Companhia De Saneamento Basico Do Estado De Sao Paulo-Sabesp Q3 FY2022 Earnings Call

Good morning, everyone. And welcome to SABESP's Earnings Call to discuss results relative to Q3 2022. My name is Luiz Roberto Tiberio. I am the Resource Funding and IRO Officer at SABESP. Today with us, Dr. Benedito Braga, the Company’s CEO; President Dr. Osvaldo Garcia, CFO and IRO; and Marcelo Miyagui, Accounting Officer. Before I move over to Dr. Braga for his opening remarks, I’d like to give some housekeeping instructions. We have simultaneous translation into English and it’s being recorded. The presentation and the respective recording will be available for download at the company’s IR website where the respective press release is already available. Our conference will last approximately 1.5 hours and we’ll have 45 minutes for Q&A at the end of the company’s remarks for analysts and investors and 15 minutes for journalists. Concluding the initial instructions, I’d like to say that forward-looking statements made during the company’s presentation concerning business outlook, operating and financial targets are based on assumptions and beliefs on the part of the company’s management and also on information currently available to the company. They are not investment recommendations. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events and therefore depend on circumstances that may or may not materialize. Investors should keep in mind that economic conditions, industry conditions and other operating factors might affect the future results of the company and thus lead to numbers that will differ considerably from those expressed in these forward-looking statements. Well, having said that, I'd like to turn the floor over to Dr. Braga who will make his opening remarks. Please Dr. Braga, over to you.

Thank you Tiberio. It's a great pleasure to be with you all here today. I'd like to greet you all. And thank you also for participating and thank you for your interest as investors and as journalists, and the general public, who are here with us following our Q3 earnings conference call. Starting with the update on the status of the water sources this year, we are seeing a more comfortable scenario compared to the same period last year. Early November 2021, the sum of the volumes stored in the reservoirs of the Metropolitan region of São Paulo was 39%. This year, the total volume stored in the eight systems we have for producing drinking water is at 45%. It is a more comfortable situation, but one that will have to be carefully monitored due to a drier summer forecast by the Climate Forecast Center of Columbia University, which could delay the rains that normally happen in December. In terms of the company's internal affairs, I'd like to highlight that the restructuring we performed by unifying the regulation oversight department and also the creation of the new business department in July 2021 brought excellent results. Under Dr. Osvaldo's leadership in the financial front, SPEs were set up that have expanded the area in which our company operates, meeting the expectations of our shareholders. As you all know, we have recently disclosed to the market the creation of three SPEs or specific purpose companies aimed at expanding the company's areas of activity, and also taking advantage of the synergies across related processes to sanitation activities. We have signed an agreement to acquire 20% share at Foxx URE-BA, a special purpose company that is a subsidiary of Orizon Valorizaçao de Resíduos, a transaction that is still pending approval by the Administrative Council for Economic Defense, a consumer defense agency. URE Barueri will operate in the thermal treatment of urban solid waste with energy recovery, adding an installed capacity of 20 megawatts and sales of approximately 60 megawatts with a treatment capacity of 300,000 tons of urban solid waste per year. It will be the first power generation plant from the incineration of urban solid waste in Brazil, and mass burning has already been used across the world, in Europe, Japan, and China. This brings an expectation to reduce landfills here in the country which brings about different issues and are increasingly more expensive due to a shortage of areas in metropolitan regions, specifically in São Paulo. We also set up the Katerra SP Energia SA in which the company will hold 49% of the capital. This SPE is focused on photovoltaic energy generation. We are working on the construction of four generation plants on floating structures, the first of which will be on the Jaguari reservoir, the largest one in our system with a capacity of 5 megawatts and scheduled to start operating in 2023. We also will further increase our generation capacity for photovoltaic energy. Using distributed generation will add economies to the company and will use sustainable energy, thus reducing our contribution to greenhouse gases. This aligns with the ESG pillars, a matter we are paying close attention to. We have also formalized a partnership where SABESP will hold a 45% stake in the SP SA, a paving company with the objective of setting up a plant for producing and selling cold asphalt with a total investment of R$40 million by 2023. This will allow SABESP to use the material in our asphalt recomposition services. As a reminder, this is a very important problem that the company faces with smaller cities from the point of view of reputation and image. Cities say that the potholes were made by SABESP and the other way around. So with this new partnership with the private sector, this will help us significantly, especially in terms of rebuilding asphalt roads in the countryside where asphalt is very expensive and logistically complex. So those are important steps towards the diversification and expansion of environmental services and reinforce our commitment to sustainability within ESG. It's important to highlight that the company's bylaws include the possibility for SABESP to participate in activities such as planning, operation, and maintenance of energy production, storage, conservation, and trading systems for energy, both for the company and for third parties. Finally, I would like to report that in the third quarter of 2022, we further increased the number of residential connections to sewage collection and treatment in the Pinheiros River Basin. There are now 650,000 households connected, exceeding the initial goal of the program by approximately 20%. Just to give you an idea, we have made connections throughout the past 3.5 years that account for the size of a city like Porto Alegre or Recife. Earlier this morning, for those of you here in Brazil, living in São Paulo and who followed the morning news, a specific host was always very hard on everyone, including on us. This morning, he was complementing SABESP on this work, which resulted in a cleaner Pinheiros River. Today, we have fish and other fauna, and people fishing in the margins of the river. We also have in operation three quality recovery units to further improve river quality. Thanks to this basic sanitation work, we have accomplished our mission to bring quality of life to the poorest, the neediest people living in informal areas of São Paulo in the metropolitan area. That's what I had as opening remarks. I'll now turn the conference over to our CFO who will bring us the excellent financial numbers we achieved this quarter. Osvaldo, over to you.

