Basic Sanitation Company of the State of Sao Paulo SABESP

SWB:SAJA

Earnings Call Transcript 2021-Q3

[Mario Sampaio, executive]

Okay. Good morning to all. Welcome to SABESP's video conference to discuss the earnings for Q3. My name is Mario Sampaio, I'm Head of Capital Markets and Investor Relations at SABESP. Today, we have with us here Dr. Benedito Braga, Chairman of SABESP; Mr. Osvaldo Garcia, Director -- Financial Economic Director and Investor Relations; Mr. Marcelo Miyagui, Head of Accounting; Marcel Sanches, Superintendent of Reg -- for Regulation. Before passing the floor to Dr. Braga to begin the conference, I'd like to give some information. First, this video conference is being recorded, and the presentation will be available for download at our portal where we already have the press release. We will accept questions only in writing through chat. Our conference will be for an hour and 30 minutes, and we will have 45 minutes to answer questions from analysts and at the end, we will have time for questions from journalists.

To conclude, a small disclosure. We would like to clarify that any declarations made during this conference concerning the business perspectives of the company, projections, operational and financial goals are based on beliefs and assumptions of the company's Board and also information currently available to the company. Considerations about the future are not guarantee of performance. They involve risks, uncertainties because they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future results of the company and may lead to results that may differ materially from those expressed in these considerations about the future.

Now, I would like to pass the floor to Dr. Braga. Dr. Braga, you have the floor for the opening of this conference.

[Benedito Pinto Braga, executive]

Thank you very much, Mario. Good morning to everyone. It's a great satisfaction to bring to you on this rainy morning good news to all. We had very positive financial results, but I will allow our CFO, Dr. Osvaldo Garcia to talk about this point to you. I would like to begin with 3 or 4 topics that are of your interest. Also as a result of this good news, we have a rainy morning concerning the water safety. We had -- we are actually having a situation that is an extreme drought in the South -- Southeast of Brazil and this even affected the electricity sector, and also as Dr. Osvaldo may explain issues involving cost of energy that went up as a result of this extreme drought situation that we are having, and we were able to get a special authorization from the water authorities to bring from our reservoir in Jaguari on Paraiba do Sul river, 40 million cubic meters.

These are additional until the end of this year and an additional 40 million cubic meters until the end of this year, thus increasing our water safety. I also informed in this direction, talking about water safety that the works for abstraction of water from Itapanhaú River to the reservoir Biritiba Mirim in the Alto Tiete system may remove or may abstract 2.5 million cubic meters of water with a monthly average. Like this, the works are going very well. And in the first semester of next year, we will have the inauguration of this supplementary system.

Now concerning rainfall, we had a month of October that was a little above-average in terms of rainfall but a month of November, in the first 2 weeks, November with little rainfall, but we still have hopes that in the second part of November, we may have more rainfall to recover our levels at the reservoirs without the need to have any extraordinary measures to guarantee the supply of water in the metropolitan region of Sao Paulo. In the interior, we had a situation in the city of Franca. In the month of August, September, we had to begin a rationing plan, but this situation is over.

And today, the supply of water in the city of Franca is normal. So in the other cities, 375 cities, the situation is okay, concerning the supply of water. Another important piece of news, very important news is the implementation of [ NetAd ]. This platform will allow the new tariff structure that we have. This structure where we will have a single tariff for all our cities and this will be applied in 2022 and reminding you that the minimum tariff disappears, and we will have a fixed tariff for water connection and plus water consumption. So the person will only pay for what they use, but there will be a fixed fee in the new structure, in the new tariff structure. Also, through this new platform, [ NetAd ], we will have different interaction with clients, much better interaction with payment via PIKs, credit cards. In other words, a modernization, a very important modernization and update.

Right now, we are implementing this system. There are some initial issues. For example, we have at our contact center. Also, we had a problem with fake news on fake bills from SABESP but the [ NetAd ] system has a much greater efficiency, brings us this greater efficiency and a reduction in delinquency due to the fact that we are working with taxpayer numbers and ID numbers. Our corporate area did an excellent job, an important job, and we inaugurated this new area in terms of relationship with the clients and the monitoring of our meters. So this is an important piece of news. We are modernizing the company.

