Companhia de Saneamento Básico do Estado de São Paulo – SABESP. (NYSE:SBS) Q3 2022 Earnings Conference Call November 17, 2022 9:00 AM ET
Luiz Tiberio – Resource Funding and IRO Officer
Benedito Braga – Chief Executive Officer of SABESP
Osvaldo Garcia – Chief Financial Officer and Investor Relations Officer
Marcelo Miyagui – Superintendent for Accounting
Conference Call Participants
Carolina Carneiro – Credit Suisse
Henrique Peretti – JPMorgan
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 house-keeping 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.
[Operator Instructions]. 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 of 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 have 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 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 when compared to the same period of last year. Early November 2021, the sum of the volumes stored in the reservoirs of the Metropolitan region of São Paolo 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 the month of December.
In terms of the company’s internal affairs, I’d like to highlight that the restructuring that 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 3 SPEs or specific purpose companies or entities aimed at expanding the company’s areas of activity, and also taking advantage of the synergies across related processes to the sanitation activities.
We have signed an agreement to acquire 20% of share at Foxx URE-BA, a special purpose company that is a subsidiary of Orizon Valorização 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 and will be the first power generation plant from the incineration of urban solid waste in the country and Brazil, and the so-called mass burning which has already been used across the world, in Europe, Japan, China.
And that, of course, brings us an expectation to reduce landfills here in the country which, as you know, bring about different issues, problems, and are increasingly more expensive because of a shortage of areas in metropolitan areas, specifically in São Paulo.
We also set up the Katerra [ph] SP Energia SA in which the company will hold 49% of the capital. This SPE or special purpose company is focused on photovoltaic energy generation. We work 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 by 2023 next year. We also will further increase our generation capacity for photovoltaic energy. And using distributed generation will add economies to the company and we will use sustainable energy, thus reducing our contribution to greenhouse gases. Therefore, something that falls within the ESG pillars, that’s a matter we are paying close attention to.
We have also formalized a partnership in which SABESP will hold a 45% stake in the SP [indiscernible] 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, allowing 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 of image. Cities say that the pot holes 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 for those kind of work. So those are important steps towards the diversification and expansion of environmental services and reinforce our commitment to sustainability with ESG.
It is 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 of energy, of course, both for the company, for third parties.
Finally, I would like to report that in the third quarter of 2022, we have further increased the number of residential connections to sewage collection and treatment in the Pinheiros River Basin. There are now 650,000 households connected a result that has exceeded the initial goal of the program by approximately 20%. Just to give you an idea, we have made connections throughout this past 3.5 years that account to the size of a city like Porto Alegre or Recife capital cities in 3.5 years, just to give you an idea of the size of the importance of those numbers.
And I’d like to take the opportunity to say that earlier this morning, those of you who are here in Brazil, living São Paulo and who followed the morning news, this specific host was always very hard on everyone, including on us. This morning, he was complementing SABESP on this work, which resulted as a consequence in having 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 units for quality recovery units to further improve the quality of rivers, that’s Piracicaba, [indiscernible] and [indiscernible], and one recovery unit in Cachoeira in assisted operation and one recovery unit called Antonico, which should start assisted operation by the end of this month. Thanks to this basic sanitation work we have accomplished our mission of bringing quality of life to the poorest, the neediest people who live in informal areas of São Paulo in the metropolitan area.
Well, 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 that we experienced in 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, which was billed of 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 is a reflection of the investments made in recent years to expand collection and treatment services that are 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 flat in water, and we take 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 mix and to 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. Next slide, please.
Starting from a profit of R$469 million in Q3 2021, we saw a positive variation in sanitation revenues net of taxes of R$670 million, with a more favorable mix and 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%. I will go into detail about those numbers on the next slide.
The net financial result showed a positive variation of R$639 million, mainly due to monetary and exchange — foreign exchange variations driven by the lower valuation of the U.S. dollar when compared to Q3 2021. The devaluation of the yen, the fall in the IPCA from plus 3.02% in Q3 2021 to minus 1.32% in Q3 2022. And also, the non-recurring events related to the core agreement with the government of the state of São Paulo entered into in July 2020.
