Basic Sanitation Company of the State of Sao Paulo SABESP

SWB:SAJA

Earnings Call Analysis

Company Progresses with Efficiency and Privatization Plans

The company is seeing tangible results from its focus on efficiency gains, restructuring, and strategic leverage. An Incentivized Dismissal Plan, part of a larger restructuring, is on schedule to be completed in January 2024, with shared services operational by mid-2024. Efforts to improve the customer relationship and billing processes are beginning to bear fruit. Energy costs are being addressed through automation, renewable projects, and plans for self-production by 2026. A robust, long-term investment plan aims at increasing water resilience and reducing event dependence, particularly in the Sao Paulo metropolitan area. Meanwhile, the company supports the ongoing privatization project, expecting a new governance structure and a privatization bill put forward by the end of the year.

Leadership's Commitment and Future Outlook

In their Q3 earnings call, SABESP's leadership, including CEO Andre Salcedo and CFO Catia Pereira, showcased their commitment to the company's strategic initiatives, emphasizing ongoing efforts in structural reforms and operational efficiencies. Salcedo outlined a timeline for completing staff restructuring by January 2024, with full operational capacity for their shared services center expected by mid-2024. Amidst these changes, the company has focused on customer relations, energy efficiency, and sustainability projects, which are already yielding positive results.

Operational and Financial Performance Highlights

Catia Pereira highlighted that the company saw volume growth across all segments, leading to a 3.3% growth in the third quarter. This has contributed to a 10.4% quarter-over-quarter increase in revenue, partly driven by volume growth and tariff adjustments made earlier in the year. The company observed a 13% growth in EBITDA, reaching BRL 2.414 billion in Q3, representing year-on-year growth of 24.3%. However, there was a noted drop in net income, down by 21.7% compared to Q3 of the previous year, primarily due to non-recurring events and adjustments from the previous year's financial results.

Focus on Sustainable Practices and Energy Efficiency

The company has been actively managing its water supplies, choosing sources with better quality to reduce the need for chemical treatments. They are progressing towards the universal provision of sewer services, with 100,000 new connections in Q3. They have also attained the Gold Seal for carbon emissions inventory, signaling their commitment to sustainability and energy efficiency initiatives.

Regulatory Environment and Privatization Strategy

SABESP is deeply engaged in discussions about the regulatory environment and its privatization process. Salcedo emphasized the importance of aligning with regulatory bodies such as ARSESP to ensure cost structures are recognized within the tariff model. There is a concerted effort to improve the regulation and to finalize a regulatory model by the end of the year. The privatization bill has been proposed, and the company supports the government's target to gain approval by the end of the year. There is a push to sign agreements with municipalities to align on the privatization benefits and expectations, with a single contract signed by URAE being the goal.

Expectations for Personnel Expense Reductions

An Involuntary Dismissal Program (IDP) has been set in motion which is expected to culminate in a 15% reduction of the salaries, payroll charges, and benefits by July 2024. A significant portion of staff exits are scheduled for the first half of 2024, timing that aligns with the knowledge transfer and transition process for remaining staff. The full financial impact of this program will be visible in later quarters.

Earnings Call Transcript 2023-Q3

[Luiz Tiberio, executive]

Good morning, everyone. Welcome to the earnings conference call for SABESP for the third quarter. I'm Luiz Roberto Tiberio, and I'm a Superintendent of Investor Relations. Today, with us, we have Andre Salcedo, CEO of the company, Catia Teixeira, CFO and Investor Relations Officer, and Marcelo Miyagui, Superintendent of Accounting.Before turning the floor over to Andre to start the conference, I would like to make some announcements. This video conference has simultaneous interpretation into English and it's being recorded. The presentation and recording will be available for download at the IR portal of SABESP where the press release is available. We remind you that questions will be taken only in writing at the chat box of this platform. This conference will last approximately 1.5 hours, considering time for Q&A with analysts, investors and journalists.We would like to clarify that statements that may be made during this call regarding the business prospects of the company projections and operating and financial goals are based on assumptions based on the beliefs of the company's management as well as on information currently available to the company. They do not constitute any recommendation for investments.Forward-looking statements are not guarantee of performance. They involve risks and assumptions and uncertainties as they refer to future events, and therefore, they depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operating factors may affect future results of the company and lead to results that differ materially from those expressed in such forward-looking statements.Now I turn the floor over to Salcedo.