Now concerning the new sanitation line, the decree that regulates Article 16 B in terms of proving the economic financial capacity of the company as a result of the goals for 2033, concerning 99% coverage with water and also sanitation. We are very comfortable with these issues. Yes, we will have conditions to prove our financial economic capacity as a result of the following: Our largest consumers. Our largest cities will not need investments in Capex. We had already foreseen getting to a situation of universalization before 2033. Also, I can mention here that, unfortunately, the federal government did not act on time in regulating this law and published this decree with 9 months late. The national water agency regulated other indices that we will have to follow everything here late, but we are working hard and fast for everything to be done, everything that is from our part until December 31. And with this, we will be absolutely in agreement with the new law for sanitation.

Finally, I would like to mention that SABESP was the only company in the southern hemisphere to have an agreement with UNFCCC, which is the platform of the United Nations for climate change, where we are collaborating in this worldwide movement to increase the resilience of the water systems. We participated actively in COP26. Taking our vision and showing that these discussions of the UN, the 26th, have focused a lot on the energy issue, CO2.

The problems that will happen in the long-term in the future, but they were not concerned with adaptation, which is happening right now. You can see the issues concerning the drought we have in Brazil. SABESP has been an example for the rest of the world for the sanitation companies in the world because it prepared itself. We adapted ourselves to climate change. So it is with great satisfaction that we saw that the final report of the Chairman of COP26 gave more importance to the adaptation issue. And not only this, the next COP that will happen in Egypt next year, the focus will be on everyone adapting themselves and how this will impact and bring an improvement to the less developed countries in the southern hemisphere. Also, within this context of ESG, the company is alert, the company is getting stronger and stronger in this direction, ESG.

Well, I believe you are more interested right now in hearing our CFO and the positive results in finance. So Dr. Osvaldo, you have the floor.

[Osvaldo Garcia, executive]

Good morning, Chairman Braga. Good morning to all. I thank you all for participating in this video conference to discuss the earnings of Q3 2021. Beginning on Slide 3, we observe the total volume billed with a growth of 3.7% in relation to Q3 '20. This considering the volumes of Maua, which in this quarter is working in retail. And Q3 -- in Q3 2020, they were working not in retail. Well, this considering the volumes that are except from collection and also social and residential categories in Shantytown, going from 957.3 to 992.7 million cubic meters billed. This growth is greater in the sewer services, 4.1% in relation to the volume billed in the segment of water that rose 3.4%.

The most significant increase happened in the nonresidential categories with -- where tariffs are higher, 15.7% in public, 7% in commercial and 6.6% in industrial clients. In the residential segment, which represents the greatest volume in relation to the total, the growth was 3.2%. With the recovery of consumption in nonresidential categories, we noticed a recovery in the average tariff with favorable impact on revenue. Next slide, please.

Now we'd like to see the slide with financial numbers. The revenue from sanitation services had an increase of 17.7% in the period, going from BRL 3.6 billion in Q3 '20 to BRL 4.3 billion in Q3 '21, especially as a result of tariff increases applied on clients' bills in August 2020, 3.4% and since May this year, an increase of 7%. The effects are -- can be seen in the revenue in this quarter when compared to the same quarter last year. Also, we add the increase of 3.7% in the total volume billed, which explains the relevant increase of the total revenue of sanitation services and the operation of water distribution in retail in the city of Maua, which is now BRL 24.7 million, more in comparison with the same period last year. Net revenue went from BRL 4.4 billion to BRL 5.2 billion due to the growth in the volume billed and the inclusion of the price increases mentioned as well as with the revenue from construction that contributed for the growth of BRL 132.7 million in the period.

The costs, administrative expenses and commercial expenses, including the cost of construction, had an increase of 13.8%, going from BRL 3.5 billion in Q3 2020 to BRL 3.9 billion in Q3 2021. When we exclude the construction costs, the increase was 14.3% or BRL 347.5 million. Adjusted EBITDA was BRL 275.7 million above the EBITDA of Q3 20, resulting in BRL 1.8 billion in Q3 '21, a positive variance of 18.2%. And now concerning the EBITDA margin, which does not consider the revenue and construction costs, was a little higher, going from 44% to 44.4%. The net profit, net income closed at BRL 486.6 million, BRL 11.1 million, above the profit in Q3 '20, which was BRL 421.6 million. I'd like to stress that this increase was based on the revenue that grew in a more vigorous way with the inclusion of recent price readjustments, a greater volume, recovery of nonresidential segments, thus improving the average tariff. And despite the pressure on costs and expenses due to higher inflation and also with higher interest rates and exchange variation.

