Companhia de Saneamento Básico do Estado de São Paulo - SABESP

Good afternoon, ladies and gentlemen.

At this time, we would like to welcome everybody to SABESP's conference call to discuss the result in first quarter 2020. The audio of this conference is being broadcast simultaneously through the internet on the website of www.sabesp.com.br where you can also find the slideshow presentation available for download. We inform that all the participants will only be able to listen to the conference during the company's presentation. After the company's remarks are over, there will be a Q&A period. At that time, further instructions will be given. Should any participant need assistance during this conference, please press star zero for an operator. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Act of 1996. Forward-looking statements are based on the beliefs and assumptions of SABESP's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions and industry conditions and other operating factors could also affect the future results of SABESP and could cause results to differ materially from those expressed in such forward-looking statements. Today with us we have Rui Afonso, Chief Financial Officer and Investor Relations Officer, Mario Arruda Sampaio, Head of Capital Market and Investor Relations, and Marcelo Miyagi, Head of Accounting. Now I will turn the conference over to Mario Sampaio. Sir, you may begin your conference.

Okay. Thank you, everybody, to join us on this

Thank you for joining us for our first quarter of 2020.

As usual, we have some slides. Let's go through them and then we're open for questions and answers. So let's move to slide three. Here we see a 2.6% growth in total built volume of water and sewage in the first quarter of the year. The total built volume increased 2.2% of which 2% in water and 2.5% in sewage. This is compared to the first quarter of 2019 and without considering the municipality of Santo André. The increase was chiefly due to the residential category, which moved up by 2.7%. This is mainly in the metro region of São Paulo, with emphasis on the municipality of São Paulo and Guarulhos. As for the municipality of Santo André, as you remember, we service on a wholesale basis up to first quarter 19. And we have been servicing since August 2019 on a retail basis. The drop in build water volume is natural at the beginning of a retail operations. since the losses in the distribution systems are not recognized by SABESP. On the other hand, there is a relevant increase in the volume of sewage treatment in Santo André as we did not operate the system at all before we took over. It was possible also to notice an increase in volume in the residential category in almost all the municipalities operated and a trend of greater increase in satellite cities both of São Paulo and in the other cities that are regional centers in the interior land and the coastal lines we operate. Although it is not possible to observe significant impacts on volumes for this quarter due to the isolation measures adopted at the end of March, We noticed a reduction in the volume billed in the industrial and public categories of 2.2% and 1%. The reasons for the fact invoice volumes not being significant due to the isolation is that only the accounts that were read at the end of March would capture this event. Move on to slide four. Let's discuss our financial results. We recorded a loss of 657 million reais in the first quarter of 2020 compared to an income of 647 million in the first quarter of 2019. The loss recorded in this first quarter of 2020 was mainly due to the 1.8 billion expense with exchange rate variations from borrowings and financing denominated in dollars and yen. In terms of the negative impact of the exchange rate variation on the debt service and on our cash, it was really small compared to the 1.8 billion, that is 42 million reais. Despite the net loss recorded in the quarter, earnings before taxes and financial results was a positive 1 billion, but 138 million lower than in the same period of 2019. This reduction was mainly due to the 149 million increase in allowance for doubtful accounts. First quarter adjusted EBITDA was 1.48 billion compared to 1.54 billion in first quarter 19. That is a reduction of 3.9%. Net operating revenue increased 163 million or 4.2%, the first quarter of 20 from a 3.88 billion to 4.04 billion as a result of the 268 million or 7.6% increase in gross revenue and the 82.1 million or 13.6% decrease in construction revenues. As for cost, administrative and selling expenses and construction costs, there was an increase of 10.9% or 299 million reais. If we disregard the effects of construction costs, the increase was 17.6% or 380 million reais. The first quarter adjusted EBITDA margin was 36.7% compared to 39.8% In first quarter 19, the adjusted EBITDA margin of the last two 12 months was 41.1%. If we exclude the effects of revenue and construction costs, the adjusted EBITDA margin fell to 41.8% in 20, first quarter 20, compared to the margin of 46.8% in first quarter 19. In the LTN 12 months, the margin was 48.3%. Moving