[Andre Gustavo Salcedo Mendes, executive]

Thank you, Tiberio. Thank you everyone for your presence. Another cycle that we're completing. I think the earnings released yesterday, it materializes all the effort we have been making with lots of communication, transparency, the alignment with an active listening to the priorities of the company, to our goals, and basically, the result of this quarter reflects part of this effort that will unfold in the coming months given the company's structure. We have a long way to capture the gains that will result from current initiatives.And in order to give some accountability within what we planned in the beginning of the year and have executed so far, I would like to share with you a bit of our perception in terms of prospects, planning, execution, and the deliveries that we are making on this quarter still in the cycle of 2023. The next call will be in 2024.So in the beginning of the year, we have reprioritized the strategic leverages of the company. We have shown you in SABESP Day in August and a good portion of these restructuring of the company is in course and being implemented. This is part of an Incentivized Dismissal plan that's been negotiated with employees with a good adherence, more than 50% of our initial target, and this is completed. The implementation happened during one whole year. That's when the entire restructuring will be completed by January '24 and the shared services center will be fully operational in the middle of 2024 because that's when the layoff program will be completed. So it's a very complete program that's on schedule.In the business optimization line, we have created the new officers of customers in the meetings held in April. The new officer took office in August. And according to the effort of Sabrina and Catia, we are rethinking the - our relationship with customers, identifying opportunities, getting to know our customers better, and paying attention to billing, ensuring that once the service is provided, we have a collection rule that is fully implemented to ensure the preservation of our revenue. So this starts to show signs of results in this quarter due to 2 shocks between this effort of this fair that we have, and also the collection that's diligent and closed in the billing cycle.Energy is another focus, is 1 of the largest expenses we have. We have a project in 3 fronts in - for efficient energy to increase the automation and efficiency, identify opportunities for energy generation, especially low voltage, solar panels. Also within our operations, identify some opportunities of a better structured energy source. In [indiscernible], we had an important waterfall from the reservoir to the treatment unit. And we are doing a partnership of a 4.1 mega hydropower plant there.So we also aim to optimize the purchase of energy. So what's the best energy sourcing that I can have to serve the company? So we migrate and we are now migrating a set of data that will add to the current situation. And until the end of the year, we'll launch a request for proposal to implement a self-production project for energy of solar panels. So that as of 2026, we can have a self-production structure for energy that will allow to -- us to reduce carbon footprint and Scope 2. So in sustainability, we have an intense agenda. And among other actions, we've been able to obtain the Gold Seal of the carbon emissions inventory. That's an important step to define the goals and to start pursuing them.Looking at the sewage treatment plants, we know that they are the highest source of greenhouse gas emission in our structure. And we want to have that projects that will generate energy within them with biomethane, biogas generation, with projects escalating to other units, productions of water for reuse. That's also implemented in a partnership with Aquapolo and we believe there is room to expand to other units.There is a challenge in terms of regulation there for it to be more favorable. And in terms of energy and biogas, we have a possibility of heat cogeneration and being able to reduce the cost of transportation of sludge that goes to sanitary fuels. So this is very important. That starts with the identification of carbon emissions, circular economy, energy efficiency. And now everything is combined in an integrated way in the new business view.From the institutional point of view, there are some important advancements made. We expect to have, in the next months, the recognition by ARSESP of this effort the company is making through the new business officer with them, with ARSESP, taking our topics in terms of tariff review and what should be recognized in our tariff, such as commercial programs, for example. We submitted that to ARSESP. We are talking to them to have a more detailed discount and types of customers that have a differentiated treatment and the rationale of such differentiated treatment for such customers so that we can have these recognized later on.In addition to our participation in all public hearings and concentrations, both in the National Water Agency as well as ARSESP, this slide tries to summarize. There's a lot more to be said. Everything that we committed to during the beginning of the year and what we have implemented or completed or still in implementing.Now, let's move on to the next slide. I'll be very brief here. Where are we in the project? The privatization, there was a phase zero that has been widely announced and discussed by us and by the government, and the macro topics were defined about privatization. We're now in phase 1 of the project. It's very intense in terms of decision-making, definition of models, due diligence, valuation of the company, the adherence of the City of Sao Paulo that changed the regulation of URAE. Now, its proportional - governance is proportional to the size of the municipalities and sending notifications or notices to the municipalities.This was sent by the state government detailing what is the potential for improvement and gains by everyone, customers, the company, municipalities, and the society as a whole that will come from privatization. And along with this notification, they sent the presentation of the extension of terms and the anticipation of goals for the universalization of services.Last month, the Privatization Bill of Law was sent to the House of Representatives of Sao Paulo, and the government expects that it will pass until the end of the year. And the government is working a lot for that to happen. Of course, here at the company, we're providing all this support so that it can happen in that time frame and we can continue with the project. We have started an in-house analysis and we expect to complete this selection of banks that will participate in the syndicate of banks. And then, once that is approved and passed, we'll structure the offering that will happen in the first half of next year.Phase 2 will include the new governance resolution election in the URAE, the regional unit for water and sanitary sewage. The new bylaws of the company will be defined based on the reduction of the government's share and the transfer of control of the company from the government to a private company. We are working already and we're talking to creditors and banks, that were part of the debenture issue, to understand what's the best time to start the consensus for the waiver, to obtain the waiver from creditors that will finish with the offering by the company.Something we haven't, not yet, is the regulation model that will be enforced as soon as the control is transferred. This is led by the IFC as well as by the government of the state, and we try to contribute as much as possible. And I know that many of you, investors, have participated in conversations with IFC and the state, suggesting ways to improve regulations.We know that this has a high impact on the value of the company and on the performance of the investments that we need to make. So we're carefully looking into that. We're very happy on our side, working heavily in this turnaround, in this change of profile, transforming the company, making it closer to customers. We are very responsible and committed to complying with the goals and meeting the goals. Everything has a positive impact on the environment, on the concept of climate resilience, and to capture all the potential we can for the benefits that this agenda could bring for the company and its value. And we are making a long-term plan for efficient capital allocation, value generation, and hydro efficiency.So I would like to thank you again for your support for all the investors who have helped us in this journey. And this is actually the first quarter in which we start to see all the effort in concrete terms. First, we had the beginning, the stabilization of the bases, and then we started implementing all our vision in terms of efficiency gains that tends to materialize in the medium-term, given the size of the company and it’s stat. We have long-term contracts, so everything will materialize in the coming months.Thank you very much, and I'll be back to you to talk soon.