Good morning, Dr. Braga. Good morning, everyone. And thank you for participating in today's conference call to discuss Q3 2022 results. Starting with Slide number 3, we see an increase in the total volume billed, which was 8.8% for water and 2.5% for sewage, leading to a growth of 1.6% compounded. As a reminder, the growth of the sewage volume above the water volume reflects the investments made in recent years to expand collection and treatment services in line with our investment plan. Driving this growth were mainly the non-residential categories. The Commercial category, with a variation of 7.3% in water and 10.2% in sewage. Public, with a variation of 13.3% in water and 17.4% in sewage. The Industrial category showed an increase of 3.5% in water and 1.1% in sewage. The Residential category remained stable in water, and we saw a 1.2% growth in sewage. This mix contributed to the increase in the average tariff in the period, positively impacting the revenues as we will be able to see on the next slide. On Slide number 4, sanitation service revenues net of taxes increased by 16.9% in the period from R$3.9 billion in Q3 2021 to R$4.6 billion in Q3 2022, due to an improvement in the mix and a tariff readjustment of 12.8%, which has been in place since May 10, 2022. EBITDA increased 19.5% from R$1.8 billion in Q3 2021 to R$2.1 billion in Q3 2022, driven mainly by an increase in revenues proportionally higher than the increase in expenses. Net income increased 130.7%, coming from R$469 million to R$1.1 billion in Q3 2022. On the following slide, we see a positive variation in sanitation revenues net of taxes of R$670 million, with a more favorable mix and the effect of the full application of the 12.8% tariff adjustments. Costs and expenses grew R$377 million compared to the previous year, or 13.6%. The net financial result showed a positive variation of R$639 million, mainly due to monetary and foreign exchange variations driven by the lower valuation of the U.S. dollar when compared to Q3 2021. Income tax and social contribution expenses increased by R$319 million, the equivalent of 134.2%, linked to the improved results. Our estimated losses with doubtful receivables were R$136 million, an increase of 14.5% compared to Q3 2021, reflecting an increase in revenue and accounting estimates. However, compared to Q2 2022, there was a reduction of 46%. The trend is that the commercial actions and recovery of the service sector will help reduce overall defaults or delinquency rates. We have intensified actions to curb delinquency, which include intensifying water disconnection actions and sending warnings to consumers with overdue bills. Moving on to Slide number 7, we note an improvement in the financial result mainly driven by monetary and foreign exchange rate variations that went from a negative situation of R$313 million in Q3 2021 to a positive variation of R$348 million in Q3 2022. Financial expenses increased by 10.7% due to the increase in interest rates on debentures. I would like to highlight the reduction of one more percentage point in our exchange rate exposure, reflecting resources on loans structured in local currency. So those are our opening comments. We'll now move on to the Q&A session, and I'll turn the floor back over to Tiberio.

Thank you, Osvaldo. Thank you, Dr. Braga. We will now begin the Q&A session. The first part is intended for analysts and investors, and afterward, we will have some time for journalists. If we aren't able to answer all questions due to time constraints, we will follow up later. Our Investor Relations team is available for that. Carolina asked a couple of questions, and I will read them to you, after which you can respond. I will start with the first question, and we will address the second one afterward.