Now we go on to the slide for costs and expenses. The costs and expenses when we [just] consider the cost of construction, had an increase of 14.3% or BRL 347.5 million. It's important to remind you that the analysis and comparison of this quarter with that of 2020, in some cases, may lead to distortions because many activities were paralyzed or delayed last year as a result of the measures for social isolation. The expenses with personnel had a small increase, 1.8%. The explanation is in the salary increase of 7.75% in May this year and medical expenses that were exceptionally low in the previous year. This variation above the -- below the inflation of the [purities] due to the reduction of around 1,000 employees. The effects of the impact of the pandemic in Q3 '20 can also be observed with different degrees of magnitude in the expenses with materials and expenses with services.

In general expenses, a significant part of the growth observed of BRL 103 million or 45.9% is explained by the expenses with court issues, BRL 53.3 million and the increase in accruals or provisions for payments to the Environmental and Infrastructure Sanitation Municipal Funds, resulting in the growth of the revenue and the number of cities included worth BRL 32.9 million. Expenses with electricity were also important. The average increase in the tariffs, ACR was 30.6%. And the impact was not greater because we migrated part of the consumption to ACL, the free environment, where the price increases were not that high. In general, the expenses with electricity had an increase of 20.6%, going from BRL 311 million to BRL 375 million in the period.

Different from the revenue that already reflects the recovery in volume and average tariffs in relation to the same period last year, the estimated losses with credit and bad debt increased by BRL 43.5 million, a growth of 57.9%. As mentioned by our Chairman, due to the beginning of the operation of the new commercial system, we will have a more modern tool to approach and solve these balances that were not collected, were not received. Next slide, please.

Financial performance. The graph for financial performance begins with the profit in Q3 2020 of BRL 421.6 million and shows the movement of the results in the period. Net operational revenue grew BRL 715.4 million due to tariff increases totally included growth in volume and improvement in the average tariff, as already mentioned. Costs and expenses plus construction costs had an increase of BRL 477.3 million. Other revenues and operational expenses, including equity, had a positive variation of BRL 2.8 million. This financial result presented a negative variation of BRL 190 million due especially to the devaluation of 8.7% and 8.3% of the Brazilian currency in comparison with the U.S. dollar and the yen, respectively; a devaluation that is greater than the one observed in Q3 '20, which was 3% and 5.2%, respectively. And also another point, the impact of the higher interest rates and also IPCA index on loans and financing.

Income tax and social contribution had a negative variance of BRL 3.9 million, resulting from the increase in net operational revenue of BRL 582.7 million, which excludes the effects of revenue and expenses with construction, the increase in cost and expenses of BRL 347.5 million and greater expenses with exchange variation for BRL 141.5 million. The result was a net profit in Q3 '21 of BRL 468.6 million. This result, although better than the one demonstrated in the same period last year shows that the company still has the effects of the crisis that began in 2020, but we have recovered revenue, not only due to higher tariffs, tariff increases, but also the effects of the economy with the recovery in industrial segment and services. On the other hand, issues like delinquency have not followed the same trend, and the strong increase in inflation can be seen in the cost of inputs.

These are our comments. Now we would like to go on to the Q&A session. Mario, you have the floor.

[Mario Sampaio, executive]

We would like to begin our question -- Q&A session. And with this, before I would like to see the questions that will come from analysts and investors and at the end from journalist. As a result of time restrictions may be some questions that we receive may not be answered. What we can do though, we can answer in writing later. I will begin with the same first question. Let me get ready for this first question. I will check with Dr. Braga. The question is from Marcelo Goncalves. He has many questions concerning tariffs and price increases indicators period and when we will have the tariff structure. Dr. Braga, please guide us.