to costs on the next slide, let's highlight the main variations. Well, again, as we already mentioned on previous slide, cost administrative selling expenses and construction costs increased 299 million reais or 10.9% year-over-year, year-over-year, first quarter 2020, that is from 2.9% . Excluding construction costs, cost and administrative and selling expenses increased 380 million or 17.6%. The main increases were in allowance for accounts of 149 million, general expenses of 100 million, Depreciation and amortization of $72 million and electricity expenses of $43 million. Here, it's worth noting that delinquency increased by approximately $100 million in the first quarter of 2020 compared to December 2019. In addition, expected losses should increase due to the economic stability worsened by and the COVID-19 crisis. For a further breakdown of these and other changes in costs, please refer to our press release. Let's move on to slide six. We quickly summarize the main changes that affected the company's net income in the first quarter of 2020 compared to first quarter of 2019. As mentioned, net loss totaled 157 million net operating revenues increased 163 million costs and expenses including construction costs increased 299 million other operating income and expenses including equity income fell 3.2 million the financial results varied negatively by as mentioned before 1.8 billion. And finally, income tax and social contribution varied positively by 633 million due to the tax losses recorded in the first quarter of 20, mainly explained by worsening in the company financial results. Let's move to slide seven. Here we will comment and highlight some of the social measures and a number of other organizations that have been implemented by SABESP due to the COVID-19 pandemic. Considering that the company implemented countless initiatives, we will highlight only some of them, always emphasizing the basic sanitation role played by SABESP at this moment and this specific health crisis. First initiative is the installation of water in field hospitals. We have been cleaning the external areas of numerous health facilities such as hospitals, those exactly filled hospitals, public spaces such as nursing homes, social reception centers, police stations, square streets, and others, using reused water with an extra dosage of chlorine. In the metro region of São Paulo region alone, Approximately 2,000 cleaning actions were carried out. This action was also extended to other 290 municipalities in the state where we operate, totaling approximately 9,000 cleaning activities. It's important to know that for these activities, we counted on donations of chlorine in sufficient volume to support this action and still carry further out and other actions and continued actions. Next initiative is the distribution of water tanks in communities where residents do not yet have a local reservoir in their homes. In total, there were 4,500 water tanks to be delivered. We already delivered 3,800. Around 3,000 units we installed were donated by manufacturers and SABESP is the body responsible for organizing the distribution. Another one is we began the installation of wash basins and drinking fountains throughout the state in many places so the population can wash their hands and have quality water to drink in many areas. There are 65 cities in the interior and coast covered by this program. In the city of São Paulo, 100 wash basins will be installed in the most vulnerable communities, with SABESP also responsible for executing the hydraulic part and the structure built by the municipality. More than 60 wash basins have already been installed in the metro region of São Paulo, and an additional 160 in the interior and the coastline. And last, the main initiatives of the main initiatives we highlighted. SABESP also participates in the volunteer program to collect food and hygiene products. 35 tons of food and 17 tons of these hygiene project kits have already been collected and distributed to institutions to take care of the needed population. Let's now move to the next slide. On this slide, we will comment on the company's initiatives to guarantee the execution of investments, also for the refinancing of debt maturing this year, as well as for the reduction of its FX exposure. SABESP is already widely known. BENIDEF created a program that provides for the suspension of debt services for six months and the corresponding amount being added to the total remaining debt for companies that have contracts financing with them. SABESP is certainly already in negotiations with the bank to access the preconditions to obtain this benefit. Also with the BNDES, the company's negotiations to expand and to increase the anticipation of disbursements of financing in progress and to postpone the deadlines for providing and showing the expenditure with name. We're also in negotiations with the SET, this is the social bank, the Caixa Econômica Federal, to defer the payment of the debt service for a predetermined period in a program recently authorized by the FGTS Management Council and similar to the one already deployed