I have 2 questions. Number one, the level of provisions for doubtful receivables dropped in Q3 when compared to Q2 2022. I'd like you to comment on that and say whether that is already reflecting the stabilization of the new systems and practices? And if we can consider that a normalized level, or we should expect to see even better levels going forward?

Ladies and gentlemen, the amount for doubtful debt total of receivables for Q3 did drop compared to Q2, driven by our effort and strict discipline to reduce default levels. We believe that this level will get closer to pre-pandemic levels in the second half of next year, 2023. Those actions in place are being implemented, and they are part of our exchange and commercial system. You were correct, and they have been showing good results. We expect to see some variations, but we do believe that starting in the second half of next year, 2023, those numbers will be close to what we had in the pre-pandemic period.

Thank you, Osvaldo. And the second question from Carolina Carneiro is the following. We'd like you to comment on the last two investments announced: the purchase of shares in URE-Barueri and the paving company. What is the rationale behind that investment? And why make an M&A in this moment when we are about to change administrations at the state level?

It's not because of the moment. That's something which has been on our agenda for some years now. When I opened this call earlier, I complimented Osvaldo for being able to focus on that topic, to tick that item and really materialize it. The rationale behind it is that from the point of view of solid waste, this is in our bylaws actually. Sanitation is not only related to drinking water and sewage treatment; it also entails solid waste and drainage. All of that combined is part of our main activities. From a financial standpoint, of course, that makes sense for us to identify the advantages coming from that partnership with the private sector. With that, we are contributing to reduce the number of landfills in the area. Everything aligns with the ESG principles, which is very important for us at this moment. Regarding the cold asphalt front, I think I did mention the advantages of that partnership. We will have technology at our disposal which will really help us, especially in the countryside.

As for the asphalt, in addition to the expected returns, which is higher than those coming from the regulators, we expect a reduction in costs. We aim to provide services at excellent levels but with controlled costs. So that's key for us, and that is in line with the company’s policies. It has made no sense to wait to execute that; it has been worked on for two years now. For URE-Barueri, along the same lines, we will acquire technology and will be able to explore that market across the 375 cities where we operate. So these are just the first steps, and we hope to have interesting returns going forward. Economic studies show good levels of return.

Good morning. Number one, the consumption mix, and as a consequence, the tariff mix. Are they already back to the pre-pandemic levels?

Yes, the answer is yes. Those levels are close to what we had in pre-pandemic periods. A small gap to be adjusted, but we're quite close to what we had before the pandemic. Economic activity has resumed to levels both in Commercial and Industrial fronts. The Public sector is still lagging a bit behind, but this will be normalized sooner rather than later.

Any news about the implementation of the new tariff structure? And is the current revenue within the revenue cap for 2022?

The regulating agency delayed the new tariff structure, and we are now waiting to hear from them. We expect this to happen this year, 2023. This has a lot to do with the second part of the question regarding the revenue cap. Yes, it is about to be implemented. If by the end of the year we have not recovered, there are protection mechanisms in place. If it's below 97.5%, this will be offset in the next tariff readjustment to happen in May 2023.

Thank you for your answers. I think the results are good, and clear explanations. If there are other questions or comments you want to make, you can do it offline or now during the Q&A. We can then move on to the Q&A session for journalists, okay?

All right, carry on.

I'd like to ask about the RSU, solid urban residues. Any new agreements still to happen this year?

Not for 2022. It takes about 1.5 years for analysis and assessments. We believe that nothing is happening this year. But we do expect to have more than one agreement next year. The good results speak for themselves, and the actions we have taken into fighting delinquency and reducing costs leave us very excited with the numbers we have announced.

Thank you for your answer. The numbers seem to have left our audience very satisfied. Dr. Braga, I turn the floor back over to you for your final remarks, if you will.

I'd like to thank the whole team for your professionalism and hard work. A special thank you to Miyagui and his team, and our employees in the financial office who worked hard for this announcement and for us to have this level of transparency and quality in announcing results. This presentation was simple but quite straightforward. Thank you, Dr. Braga.

On our end, we are quite satisfied and happy with the results for Q3. The financial team has worked really hard, and I'd like to compliment their dedicated work. Osvaldo, Miyagui, Tiberio, the whole team. I want to acknowledge everyone’s hard work and competence. That’s what allows this company to deliver good financial results, and more importantly, deliver results that matter to the population. SABESP serves 28 million consumers. With the work we have been doing throughout this period, connecting more people to the collection and treatment of sewage is vital for the quality of life of those people. Today, sewage is treated and helps preserve the environment and improve the quality of life of those in need. Thank you everyone, and this ends our meeting for today.