Income tax and social contribution expenses increased by R$319 million, the equivalent of 134.2%, and that’s linked to the improved results. As an outcome, we have a net income of R$1.1 billion.
Going on to the next slide. On compared to the same period of last year, costs and expenses have increased by 30.6% excluding construction costs, moving from R$2.8 billion in Q3 2021 to R$3.2 billion in Q3 2022, still under the impact of accumulated inflation in the period. Personnel expenses rose by 12.3%, reflecting an adjustment for inflation of 12.9% on salaries, wages, labor, taxes and benefits, and also on social security obligations applied since May 2022. Expenses with materials, both general and retreatment, increased by 35.9% and 82.6% respectively, both due to the increase in prices and also due to higher consumption.
Expenses with services showed an increase of 21.7% with the following highlights. Annualized contractual readjustments associated with the maintenance activities of the water and sewer systems would imply more paving expenses, more spending on our customer relationship channels, reinforcing effort to improve delinquency levels.
In addition, there was a greater use of waste, transportation services from the water treatment plants and also from the sewage treatment plants due to the expansion of this service, as mentioned earlier in this conference.
Costs with electric energy were reduced by 4.2% or R$15.7 million, despite the consumption having remained stable. That reduction came from the end of the right [ph] tariff, as it was called, that raised the average cost of energy in Q3 2021 and also from the reduction in the tax burden on electricity bills, which were implemented in Q3 2022.
The estimated losses with doubtful receivables, or PCLD in our terminology were R$136 million, an increase of 14.5% when compared to Q3 2021 reflecting, among other factors, an increase in revenue in accounting estimates. Remember that in relation to the previous quarter, Q2 2022, in which the expense reached 253 million, there was a reduction of 46%. The trend is that the commercial actions and the recovery of the service sector will help reduce overall defaults or delinquency rates.
Commercial actions to curb delinquency continuing to be implemented, and they include the intensification of water disconnection actions, sending warnings to consumers with overdue bills and also the expansion of access to virtual agencies. We have intensified those actions, but the country’s economic situation is an important component that weighs on the reduction. With inflationary pressure on family income, some customers end up prioritizing paying the bills which have higher interest rates, and they come over to you. Next, please.
Moving on to Slide number 7 we will talk about financial expenses and debt. We see an improvement in the financial result of R$639 million, 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, given the recognition of R$325 million for the monetary adjustment on the 215 agreement with the state government of São Paulo as a result of the aforementioned core decision, which happened in July.
Just as a reminder, in March 2015, SABESP entered in an agreement with the government state of São Paulo. An agreement that dates back 2008 when the company, the state and the DAEE, the water department entered into the third amendment to an agreement with the government, whose objective was to equate the value of debt related to retirement and pension supplementation benefits which was covered by an old law, Law 4819 from 1958, which were paid by the company due to an obligation set by the government. And that has not been reimbursed by the state to SABESP.
In this agreement, the assets that make up the reservoir of the Alto Tiete system were given as a provisional payment as part of the debt. This happened in 2008. However, a lawsuit was brought by third parties against the government, saying that it could not transfer the reservoir to SABESP due to a registration difficulty, property bids of several small holders in the region and so on.
In other words, due to this lawsuit, it was not possible to transfer the reservoirs to SABESP. Because of this impediment, the state, SABESP and DAEE, the water department, signed an agreement in March 2015 to replace those reservoirs by the payment of that debt installments. In July this year, the sentence was issued that prevents the definitive transfer of the Alto Tiete system reservoirs to SABESP.
With this, according to the agreement signed in 2015, the state of São Paulo must make the payment to SABESP of the monetary correction credit in 60 installments in addition to the principal amount, which had — which was being paid, right. Those reservoirs are not part of our asset base, and there will be no interference whatsoever with the supply of water in the population.