by NANIDAD. Moving on, multilateral agencies, as you know, are actively working to support sanitation throughout programs that are, by the way, restricted to state-controlled companies such as SABESP. Let's start commenting with the World Bank. We recently signed a $250 million financing agreement. In the context of this contract, we are negotiating the participation, sorry, the anticipation of resources for further verification, as well as the application of emergency support actions that allow us to advance additional resources for works and expenses not included and the original scope contracted, but related to this one. So we have also the IDB, the same for the World Bank in the context of the recently signed $350 million contract, which has already offered to provide support similar to the express by the World Bank. Note, important, that these two contracts above, there's a provision that allows the exchange of currency from dollars to reais as we move on with the disbursement. So, due to this, the execution may not necessarily increase foreign exchange exposure, but in this case, more specifically, we will comment the reduction in effect exposure and further in this presentation. All added, it's premature to predict the exact amount of funds from this initiative that will be secured. We can say that given the magnitude of the amounts involved, it should be a significant number to support our capacity execution and also the company's liquidity. We now are going to comment on the debt management aimed at meeting the company's needs for refinancing service in a year marked by a sharp change in market conditions, particularly impacted by the devaluation of the real. We start with the 25th venture issuance by the company, settled on April 27. The volume reached 1.45 billion reais in one series, CDIs rate at plus 3.6% for a period of 18 months with billet maturity of principal and interest. Note that this issue was initially scheduled to raise 1 billion by the end of April. With the outbreak of the crisis at the end of March, the market significantly restricted and other companies to intensify the demand for liquidity in banks. In this context, the company was not only able to conclude the issue within the initial schedule that is in April, but also increased the total amount raised by $450 million. In such, anticipating the inflow of funds foreseen and planned in its funding and refinancing Still in the context of fundraising, the company has already mandated IDB invest for a loan in reais of 600 million and has already received authorization from the federal government to issue up to 1 billion reais in infrastructure demands. Well, in this point, let's make sure that the company is not announcing it is issuing an infrastructure debenture. But again, it's now allowed to issue and in such an imposition that in the appropriate time, we will structure an issue but before obviously following all the communication and regulation guidelines by CVM. We would also like to highlight that the company has already contracted several public financing for investment, which are in disbursement. And specifically this year, we have the expectation to disburse 1.1 billion reais. In all, if we add what the company has already secured with the resources of the 25th, the bank duration with the disbursements of financing already contracted with public banks that I mentioned before of 1.1 billion, adding the operation mandated with IDB Invest, we reach a value of 3.15 billion reais. If we also consider the authorization for issuing infrastructure debentures, if the company decides to issue later this year, the value of these funds raised could exceed 4 billion. But also, let's make sure that the company financing actions do not end with this movement. Given the company's robust credit profile, we continue to seek new local and international fundraising opportunities. Let's now comment on the initiatives to reduce our foreign exchange exposure. Following guidelines established by SABESP, in relation to foreign exchange exposure presented to you in past conferences. On April 27, the company managed to convert $495 million in dollars to reais from the debt contracted with the Inter-American Development Bank, the IDB, corresponding to the outstanding balance of the finance contracted to support and the Rio Tietê Stage 3 depollution program. This debt was originally contracted in dollars at LIBOR three months plus 0.39% per year with maturity in December 2035. With the conversion, the debt now is 2.81 bilhões de reais at the cost of CDI rate plus 0.06% per year with a semi-annual amortization and maturity unchanged. So this rate is important to note. We have to add a variable margin periodically determined by the bank for loans that are supported by ordinary capital, which today is set at 80 basis points. which in fact is the same rate added to the dollar denominated debt. Note that if we estimate the impact in the first quarter of this year of the conversion to reais of the 494 million dollar using the conversion rate for dollar of March 31, we will reach a reduction of 17% on our FX