[Luiz Tiberio, executive]

Thank you, Andrea. Now, Catia will talk about the results.

[Catia Cristina Pereira, executive]

Good morning, Tiberio. Good morning, Andre. Good morning, ladies and gentlemen, everyone.I'll talk about the financial performance. Let's start with the operational performance. We continue to see a growth in volume we've had that in the second quarter. This growth became even stronger in the third quarter. We had a growth of 3.3% in basically all segments, residential, commercial, and industrial, and public. And when we look giving transparency in this presentation, in our releases, we always show year-to-date.So we have been - it's now - we have the data from 9 months of the year with the comparison to help to better understand our figures. So year-to-date we have 2.1 build total water volume, build new connections. In this third quarter we see a concentration made. Most of the growth comes from volumes above 10 cubic meter because we start looking not only at growth looking for an average tariff that's better for the company.Next slide, please. When we talk about sewage, the growth also took place above the water, given our commitment to advance in sewage implementation. So we are closing this quarter with 3.7% growth in sewage. And when we look at year-to-date, it's 2.7%. Again, the same analysis we make for water, we make for sewage. So growth accompanies that of water. And when we look at the bar graph, we can see volumes above 10 cubic meters that contributes in a consolidated way to the growth of the company in terms of billing.In sewage, we grew quarter-on-quarter by 100,000 new connections. We are advancing on the universal utility services provision agenda and increasing allocation for sewage because of that goal.Now, financial data. When we look at revenue quarter-on-quarter, we have grown 10.4%, part of this growth comes from volume. So the average volume growth was 3.5%. And we also have a growth that comes from tariff adjustments. The tariff review happened in May, so there's an effect that comes from volume tariff adjustments and also mix because we are growing - the consumption is growing in the areas where tariffs are better. This is reflected on consolidated figures year-on-year in the first 9 months. We can also see that a growth of 14.1% in our revenue.When we look at EBITDA and EBITDA margin, we go from BRL 2.1 billion in 2022 third quarter to BRL 2,414 billion. We grew 13% quarter-on-quarter in EBITDA and year-on-year 24.3%. It's a significant growth, shows that - showing all the initiatives that company has taken. Of course, it's a journey. And in some areas, results are obtained faster, others take longer to appear.When we look at net income and net income margin, there was a drop when compared to the same quarter in '22 of 21.7%, and in the year 5.7%. When we compare periods, there are events. For example, one important event in the third quarter of '22 that is non-recurring of BRL 325 million. So that alone, if we exclude that, we would be pretty much at the same level of last year. That was an adjustment for inflation of a debt we had with the government, state government. We had to adjust that in 2022. It was recognized in 2022 and contributed to financial result in 2022. Looking at the year, this also materializes and this effect of '22 is carried forward when compared to 2023.The next slide shows what we did. We come from a net income of BRL 1,081 million, net income in third quarter '22 we grow and it's a neutral result of construction. When we look at costs and expenses, there is a decrease of BRL 303 million, and other revenues and expenses BRL 7 million. And financial results, what's what I explained previously, BRL 325 million came from a non-recurring event in 2022, which explains part of this difference. In addition, BRL 101 million in net financial expenses, of which BRL 26 million refer to new debt made - loans made in July last year and May of 2023 BID invest. We also had BRL 8 million coming from increase in interest rates. When we look at interest loans in foreign currency, especially in U.S. dollars, our rate is super. So there was an inflation pressure. We went from 2.12% to 5.27%, quarter-on-quarter.There was an impact also of foreign exchange variance, quarter-on-quarter, with an effect from last year, in which the Brazilian real was appreciated when compared to the yen, so the revenue that was captured in 2022 now has stabilized in this year. In this account, there are also updates regarding lawsuits. Every quarter, we update that -- these lawsuits with our legal department, and there are also performance agreements expenses. So in general, this explains our financial performance.Income tax is BRL 126 million, which is expected. It's higher, because we had a better income, or rather expenses were higher, with a net income of BRL 846 million. This is a general view quarter-on-quarter of our financial performance.Next, now, because you, investors, asked. This is to explain the journey more