnection within the message, SMS and e-mail, these are all administrative processes. They are not physical processes, adding this contractor physical process going to the household of the customer. This leads to more costs. So, bringing this to a field activity would be more efficient. This will improve our ability to really implement a better collection. We hope that in the next quarters, this gain in efficiency will materialize in materials. And the gap on the side of revenue is okay.

On the side of expenses, a number of things are being done. Some of the things are about to show how we operate and for our SABESP understanding to what extent -- what they want can be adjusted to our reality because we had some price shocks over time that were not captured. I think this is something we have been doing our homework so that our company is more efficient and also talking with the regulatory agencies showing that we are doing whatever we can to be as efficient as possible. So that these visions are as close as possible for the next tariff cycle.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Thank you, Andre. Thank you, Catia. Next question by Lilyanna Yang from HSBC. Thank you for the opportunity. Could you give us an update of your discussions with ARSESP? What passed by SABESP are still being assessed by the regulatory agency? Is there a discussion underway to adjust or change the tariff model and regulatory model? And if yes, could you give us more details?

[Andre Salcedo, Chief Executive Officer]

Thank you, Lily, for joining us, and thank you for your question. Most of your question, I think I answered in the previous question asked by [Mattios] (ph) details of what we have been discussing with the agency, I think that would expose our team and the agencies team. But generally speaking, we have been tackled the revenue gap through this alignment of accounting regarding commercial agreements and telling the agency that the other value levers have to do with the consumption, with mix. These are things that are out of our control, understanding how they can see that.

On the side of expenses, I think there are a number of activities that we are doing here and part should be done by the agency. Expenses we have that are not taken into account today. So we won't finish this agenda in one month. So we are trying to get our views closer and closer, and we have a contact once a month by Bruno from the regulatory team and directors from other teams that will show the agency and we want to be as clear as possible with the agency showing what reality is and what is our capacity to invest vis-a-vis the reality, what they see in our company.

I hope I have answered your question. This is a very broad agenda, but we are trying to tackle it since the first day we are here.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

So, we are reaching the last 15 minutes. Journalists have started asking their questions. So, we still have some questions, some investor. Miguel Rodriguez from Morgan Stanley asks, well, the decision of not exercising the preference right, Andradina and Castilho, were it exclusively related to the level of return, or is there any other factor involved? Could you please comment how has the company looked at the demands of return for different projects and maybe factors that may lead to the requirement of bigger returns or smaller returns?

[Andre Salcedo, Chief Executive Officer]

Well, Miguel. Good question. This is a very complex topic, but basically trying to simplify this complex analysis. Any capital allocation by the company takes into account risks and returns coming from that opportunity. So what is risk in a concession regulatory environment, we have a lot of CapEx looking forward, and obviously, looking at the risk taking appetite of the company. And this is shown at the decision-making levels with the regulation office, and we also have the other office taking decisions depending on the investment, this is submitted to the Board of Directors. What we have been doing is that over this whole journey to standardize the risk the level of risk and return we are willing to take, depending on the project.

In the case of Andradina and Castilho, the risk is relatively low. These are mature concessions and the regulation in that area is a regulation that we don't see has extraordinary risks. Having said that, it was much more a matter of return, we thought that we would get the best return for our investments. So, we don't have any other rights. And thank you for your question.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Next question on by Aaron Re'em from Robeco. He was kind enough to send the question translated into Portuguese. So I read -- apologize if the translation is not okay, but I think it's good enough. Total receivables have continued to grow. Total overdue receivables in those more than 360 days overdue also remain elevated. Then he asks, is there a plan to reduce these receivables by recovery, or should we expect them to be written down via the P&L? What is the expected timeline to meaningfully reduce the overdue receivables?

[Catia Pereira]

I can answer that. Thank you for your question, and thank you for being so kind to provide a translation. Increase in receivables follows the revenue. If we have a greater revenue, we have also more accounts receivable. An important piece of information is that today, in our accounts receivable or in our balance sheet, we don't have anything above 360 days. We follow that because we are still trying to recover that, but everything that is above 360 days has been duly written down, being treated accordingly in our P&L. So our receivables is clean of any debt that cannot be collected. We are trying to recover this overdue. We're going down to five years, even longer terms, but that would have a positive effect. It wouldn't have a negative effect.

So looking at my receivables, 360 is already okay. We do allowance for losses after 180 days, we increase the volume we allowed for, but a counting here does allowances by edge. Looking at the delinquency history, we are very conservative. We look at what we have in the overdue and to be due, and we apply them according to the history of the company, then we provide the allowance required to prevent an impact on results.