[Benedito Pinto Braga, executive]

The implementation of the new tariff structure will happen in April next year and will be implemented in May, will begin in May but I see here that there are more detailed questions on revenue and so forth. I will ask Osvaldo and Marcel to answer these questions. Marcel, I will try to answer. Please supplement concerning the revenue. We have -- the amount is BRL 17.5 billion and if SABESP has an expectation in relation to revenue this year. What I can say today that it is a little below the required revenue, but only at the end of December, will we have the final number. We believe it will be a little lower, but not very much lower. Now concerning the period of evaluation of inflation. I'd like to say that our P0 was February 2021. And therefore, the way the -- since the agency will treat this in March, let's see the index that will be used, so we can adjust for inflation in the period. This will be discussed in April and implemented as of May. Now concerning tariffs, the Chairman already mentioned, it will -- the new system will be implemented in May 2022. Would you like to supplement, Marcel.

[Marcelo Miyagui, executive]

No, perfect.

[Mario Sampaio, executive]

The next question is from [ Gabriel Chiapu ]. How is the process concerning a possible privatization of the company.

[Benedito Pinto Braga, executive]

Very well. Always reminding you that this topic of privatization is up to our controller. It's not up to us to discuss this point. I would like to say concerning the progress it is what is public, our economic minister has said, everyone knows that the privatization committee of the government is analyzing this topic for the company's status and intends to hire the IFC to prepare a study. This is the information that is public and everyone knows. I have no additional information apart from what we read in the press.

[Mario Sampaio, executive]

Well, we are awaiting more questions. For the time being, we have Marcelo Goncalves. A question from Marcelo. The question is, please give us an update about the investments in the new Pinheiros River. So please talk about the schedule, amount invested, measurement of results and expectations involving conclusion.

[Benedito Pinto Braga, executive]

Well, it is a great pleasure to answer this question. In October, we connected 428,000 users of the 530,000 savings for this project, new Pinheiros River. We sense first, we have the concrete hope to finalize until the end of 2023, all the 533,000 savings apart from the quality recovery units for streams that feed the Pinheiros River. We have 5 stations, total investment, BRL 1.7 billion. We are only paying by -- according to results, we have 87% of physical part working ready but in terms of finance, we're close to 30%, 40% in terms of payments because the payment is only made when you have the results in terms of connections and quality of water in the streams that feed the Pinheiros River. So it's a project that is going very well, very successful even during the pandemic. We are going beyond the forecast, as I mentioned. The forecast was 85% in October, and we have 87% ready.

[Mario Sampaio, executive]

Okay. We have a question from Daniel Travitzky. And the question is, please comment on expansion plans for operations, participation in auctions for sanitation and expansion to other states.

[Benedito Pinto Braga, executive]

The company is very connected to new businesses, expansion. Dr. Osvaldo and the financial department has a superintendent allocated to treat this topic of new businesses. We are looking at this topic with great interest. We are focusing right now on the universalization and to reach the goals that we have in our program for 2033. As I mentioned in my initial speech, we are observing this. We have outside consultants for M&A to help us. We are competing for [ Ourolandia ] for -- to take care of the city. Next, close to Franca, where we are already present. But maybe Dr. Osvaldo can supplement with some comments in terms of new businesses.

[Osvaldo Garcia, executive]

Mr. Chairman, supplementing this information. It's basically what you mentioned. Our focus is in serving the 325 contracts, improving our economic and financial capacity and CapEx. But of course, after January 1, when we have the confirmation of the financial capacity and the other companies, we expect some action. Especially in new businesses, we're focused in looking at the opportunities. First, with priority to our states, Sao Paulo and then other businesses participating in auctions together or together with other companies.

[Mario Sampaio, executive]

We have a question from Carolyn [Cabral] from Credit Suisse. The question is on the implementation of the new tool for collection that Dr. Braga mentioned. Specifically, she wants to know, how long will it take to implement this new tool and expectations to decrease PDD, which would happen in Q4.

[Benedito Pinto Braga, executive]

We -- the tool is already working. What we are improving are the ways, the better ways to collect more modern ways to collect, which should happen in the next 2, 3 months in the beginning of the year. At the beginning of the year, we will have more news about this using WhatsApp, using PIK for payments, all these modern tools for payments and also more effective ways to reduce delinquency but the tool is already working, but these upgrades that it allows will happen in the next 3, 4, 5 months. Thank you.