clearly. So it's the same period, year-on-year, first 9 months of 2022 and 2023. So, we come from BRL 2,479 million in net income. There's an increase of BRL 1,800 million in revenue. Then costs and expenses, there would be also a non-recurring expense that, is the layoff program.Other operating expenses, BRL 73 million favorable. And financial expenses, BRL 837 million, the BRL 547 million that I mentioned before. And the difference is exchange variance and interest expenses on our loans. Income tax and social contribution BRL 93 million positive, reaching a net income of BRL 2,337 million. This is the overview looking at the first 9 months of 2022 and 2023.Now, going into details about operating expenses. When we look at personnel, there has been a growth quarter-on-quarter of 4.7%. We're basically growing BRL 15 million, due to health plan expenses, both based on use and cost. There was an increase in costs in the beginning of the year, and also an increase in the use of -- considering that we have a dismissal plan that employees will leave until the end of next year, they may tend to use their health insurance as much as they can while in the company.In terms of expenses, there was a growth of BRL 15 million that if you consider the expenses of personnel that was neutralized by many people that left the company, the 3.7% reduction in our staff. And we are still cannot see the -- such a strong effect in the first quarter, because there's a lot of concentration of people who left in August and September and the expense was not accounted for and they will be shown in next quarters.Although we have almost a linear distribution of exits, there are people who have higher salaries that are scheduled to leave in the first half of 2024, because we need to ensure the transfer of knowledge and transition of processes as well. But from -- when comparing September to August, we see and reduction of BRL 3 million in the salaries account. So now is for this to go down.We can still see some effect in the health insurance account. Materials, we had a reduction of BRL 12 million, 10%. It's a small difference, but we believe it comes from movements that happen, to the services account. There are 2 possibilities, buying services or materials, and we can buy services and materials. This -- based on the contract analysis, we have contracts to build -- to buy materials less than we had -- compared to 2022. So much of the materials we used to buy, now we're buying services and materials.So it's important to look at these accounts on a consolidated way. The same thing happens with services and personnel. That's a positive effect of 10.4%. Material for treatment, there is a drop, which is a positive effect. What explains that? We have a reservation level of 74%. So, we can manage the use of water, which allows us to choose better quality water, such as coming from Cantareira to supply. That leads us to a lower demand of chemical products.But we also see a trend in the decrease in the prices of treatment materials, especially the most significant ones in terms of consumptions with a drop in prices. And also, the management team and operations team is working to look for other products to replace the ones we usually use. So that we can benefit from this change in the prices in the market. That's not only a full reservoir, but there's also an effect of good management of the company.In terms of services, there was an increase in BRL 89 million. There is an increase that comes partially from pavement and refurbishing of roads, BRL 30 million. And a specific point here, this growth came in the third quarter, because we were not doing as demanded in the beginning of the year. An important supplier is no longer working with us. The agreement was broken, as we mentioned in our last call. And we had little time -- to make a new agreement.So, we had a liability to be served. And this liability of these commitments caused a BRL 17 million impact on this curve. This was specific and one-off event. In terms ofexpenses, we should have had in the first and second quarter and we didn't. There was no contract. And if we don't have a contract, we cannot make the provisions. So part of these expenses of services, in terms of IT and consulting services, we are in a restructuring phase of the company.Some consulting are working with us, looking at IT roadmap, future for the next -- future vision for the next 3 years. We have consulting company working with us in restructure personnel and we also have consulting companies working with contract modeling. So all of this is taking place now, all these expenses, so that we will have the benefits in the future.So this is a lot of work that happens before the journey of obtaining the result. BRL 11 million that we pay for collection companies. So BRL 11 million in collection companies that help with us to recover defaulting customers. And there is also an amount for new connections and maintenance.When we moved to electricity. We're moving sideways here and we're