Answer to your questions, receivables you see in our balance sheet is clean of any loss, everything has already been generated and has already been taken into account in our P&L. And the growth we see is basically related to the growth in our revenue.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Thank you, Catia. He goes on with another question around [indiscernible]. Since the third quarter 2022, a collection action against the city government of Sao Paulo has been reported in the receivables for the quarters, the receivable correlated now is BRL2.8 billion. I'd like to understand a little bit more about that, the probability of monetize this debt papers, what is necessary of this BRL2.8 billion to be recognized? And the time during which they could be realized? If there is a time or schedule for anticipated payment? And what are the uncertainties? And thirdly, how would they be considered in the balance sheet if recognized, meaning assets would be a commercial receivable or an investment paper?

[Catia Pereira]

Well, of this BRL2.8 billion, we make them visible. We haven't recognized them in our results because this is the right we have. But the time depends on the availability of the city administration to pay in '23, we see the city paying debt from 2006. Looking at the realization of these payments, there are two ways to go, wait to enter into the flow of payment by the municipality or work with -- we have other possibilities. It has to do with an agreement and maybe we can provide further details. We are looking at other possibilities as well. But actually, these other ways we have to recover this BRL2.8 billion. Looking at the value, this is -- we have the principal and interest part of it is commercial, but part of it will affect the financial line we are talking here about updating this value, this figure over time.

Would you like to complement, Andre?

[Andre Salcedo, Chief Executive Officer]

I think that said, we have a stock of unpaid receivables. This is the most representative one, BRL2.8 billion, and we have been looking at the best way to monetize that. The city administration launches bidding processes. And latest one was in April. We don't think the conditions were attractive. And we are looking at other ways of monetizing that, obviously, taking into account conversations with the city administration. So, we have been working to try to get other alternatives to get this paid. Nothing has been decided. But Aaron, we are paying close attention to that credit and we are really addressing this issue with the city administration of Sao Paulo.

[Luiz Roberto Tiberio, Superintendent of Investor Relations]

Thank you, Andre. This was the last question. We are answering questions coming through the Q&A box. If you have any further questions, you can ask. And including journalists, if not, I'll give the floor to Andre and Catia for their final remarks. Well, no further questions. So Andre, Catia, if you want to make any final remarks?

[Catia Pereira]

I'd also like to thank the whole team and my peers, Andre. This has really been challenged. We have a very important agenda ahead and we have a full focus so that we really deliver one single SABESP with the efficiencies we have been capturing all the levels that have been identified. This is the commitment we have.

[Andre Salcedo, Chief Executive Officer]

Thank you, Tiberio. Thank you, Catia. So, again, we have this commitment to be transparent with a focus on results, have a company that uses its full potential to be more competitive, more modern, more flexible, a company adapted to this new reality and the opportunities that come together with the new regulations. We have a set of opportunities we have been looking at to generate new businesses in our company with our customers, with our water and sewage treatment processes. We have been looking at all that. And over time, we will be communicating all this to you.

I would like to thank our employees who really embraced this agenda who have been working very hard transforming the company into a company that is much closer to consumers with a clear goal of being the best sanitation and water supply provider, not only in the state of Sao Paulo, but in Brazil.

And finally, this is not done just by me, by Catia, Tiberio. We were already thinking about an event to introduce all the directors and the offices, people who really work to deliver results, we -- until the end of this month, we will have a meeting, which we are calling SABESP Day, where we will be bringing the other directors, and they will all be talking and they will talk about everything we did in the past six months, our challenges and the foundation that is being built for this future. Also talking about the vision, what we want to deliver in the next six and 12 months to you, to society, and to our investors.

Further details, the IR team will provide you, but investors and the press society, you will get to know our agenda and the people who are leading these agendas. So this is an invitation. Suggestion of topics and items for the agenda are welcome. You can submit them to us.

And again, thank you very much for your feedback. Thank you for all the constructive criticism we have been getting during our journey. And whenever possible, we'll implement them. This construction of the new SABESP is a joint construction. Part of it is done by us because we are in charge of leading it, but in the company with suggestions made by our employees so that we have a better operation and also comes from our investors from society. So that we also look at external visions in terms of what we improve.

So, it is a thank you message to the state government for having given me and all the directors the possibility to run this company and prepare it for the second phase. We are very happy to be here. It's an honor to be in this position at a challenging time when we can really make a difference for this industry, not only in the state of Sao Paulo, but for Brazil.

Thank you all very much. Thank you, Tiberio, Miyagui, Catia, the whole team, and those who have been working with us. Thank you very much.