[Mario Sampaio, executive]

Right now, we don't have any new questions.

[Benedito Pinto Braga, executive]

I understand that the system identifies whether these are analysts.

[Mario Sampaio, executive]

Dr. Braga, can we open the floor to journalists?

[Benedito Pinto Braga, executive]

Yes.

[Mario Sampaio, executive]

So let's wait a little. Let's see if we receive questions in order to clarify points. So we will wait a little. Mario, point involving logistics. The only way to receive questions is through the Q&A or do we have other ways to receive questions from analysts and journalists? Only through the Q&A questions only through the Q&A. I didn't see Caroline's question. Carolina is an analyst. She had difficulty to ask her question. So she's an analyst. She has contact with the company. She sent it through WhatsApp and I read the question. We have more questions. Dr. Braga, Dr. Osvaldo, the question is from [ Juliana Stigareinbier ]. How are the recent changes having an impact on the company? How is the issue of costs? How are the costs?

[Benedito Pinto Braga, executive]

Very well. This question is for Dr. Osvaldo.

[Osvaldo Garcia, executive]

Okay, Mr. Chairman. Well, in the macroeconomic system, we had an increase in interest rates. This will have an impact on our costs with because of the loans we have and our debt. Now concerning the other issue, it's a great concern of the company, this variation with higher inflation. This has put pressure on many of our costs, operational costs, cost of materials, cost of electricity was -- had a direct impact, not only by inflation, but also the drought, the scarcity of water in the reservoirs. We are looking at this very careful. That's why I mentioned this point, but the costs are under control and within the goals that we had projected. Pressure exists. We are working now for this pressure, not to have a great effect.

[Mario Sampaio, executive]

Okay, I believe we have another question. I believe it was already answered. [ Arlun Cawaryani ], he asks whether SABESP intends to participate in sanitation auctions. This was answered, maybe we can have more comments.

[Benedito Pinto Braga, executive]

Well, myself and Osvaldo we answered. We're alert. We're looking at the possibilities. We may participate as if it does not affect our contracts, current contracts. Now with the new regulations, we have an important challenge. Marco mentioned this possibility of new businesses, but also there are serious issues because we have goals with our current contracts. That's why we're focused on reaching the goals in our contract. But as Osvaldo mentioned, we are alert. We're looking at the opportunities. If we can have important financial results, enabling an acceleration of the universalization in Sao Paulo, we will consider the opportunities. Mario, it seems that I said that we would deliver the new Pinheiros River at the end of 2023. No, I did not say that. If someone understood 2023, they understood it wrongly. 2022 next year, clean Pinheiros River from our viewpoint.

[Mario Sampaio, executive]

Dr. Braga, next question. Marcelo Goncalves who will ask the questions about revenue. He asks for details and clarifications. Concerning the required revenue, is it BRL 17.5 billion for 2021. And based on prices of -- is this based on prices of February 2021? Is this net revenue?

[Osvaldo Garcia, executive]

In the 2 cases, the answer is okay.

[Mario Sampaio, executive]

Waiting for more questions. Reminding you that those who are listening to the translation in English are invited to ask questions. You may ask questions in English too. So please feel free to ask questions in English. SABESP is innovating -- Mario, SABESP is innovating?

[Benedito Pinto Braga, executive]

In the past, we used 2 of our periods to have reported in Portuguese and then in English. Now with the Zoom technology, today, we are doing at the same time. The call and also the virtual meeting in English and in Portuguese. So we are more efficient now. Yes, and this cut the cost of our conference calls.

[Mario Sampaio, executive]

Let's see if we receive more questions. Yes, we have another question. [ Mariani Moraes ]. Could you detail the strategy, how the company has financed new loans, potential buybacks.

[Benedito Pinto Braga, executive]

Osvaldo, please. This could be better answered by you because you are responsible directly. So please.

[Osvaldo Garcia, executive]

Well, let me answer, Mariani. Thank you. I will answer in the following way. The company has an intense process of refinancing and loans. We have tried to diversify the sources of loans apart from the debentures. And with incentives, we have sought multilaterals from the private market. We had an operation at the end of the year, almost BRL 1 billion would be invested in reals, not in foreign currency. Actually, this is a trend. The company guided by the Board and the counsel is trying to reduce as possible, the exchange rate exposure.