able to see an effect of reduction in consumption of almost 10% in our demand. Because we have a reservoir level that is high, so that allows us to use less energy. However, on the other hand, there was an increase in tariff, both in the regulated market and the free market, 5.9% and 11%. So this mix of increase in tariffs and reduction of consumption, the impact was only 2.4% in the electricity bill.Moving on to general expenses, since the last quarter, we have explained what is the transfer of municipal fund for greater transparency. There is a growth in these municipal fund, especially given the growth in revenue that's the main driver of growth. As well as the new municipalities that entered.The main impact we have in general expenses refer to lawsuits. Each quarter, the legal department of the company does an evaluation of expected losses. And the reassessment made this quarter increased the provision BRL 78 million. These are -- not new lawsuits, but they were classified as possible losses -- in the second quarter and now it's a probable loss according to the legal department.In terms of depreciation amortization, we see a significant growth of almost BRL 100 million that basically reflects all the investment effort made by the company. Behind this, we have BRL 6.4 billion in property, plant and equipment. This we are investing and increasing our depreciation and amortization account.When moving to allowance for doubtful accounts. Although there is a growth of 15%. Perceptually speaking, we are very close to what we were where we were in the second quarter of '22, but we see a reduction of BRL 50 million, which comes from an effort to curb default, as we call structural effort to strengthen our collection efforts, know our customers and act on it, not letting a delay in payment, become a default.This is something we're doing very well, focusing on the first 90 days, to ensure that this is not -- this is does not become an allowance for -- doubtful accounts. We add it only when it's 370 days. So, if these collection efforts are completed within 90 days, the -- fewer defaulting customers go to the allowance for doubtful accounts.There is also an effort to recover and to collect those defaulting accounts, and we are benefiting from that. There is a lot to be done still in terms of change of behavior with the customers and these large fair that we did for collection is an effort. Other companies in the market do that in order to compete for funds of customers and make sure that we get paid.We must have that event to ensure that the indebted families in Brazil are still highly indebted. So it's important to compete for those additional funds that, may come to capture and reduce our default rate to a controlled level. So we had a positive effect there. Tax expenses have dropped by 2.1%, but in terms of financial value it's the same. This is the year view, in personnel, there is a large growth when we consider the dismissal program, excluding that it's 7%.Looking at the first 9 months of 2022 and '23. For '23, there is 12% of the collective bargaining agreement that's been carried to '23 plus the 4.9% in May. So this will be diluted or reduced in time, because of the dismissal program. In general, supplies and treatment supplies expenses are dropping, due to our efforts services. This is basically due to consulting fees, asphalt and pavement expenses, connections and electricity is neutral.And general expenses growth in the 9 months is explained by the fund and lawsuits. What happened in this quarter explains most of this difference. Depreciation and amortization is, follows the same trend allows for doubtful accounts. We see a significant drop quarter on or year-on-year. We go from 4.1% to 3.4% in the 9 months of '22 to '23.In terms of investment in this quarter we had BRL 1.4 billion in investments, accelerating this CapEx movement where there was a disbursement of cash of BRL 752 million. In the first 9 months of this year, we invested almost BRL 4 billion in 9 months and we are accelerating the most we can to ensure that our goals are met. The bottom of the slide shows how investments are made mostly into sewage collection and treatment. And that's the trend for the next 5 years. The main highlight here is [indiscernible] Cantareira [indiscernible] in the North Coast. And the focus the universalization target so that we can close the tariff review cycle in 2024 with the most of our commitments met.Looking at this connections and loans and financing in terms of net debt versus adjusted EBITDA 2.2 to 2. Basically, this drop, it's due to an increase in EBITDA and the same is reflected in the adjusted EBITDA. There was an increase in coverage and increase in EBITDA. We have 13% of debt in foreign currency and half yen and half dollar. Basically, because the yen is in the amortization repayment stage and expenses in dollars are still in the investment stage. Okay, this is it. This is what I had to say.Now I turn the floor over to Tiberio for the Q&A session.

