Earnings Call Transcript - SBS Q2 2021

Mario Sampaio, Head of Capital Markets and Investor Relations

Good afternoon, everyone, and welcome to SABESP's video conference to discuss the results for the second quarter of 2021. My name is Mario Sampaio. I'm the Head of Capital Markets and Investor Relations. Let's start by informing all participants that this video conference is being recorded. The presentation followed by slides is being transmitted over the Internet through the website, www.sabesp.com.br and through the MZiQ platform. The presentation will be available for download on the same portal as well as the results release. We remind you that questions will be accepted to the speakers only through the videocast platform. But before proceeding, we would like to clarify that any statements that may be made during this conference relating to the company's business prospects, projections and operational and financial goals constitute the beliefs and assumptions of SABESP management as well as information currently available for the company. Future considerations are not guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events. And therefore, it depends on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future results of the company and may lead to results that differ materially from those expressed in such forward-looking statements. Now let's open the image. I would like to present the participants today starting with Mr. Benedito Braga, our Chief Executive Officer; Mr. Osvaldo Garcia, Chief Financial and Investor Relations Officer; Luiz Tiberio, Executive Assistant; Marcelo Miyagui, Head of Accounting; Agnaldo Pacheco, Controller; and Marcel Sanches, Head of Regulations. Now I would like to pass the floor to Mr. Braga. Mr. Braga, for your opening, please?

Benedito Braga, CEO

Thank you, Mario. Good afternoon, good morning, good evening to everyone on the call. I'd like to introduce Osvaldo Garcia, the new superintendent of financial and economic matters and investor relations at SABESP. He recently joined us and comes with an engineering background, having served as the Director President of Caixa Participações and the National Secretary of Sanitation in Brazil's Ministry of National Integration. He has extensive experience in sanitation, and we are pleased to have him on board in this critical role. I also want to highlight that we've taken steps to enhance our regulatory framework and our relationships with the regulatory agency. Previously, our regulation was divided into two separate areas—tariffs and costs managed under financial and economic affairs, and regulatory communication and oversight handled by the presidency. Now, these two areas have been combined under one superintendency led by Marcel Sanches, who is with us today. This new structure will enable us to handle regulatory matters more effectively. This integration has been a long-term goal, and we are finally able to achieve it with Mr. Osvaldo Garcia's leadership. Additionally, we have established a new superintendency to focus on business development and expand our sanitation market, which is crucial given the opportunities presented by the recently approved regulatory framework, specifically Law 14,026 of 2019. A decree has also been issued to regulate Article 10 of that law, setting rules for verifying the financial and economic capacity of public service providers. We are optimistic about these developments, although we acknowledge that some companies might face challenges meeting the deadlines set for next March. Nevertheless, most of our contracts comply with the new framework. On the legislative front, Law 17,383 has been passed to rationalize sanitation areas, defining four regions in the state. The Southeast and Southwest region includes the 370 municipalities we serve, allowing us to maintain our current contracts without changes. Financially, we have positive updates as well. Mario Sampaio will provide further details, but I want to note that we've recovered from last year's challenging situation regarding exchange rates that affected our balance. We are now reporting an excellent result of BRL 773 million for the second quarter. Regarding the climate and hydrologic conditions, the situation is stable. Although there have been reports about potential energy challenges in Brazil due to water shortages, those issues pertain to the federal government's responsibility over the energy sector. In terms of sanitation services, municipalities and the state remain accountable for water and sanitation provisions, and I'm happy to inform you that we are in a good position. The infrastructure we've developed in recent years has made us resilient, and we have managed through difficult times without service outages during the pandemic and environmental challenges. I am here to answer any questions you may have, and I'll now turn it over to Mario Sampaio to discuss our financial situation and the impacts of the new regulatory framework on our business. Thank you.