So our strategy is to diversify and anticipate the loans. Now concerning potential buybacks, we will see this when opportunities arise. But certainly, the company does manage its debt, and it can in the future, maybe pay off the loans that are very expensive in relation to what the market is offering. The debts, we have almost all of them CDI allow us to pay off the loans in advance, but always after a period after the issuance. I believe that in general terms, this is it, reminding you that the company has access to public multilaterals. Recently, we received approval from COFIEX due for the next step for financing of $200 million. It will be in the end with JICA, the public bank that does international development from Japan, and this is also in our pipeline. So we have many loans from the public bid and World Bank. These may later be converted to reals.

So we have a robust situation to guarantee the liquidity of the company and also guarantee the CapEx of the company to reach the goals and deliver the clean Pinheiros River on the date that Dr. Braga mentioned.

[Mario Sampaio, executive]

Mario, it seems that Julianna Roche asked the question. Julianna Roche, journalist from Reed at 11:46. I did not receive this question. I will read the question. I apologize. Journalist from Reed Intelligence. Her question details about my initial comments. SABESP does not wait to have rationing, what is the scenario for 2022? What levels do you expect to have when the -- during the droughts?

[Benedito Pinto Braga, executive]

Well, Julianna, during these years, we have 3 actions, 3 movements. One, to increase the infrastructure. Second, reduce losses of water and also to bring and also to have conscious consumption from consumers. We were successful in these 3. That is why today, we can say that we have no forecast for rationing of water. We are in November. We're expecting more rainfall this month of November and also during December and January, which are the rainy months. There is a difference in climate forecast between the institutes, research institutes. Some saying La Nina, others do not foresee La Nina.

La Nina means that we would have a dry summer. Otherwise, we would have a normal summer. So there are uncertainties. What we have in terms of expectations, is the average what happens more frequently. And therefore, right now, we are not seeing difficulties. Now we will have no difficulties. If we have a dry summer because we have alternatives to face a challenge like this one. We have experience to use technical reserves. You already use them. For your information, Cantareira reservoir has a technical reserve. The size of the full reservoir of Guarapiranga, which is the third largest system producing water in the metropolitan region of Sao Paulo.

Therefore, we right now, we don't see the need for rationing water. Now if we have a different situation, for example, in Franca, we did this. Why? Because there next year, in the first semester, everything will be okay. It rained there. We have more problems, but when we had a more difficult situation, it was necessary to ration the water, so people could fill their water reservoirs in their homes for their basic needs. But we don't have this perspective in Sao Paulo. We don't see this as necessary in Sao Paulo.

[Mario Sampaio, executive]

Now I received the question. Let's continue. We have no further questions. Dr. Braga. Let's wait another 3 minutes to receive questions. And do we conclude or do we wait more, Dr. Braga, Osvaldo. So let's wait another 3, 4 minutes. And if we don't have questions, we can close the conference call. We have 106 participants in this meeting. And certainly, those who had questions have already asked their questions.

[Benedito Pinto Braga, executive]

Well, Mario, I believe we have no more questions.

[Mario Sampaio, executive]

Yes, we have a question. Diego Nascimento is asking. Will you announce dividends, Dr. Osvaldo.

[Osvaldo Garcia, executive]

Well, the dividends foreseen are the minimum, and this will happen when we close our year-end report, we will define the company's profit. And there is no -- we don't intend to change this. 25%, which is the minimum dividend. We have a strong investment plan for -- according to the new law and we want to really bring universalization of these services to the state of Sao Paulo.

[Mario Sampaio, executive]

Very well, Dr. Braga, Dr. Osvaldo, we would like to close. So I will pass the floor to Dr. Braga for his final comments.

[Benedito Pinto Braga, executive]

Well, I would like to thank all the participants. I would like to thank our directors and our CFO. And I'd like to say that we continue working hard on our challenges, especially to meet the goals and everything that is in the new law. We will continue in reducing costs, improving efficiency. So this is what our company intends to do in the near future. And all those who participated may be sure that we will make our best efforts for our results to be greater, both financially and in terms of the improvement of the standard of life of people that we serve and we supply water and sanitation. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]