[Luiz Tiberio, executive]

Thank you, Catia. Let's now start the Q&A session. [Operator Instructions] Carolina [ Carneiro ] has 2 questions. First is about allowance for doubtful accounts. Could we consider improvement on this improvement as recurring? What would be the level of debt that we should consider? And the second question is the company was working with the regulator, discussing several -- topics as well as some costs not included in the tariff. Did we have any development in such conversations? So, 1 question about doubtful accounts and the regulatory environment.

[Catia Cristina Pereira, executive]

I can start here when we talk about allowance for doubtful accounts, the fair this collection event brings benefit. We'll continue to do that to make the wheel turn. Until we haven't treated all the structural aspect, we are making actions with our customers to understand what works for them. A structural work is not something that has a quick return.The results will happen, but gradually. So this collection fair is something that helps bring customers to the table to have a negotiation. So, we're looking at this doubtful accounts is based on debt from the past. So, when we compare to a higher revenue, the percentage is lower. So, we are focusing on the collection rule to ensure that the 90 days default will be -- collected as soon as possible, in order not to become doubtful accounts.But we want to keep the collection efforts consistent. So, when I compare that revenue is growing to a higher average tariff and a higher volume. So, we look at doubtful accounts as something from the past. In the collection fair, we opened for debts starting at 70 days. And many of these negotiations for settlement were of debts that were still not in the provision of our balance sheet.It was good for results, it's good for cash, but we ended up getting paid on debts that are short-term debts. We still have the challenge of going back and to this event and see what we have to do differently to have older debts paid, debts that have an impact on our balance sheet, this year. When we talk about expenses in the cost of electricity or costs here, we're talking to the regulator.There was a major debt the company had with the commercial issue. The company has worked on the last 3 months looking at our sales program, seeing how we could build on that with a technical structure for the firm demand program so, that we could present it to our regulatory agency. This was done in the end of September and now we're waiting for their answer. We provided all the technical support in terms of the tariff structure and the beneficial effect it would have on the company. So for the population to have a firm demand contract in the company. In the expense account, we look at what, how we can get closer to the regulator by our regulation team.Andre, now it's you.

[Andre Gustavo Salcedo Mendes, executive]

I think Catia -- I believe you have addressed both topics on our side. We're doing everything we can to accelerate the cap reduction process, either by having conversation with ARSESP, showing them what's feasible, our investment capacity, and this effect of this considering -- no longer considering some expenses line is something that affects us, because we cannot afford not to have those expense lines.And so, we're working to find an alignment between what we find more reasonable to be able to deliver on what we are required to do. We send this proposal to SASB and we are now detailing the program to make sure that for each segment there is a rationale and then SASB will analyze it. If they find it -- if they agree with it, they will rectify it and then we'll recognize these programs as part of our cost structure.Reprocessing of invoices is something Catia didn't talk about. This was a topic or rather that Catia asked and we didn't answer. There was a difference in reprocessing and we are since the first quarter we are collecting -- considering the revenue sending to SASB the net revenue data without reprocessing costs. So this BRL 97.5 million will imply in tariff offsetting if we perform below the level established by ARSESP.