Going back to this topic, the financial expenses saw an increase of 10.7% due to the increase in interest rates on debentures, mainly due to the recognition of interest rates from the 29th and 30th debenture issues.
Finally, I’d like to highlight the reduction of one more percentage point in our exchange rate exposure, from 15% to 14%. The component of the debt which is backed to foreign currency. This reflects resources on the blue loan with IFC to the tune of R$760 million and from the IDB Invest in the amount of R$466 million, which were structured in local currency. In other words, they do not create exchange rate exposure.
So those are our opening comments. We’ll now move on to the Q&A session, and I’ll turn the floor back to Tiberio.
Thank you, Osvaldo. Thank you, Dr. Braga. So we’ll now start the Q&A. The first part is geared to analysts and investors, and then we’ll have some time for journalists. If due to time limitations, we’re not able to answer, we will address questions at a later moment off-line. Our IR team remains available for that.
We have received — Carolina asked a couple of questions actually, and I’ll read those questions to you and then you’ll tackle them. I’ll read the first one, and then we’ll answer the second question after that.
Q -Carolina Carneiro
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?
Doubtful receivables, I’ll hold that. That’s a question, Dr. Braga. Are we going to read both questions one at a time? One at a time. Okay.
I’ll turn it over to Osvaldo course, our CFO.
Okay. Ladies and gentlemen, the amount for doubtful debt total of receivables for Q3 did drop when compared to Q2 driven by our effort, our strict discipline to reduce default levels. And we believe that that level will get closer to pre-pandemic levels in the second half of next year, 2023. Those actions are assumed in place are being implemented, and they are part of our exchange and our 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.
Okay. 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 in the share of URE-Barueri in 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 in the state level?
It’s not because of the moment. That’s something which has been in our agenda, in our radar for some years now. When I opened this call earlier, I complemented Osvaldo on — as being able to focus on that topic, to tick that item and to really materialize that. And the rationale behind it is that from the point of view of solid reviews. This is in our bylaws actually. Sanitation is not only related to drinking water and sewage treatment, it also entails solid waste and also drainage. So all of that combined is part of our mainstream activities.
And from the point of your finance, of course, that makes sense, has to make sense, for us to identify the advantages coming from that partnership with the private sector that is there. And with that, we are contributing to reduce the number of landfills in the area. So everything along the lines of the ESG, that’s very, very important for us at this moment for the environment to reduce also greenhouse gases coming from methane produced at landfills, and so on and so forth.
So in relation to the cold asphalt front, I think I did mention the advantages of that partnership. We will be able to have a technology at our disposal which will really help us, especially in the country side of the state. And of course, you can use it in the capital city too because in terms of logistics, it’s much more interesting.
But perhaps Osvaldo can jump in and add something to my comments on the financial side, speaking to the advantages of having entered into this partnership.
As to the asphalt, in addition to the expected returns, which is higher than that coming from the regulators, we expect a reduction in cost also. So we will improve the quality of services and a reduction in costs. Cost reduction is the company’s mantra number one, right? We want 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 made no sense to wait to execute that. It has been working on — has been worked on for 2 years now.
As for the URE-Barueri, along the same lines, we will acquire at first technology and we’ll be able to explore that market across the 375 cities where we operate. So this is just the first steps, and we hope to have interesting returns going forward. Economic studies show good levels of return, as I said. So we expect that that additional revenue will contribute to the company so that we can meet all targets we have set for 2030.
Okay. We have received another couple of questions from Henrique Peretti. [Operator Instructions]
So from Henrique Peretti, two questions. Good morning. Number one, the consumption mix, and as a consequence, the tariff mix. Are they already back to the pre-pandemic levels? Osvaldo?
Yes, the answer is yes. Those levels are close to what we had in pre-pandemic periods. A small gap to be adjust, but we’re quite close to what we had before the pandemic. Economic activity has pretty much resumed the levels, both in Commercial and Industrial front. Public sector is still lagging a bit behind, but that’s only normal and this will be normalized sooner than later. We should see the order mix in place sooner than later, as I said. Thank you.