Mario Sampaio, Head of Capital Markets and Investor Relations

Thank you all for joining us today. Let's begin by welcoming Marcel Sanches, who has transitioned from heading the regulatory affairs team to join our finance division in the newly expanded regulation area. With this reorganization, Luiz Tiberio, the previous head of cost and tariffs, will now serve as Osvaldo's executive assistant, acting as chief of staff to enhance support for the CFO. Marcelo Batista Gomes will take on the role of Head of Superintendent of New Businesses this week and will be introduced shortly. Before we dive into the quarterly results slides, I’d like to highlight some key points. In May, we concluded the third ordinary tariff review, resulting in an average tariff increase of 7%. This includes a 7.6% rise in residential and nonresidential categories, a 1% decrease in the social and favela categories, and a 5.45% increase in wholesale rates. The impact of these tariff adjustments will be more evident in future quarters, enabling us to better assess their effect on our revenue. This year's adjustments initiated the introduction of new tariff structures with differentiated readjustments based on category. By the end of 2024, we anticipate a more balanced distribution of tariffs, leading to more predictable recurring revenue. In the second quarter of 2021, we recorded an increase in both revenues and expenses compared to the same quarter last year. Adjusted EBITDA saw a decrease of BRL 128 million; however, when excluding nonrecurring effects from last year, particularly the BRL 181 million agreement with the municipality of Mauá, adjusted EBITDA actually increased by BRL 66 million. Similar dynamics were observed with average tariffs when estimated based on net revenues without construction revenue relative to total billed volume, showing a 3% increase compared to the second quarter of 2020. Excluding the nonrecurring impacts from Mauá, average tariff increases reached 9.2%. Moreover, when disregarding the volumes of the residential, social, and favela categories that were exempted last year, average tariffs still rose by 4.3%. Regarding foreign currency exposure, we have successfully reduced it from 34% last year to 19% this quarter. This change primarily results from refinancing local debt with real currency, which replaced the dollar bonds that matured last year. Additionally, the appreciation of the real against both the dollar and yen has positively influenced our results this quarter. Now, moving on to our slides, let's look at Slide 3. In the second quarter of 2021, our total billed volume grew by 1.6% compared to the same period last year, broken down into a 0.7% increase in water and a 2.7% increase in sewage. Excluding the temporary exemption effects in Mauá and the social, residential, and favela categories, real growth reaches 7%. Although our main segments showed quarterly growth, volumes in the commercial and industrial categories, which carry higher tariffs, have yet to return to pre-pandemic levels, impacting our overall average tariffs. On the next slide, we see that revenue from sanitation services rose by 6%, increasing from BRL 3.7 billion in the second quarter of 2020 to BRL 3.9 billion this year, driven largely by authorized tariff adjustments of 3.4% in August 2020 and 7% in May. Net revenue increased from BRL 4.4 billion to BRL 4.6 billion in line with service revenue growth. However, construction revenue remained stable compared to the previous year. Costs associated with administrative and commercial activities, including construction, surged by 10.4%, climbing from BRL 3.4 billion in the second quarter of 2020 to BRL 3.7 billion. Significant cost increases were noted particularly in general expenses, materials, electricity, and provisions for doubtful accounts. As a result, adjusted EBITDA decreased by 8.1%, falling from BRL 1.6 billion to BRL 1.5 billion, largely due to increased cost pressures and nonrecurring results from the prior year. Excluding these nonrecurring factors, the adjusted variation is positive by BRL 66 million. Despite these challenges, net income surged from BRL 378 million last year to BRL 773 million this year, marking a 104% increase driven predominantly by favorable financial outcomes from currency appreciation. On the subsequent slide, we note that rising costs were influenced significantly by inflation, which reached 8.3% in the period. Quarter-on-quarter, costs including construction rose by 10.4%, and without including construction, this increase escalated to 14.6%. Personnel expenses, while rising by 3%, remained below the inflation rate due to our retirement program, which concluded at the end of 2020, reducing our total workforce by 8.2% compared to last year. This change occurred despite a rise in medical expenses that followed a low quarter during the previous year due to social isolation measures. The notable 59.3% increase in general expenses was mainly attributed to legal costs and rising provisions for municipal taxes, while materials and energy expenses also saw significant hikes due to increased consumption and regulatory tariffs. As we move to Slide 6, we analyze the financial performance starting with the BRL 378 million profit recorded in the second quarter of 2020 and highlight the key changes that shaped our current results. Net operating revenue increased by BRL 163 million due to tariff adjustments. Overall costs increased by BRL 347 million when considering construction expenses, while other operating income and expenses, significantly influenced by agreements with Mauá and CASAL, deteriorated by BRL 109 million because of nonrecurring items. Financial results improved substantially, rising by BRL 924 million due to currency appreciation compared to the previous year's devaluation, while income tax and contributions changed negatively by BRL 236 million due to higher taxable income, ultimately concluding in a net income of BRL 773 million for this quarter. Before opening the floor to questions, I want to briefly touch on two additional points. First, following the recent approval of Law 14,026 which modifies sector guidelines, the federal government issued Decree 10,710 on June 1, which defined the methodology for assessing the financial capacity of public water and sewage service providers. Providers must fulfill this methodology in two parts. Initially, they'll need to meet basic economic financial indicators and later demonstrate through feasibility studies that their funding plans suffice to achieve full coverage by 2023. SABESP already meets the minimum criteria established by the decree and is now engaged in preparing the required feasibility studies to comply with ARSESP by the December 31 deadline. An important legislative step at the state level was achieved on July 5 with the approval of State Law 17,383, which outlines the regional breakdowns for sanitation services within the state, creating four regional units, collectively referred to as URAEs, for managing water and sewage services. Finally, I'd like to highlight our recent issuance on July 16, where we successfully issued the 28th debenture amounting to BRL 1.2 billion across three series at rates of CDI plus 1.2%, CDI plus 1.44%, and CDI plus 1.6%. The funds from this issuance will be allocated to refinancings, particularly focusing on the upcoming maturing 25th debenture of BRL 1.45 billion this October. With that, I am ready to take any questions you may have. It seems that there are no questions.

Benedito Braga, CEO

It looks like, Mario, you have done a very good job.

Mario Sampaio, Head of Capital Markets and Investor Relations

Good. So thank you. But I would then last ask Mr. Braga to then conclude because we don't have any other questions. I just got that information. So maybe we can conclude. And Mr. Braga, I pass on the word for you for the last remarks.

Benedito Braga, CEO

Thank you very much. It has been a great pleasure for us to have this call with you. As Mario mentioned, we are here to answer any questions and provide more specific information you may need. Mario will be your contact person for any inquiries regarding the results of the second quarter of 2021. We remain optimistic despite the challenging political, economic, pandemic, and climatic circumstances because, regardless of external factors, the company is performing well. We are making progress in connecting more residences to our sewage collection and treatment system. I neglected to mention at the beginning of this meeting that the new Pinheiros River project is progressing well. This month, we have connected 368,000 residences to our sewage system, which is comparable to the size of a city like Guarulhos in just 1.5 years. The company is advancing well in the universalization of sanitation in its network. This is good news. I hope you found Mario's presentation enjoyable, and I look forward to seeing you in three months. Thank you.