[Luiz Tiberio, executive]

The next question comes from [ Guilherme Lima ]. I believe you have answered his question. If Guilherme understands his question was answered or not answered, he can tell us again. So let's move on to the next one. Could you the next question from Guilherme Lima. Could you give us an update on the option to define the regulatory model for private company? We've seen -- the government's position discussing the current change of the current model from forward-looking to backward looking. How is the discussion of the bill for the regulatory bill?

[Andre Gustavo Salcedo Mendes, executive]

So, Guilherme Lima, again, let us know if your question was answered. As for regulation, the company is working according to the current rule. What's happening in parallel in the context of privatization, is structured conversation led by IFC along with the state government, Natalia from the Secretary of Logistic Infrastructure, Environment and Rafael in SPI to look for the leverage to improve regulation.They have announced what we seek, and part of that is reflected in the contribution of SPI and the public hearing at ARSESP. What we believe is that there is room for improvement for the population. The adjustment of CapEx recognition is something that compares to what currently exists in the electricity industry, but no decision was made so far. What we expect is that these conversations become more intense in November and that we'll have a definition until the end of the year of that model.And then -- this new structure that aims to align shared efficiency gains, having a higher certainty level in shared revenues, and the investment plan we have to make. But there's a whole process to take place still for it to be approved. This is work in progress and there's no decision as to the detailing of the improvements.

[Luiz Tiberio, executive]

Next question from Marcelo Sa. Do you have any idea of the impact on the tariff discount for customers? The other question is about the contracts you mentioned, as if it was going to happen in the next phase, only after January. But in the event, Natalia is saying that she was working to sign it this year, could you imagine that it's possible to sign contracts with the most important municipalities still this year. Will the regulatory issue be reflected in the agreements with the municipalities?

[Andre Gustavo Salcedo Mendes, executive]

We don't disclose details of commercial discount, Marcelo, because this is a commercial issue of the company. As for the signing agreements with the municipalities, what I understood from the structure that was built is that the structure for the agreement to be signed, we need to have a meeting of the Collegiate of Municipalities, the meeting of the Board, the executive.And if this agreement is approved, then it will be signed by the representative of URAE that will be appointed in the process. It's possible that municipalities state their opinion until the end of the year, to agree with the privatization. Yes, of course, that's highly desirable. We're working at that agenda. The teams of the company, regulatory investments, Natalia and the team of the Infrastructure Secretariat are having weekly meetings, many meetings, to explain to all city halls of 375 city halls, the investment plan, the benefits that -- the process can bring to each one of them.So we would like the most of the municipalities to express their opinion by the end of the year. And the details, the step-by-step was extracted from a presentation of the state government. So I believe that it's in agreement with what we planned. He completed his question, asking us to confirm if we're going to sign a single contract for URAE and not a contract by municipality.This is what we understood based on the statements and what -- on everything that's being discussed in the project, a single contract signed by URAE. But this needs a voting process from the municipalities in electing the committee of URAE as well as the executive -- at the executive level.

[Luiz Tiberio, executive]

So there are no further questions so far. [Operator Instructions] [ Aaron Ream ] asks if IDP expected to deliver a 15% reduction of the salaries, payroll charges and benefits P&L line item by June 2023. If not, when is the full reduction expected to be realized?

[Catia Cristina Pereira, executive]

No, we expect the full appropriation of the benefit reduction from the exit of people to happen as of July 2024. The IDP program Aaron has a schedule for people to leave that started in July 2023. That will happen until June 2024. So throughout this period there's a growing impact of reduction of expenses with benefits from personnel line. But this full benefit will really be seen as of July 2024.We have the Q&A page open for investors.

[Luiz Tiberio, executive]

Since there are no further questions from investors, let's answer the journalist questions. First question from [indiscernible]. About discussions of changes in the regulation of privatization. One, what have the government or IFC actually proposed? Two, what are the necessary steps to formalize it? Will the law need to be amended?