And about the following. Any news about the implementation of the new tariff structure? And is the current revenue within the revenue cap for 2022? Thank you. Our regulating agency is extremely interested in the fact that this structure be implemented next year.
That’s exactly at — President, Mr. President — from May this year. The regulating agency delayed the new tariff structure, and we are now waiting to hear from the regulating agency. So this will — we expect this to happen this year, 2023.
And that has a lot to do with the second part of the question, which has to do with the revenue cap. The second part, the company has to do with the implementation of the new tax structure vis-à-vis the revenue cap. Yes, it is about to be implemented. We expect to see this happen this year, and it is key for us to have our revenues reaching the expected levels.
Today, we are still below that cap. But if until the end of the year we have not recovered, there are protection mechanisms in place. When it’s below 97.5%, this will be offset in the next tariff readjustment to happen in May 2023.
Okay. Thank you for your answers. [Operator Instructions] I think the results are good, and clear explanations. There is no room for doubt separately, right, for questions.
That’s a nice observation, Tiberio. You did a good job.
Well, once again, if there are other questions or comments you want to make, you can do it off-line or now using the Q&A. We can then, in this case, move on to the Q&A session for journalists, okay?
All right. Carry on.
[Operator Instructions] That concludes our Q&A session. I think Dias [ph] has a question. Okay, Dias [ph]. Sorry, I haven’t seen her.
[indiscernible] from Valor Economico Newspaper. I’d like to ask about the RSU, solid urban residues. Any new agreements still to happen in this year?
Not for 2022. It’s what we have for now. It takes about 1.5 years in terms of analysis of assessments. So no, none specific right now. We do believe that nothing we’re having still this year.
But just to be sure, this is just first steps. And we do expect that for next year, will have more than one, more than what we had this year. And also, Tiberio has already mentioned, the good results speak for themselves and also the action we have taken into fighting delinquency, reducing costs. All of that leaves us all very excited with the numbers we have just announced.
Dias [ph] has thanked for your answer. [Operator Instructions].I think numbers seem to have left our audience very satisfied and happy, right? Our public, our target audience. Yes.
In this case, Dr. Braga, I turn the floor back over to you for your final remarks, if you will.
So Osvaldo, I’ll — talk after Osvaldo.
So I’d like to thank the whole team for your professionalism, your hard work. A special thank you to Miyagui and his team, and our employees and financial office who worked hard for this announcement, this call and for us to be able to be — to have this level of transparency of quality and announcing results. So this presentation was simple but quite straightforward. And thank you, Mr. Braga.
Okay. 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 complement on their dedicated hard work. I mean, Osvaldo, Miyagui, Tiberio, the whole team, Pacheco [ph] Marcelo. I don’t want to forget anyone, right? And I would say, it’s my white — my grey here implies that I’ll forget a couple of names. So feel complemented on your hard work and competence, everyone. That’s what makes this company — or allows this company to deliver good financial results, and also deliver. And that’s more important; deliver results which are important to the population.
SABESP serves 28 million consumers. And with the work we have been doing throughout this period, connecting more people, more households to the grid, to the collection and treatment of sewage and special, because the waterfront is well taken care of. That spells quality of life to all those people. When I started, I talked about the Pinheiros River Basin. The river is now beautiful and clean.
But I’d like to emphasize to all of you, ladies and gentlemen, at the other end of the screen to say that the ones who benefited the most are the neediest, the ones who live in the favelas, in the slums, and the neediest part of the city where river would take sewage, right? Not anymore. Today, sewage is treated and helping preserve the environment and improving the quality of life of those people. So that’s a takeaway I’d like to convey. And after all, people are benefiting from those good financial numbers, and a good financial performance allows us to better serve our customers.
Thank you everyone, and this ends our meeting for today. Thank you. And I wish you good travels to those of you who are leaving now.
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