[Andre Gustavo Salcedo Mendes, executive]

Well, the best vehicle to answer the question is the government or IFC. What we know is that there is a desire to improve the regulation mentioned by the [ upper tier ] and the secretary that's being discussed with IFC. I don't have the details of each of the steps, but I know that each event goes through ARSESP to analyze the merit of the proposal.But I don't foresee any changes in the law because there is a regulation that says that the regulation is made by ARSESP. What may happen is that part of the regulation being reflected in the agreement. So a part of the agreement may reflect some items that are purely regulational today to increase the safety during this journey. This contract may include some of these points if the government finds it convenient.

[Luiz Tiberio, executive]

The next question is from Bruno [indiscernible]. The privatization of SABESP has been questioned by the opposition after the blackout in Sao Paulo, after a strong windstorm. The privatization of SABESP foresees a better regulation in case of longer delays in the supply of water for consumers after some accident. Will there be established deadlines?

[Andre Gustavo Salcedo Mendes, executive]

I think it's natural for people to question that this event impacted every one of us. And SABESP had a blackout in some of its facilities as well. So if the privatization. We believe that privatization will be beneficial. There are several sectors, including the power sector, has evolved a lot after the privatization. In terms of the debate by the population is, what are the best models in terms of regulation applicable to our case regulation is robust.It provides the flexibility of investments in more severe moments. The best example that's good regulation is in the water crisis. There was a very extreme environment or climate event and the company was able, based on a lot of cooperation with the state, the government, the granting authority, to organize itself and face the problem. The regulation includes that type of effort.Our investment plan is very robust, focused on the medium and long-term, on water resilience. And we are anticipating an increase of water availability throughout this journey. One example are the desalination plants at the coast that will help build resilience, because the water supply is made, basically based on rivers, and there are events that happen and that harm the water availability.So we're increasing that water availability, enlarging the connection between Santos and Sao Vicente and Guaruja. There are many efforts made to reduce the dependence on events and also increasing resilience and the communication among the metropolitan area of Sao Paulo. The Cantareira system was responsible for supplying water to half the metropolitan area. After many interventions inside the metropolitan area.Now cities can be supplied by other system Alto Tiete, Cotia, Sao Lourenco, Guarapiranga, Billings so the dependence was to be 50% of the best, and now it's only 1/3. That allows us to manage the availability of water in these reservoirs. And there's also a connection among them. We are able to pump water from one reservoir to the other, rebalancing the level of water.So, we can have a uniform supply in the metropolitan area. So there is room for improvement, but it's a robust regulation. This is being analyzed by the IFC and the state government to reduce the time of service in case of crisis.

[Luiz Tiberio, executive]

Okay, this was the last question. I believe there is 1 last question by [indiscernible]. Oh, okay. I'm sorry. How is the crisis with and now Sao Paulo, how can the crisis within now Sao Paulo the electricity company, impact the advancement of privatization with SABESP?

[Andre Gustavo Salcedo Mendes, executive]

Well, [indiscernible] I think the debate shed light on the regulation model. How can a private concessionaire have a supervision and alignment level with the provision of services? There are several differences between the electricity sector and the sanitation. First, the granting authority is municipal for the metropolitan area. It's a shared granting authority, between the state and the municipality.But there is a difference between the municipality, which is closer to the citizen. The regulation is state and it's much clearer and easy to identify any problems and correct them if necessary. So the debate will happen. It's only natural. It is our role as a company and the state government role to explain the difference and say that it's a good project and the regulation could be improved to ensure perpetuity and any problems in the reduction of provision of services.And in the event of any atypical circumstance, the population would be served as quickly as possible. This debate is taking place. If they ask us, we will provide the necessary clarification. And my feeling is that the process will continue after this clarifications are made.

[Luiz Tiberio, executive]

Now there are no further questions. Now I would like to turn the floor over to you for your final remarks.

[Andre Gustavo Salcedo Mendes, executive]

So once again, I would like to thank you all. Thank the company, the employees and associates. There's been a very rich year in terms of challenge changes. It's a very impressive company. It really responds well when seeing the purpose and the rationale for transformation. I would like to congratulate my C-level colleagues and also congratulate all employees of the company, employees who've been with the company for many decades that are embracing this project.That build this new company every day to make it a more modern company, closer to people with a broader view, of our role as a public utility concessionaire to take, to bring quality of life to the population. So, I would like to thank investors, all those present here, for listening to us, and contributing to this journey of creating a company that's a benchmark in Brazil, and as well as worldwide when we speak of sanitation, innovation and new technologies. Thank you, everybody.