or as you can see in the slide from 55% to 38% effects exposure. To conclude, we highlight that the Eurobonds 2020 in the amount of $350 million maturing in December 2020, we will be in state and observing the market and such to access the best strategy, the best timing, and the best instrument to carry out its redemption. Well, said that on the desk, let's move on to the next slide here. We will comment on the impact of the economic crisis on SABESP and present measures adopted by the company to preserve liquidity and maintain the positive task of results. Initially, we like to note that the economy was already showing signs of fragility and lagging even before COVID-19 pandemic was granted a status of pandemic, sorry, by WHO. In this sense, COVID-19 intertwines The current situation is marked by the deterioration in the confidence indicators of the economic agents and the soaring of the degree of uncertainty in the economy. There's a reduction in the economic activity in practically all sectors and the GDP slowdown estimates and the growth successive downward reduce including those made by the government. In this scenario of recession, unemployment, and expected slowdown in recovery activity of economic activity, there's a clear sign of a drop in revenues and an increase in delinquency despite nearly 84% of the volume built by the company is in the residential category. In addition, the high volatility of the exchange rate opens the possibility of negative impacts on our financial expenses. On the other hand, it's important to note that SABESP as a provider of public water supply and sewage service is an essential player in combating the pandemic. In this regard, the company exempted consumers in the residential social and favela and residential favela categories from paying water and sewage bill for a period of 90 days that is for bills issued as April 1st. In contrast, by the way, to the adverse effect on the company's cash brought on by the economic crisis and the pandemic, there was an increase in revenue from residential customers, except obviously from the social and the slum favela categories, and the postponement of the payment of 50% of the regulation fee to January 2021. So that helped. Aware of the situation, the company promoted actions with the objective of strengthening its liquidity and maintaining the positive trajectory of its results, or maybe path, that would be better, among which the following stands out. First, reduction of 360 million in expenses and postponement of 300 million of 2020 planned cutbacks. Another is the decrease in the number of employees in the context of a voluntary and incentive dismissal program created and ongoing since 2018. This year, by the end of the year, we expect there should be 998 employees leaving the company. Another is the replacement in the judicial sphere. of Judicial Deposits by Surety Bonds, which will reduce pressure on our cash outflows. So basically, that summarizes these measures. But before we conclude our presentation, we would like to remind you that on April 1st, we issued a notice to the market about our set resolution 974, regarding the schedule of events for this third ordinary turf review. In sequence on April 14, we also published another notice to the market on Resolution 981 that disclosed the regulatory agenda for 2021 biennium. Following the regulatory schedule, on May 14, the agency published public consultation notices 05-2020 and 06-2020. The first refers to the definition of the methodology to be used in the calculation of the maximum tariff and the tariff structure. Now the second addresses the calculation of the weighted average cost of capital. As disclosed by the regulator, the WACC initially proposed is 7.38% below our current allowed WACC 8.11%. The company is currently working on the contributions and comments on the published, over the published materials, and we will, which our contributions will be sent to RSASP by the end of the public consultation period in July 3rd. It's also worth noting that on April 17, RSASP published two deliberations that will contribute to mitigate the financial impacts on the company arising from the crisis caused by the COVID. One is resolution 985 that temporarily postpones payment of the regulation fee and the other is resolution 991 which proposes the postponement of the beginning of the four-year program of research and technological development for innovation in Sanitation and Services.

So, those two should give us some help.

Well, that concludes our remarks. Now, we'll turn into our Q&A session.

At this time, I would like to remind everyone that in order to ask a question, you may press star then 1 on your telephone keypad. If you would like to withdraw your question, please press star then 2. Again, star and 1 to ask a question. At this time, we have no questions. Again, to ask a question, star then one. Our first question is from Liliana Young from HSBC. Go ahead.

Hey, hi, thank you for the comprehensive presentation. Would you mind please giving us a brief overview of how you see the regulator Responding to the crisis together with SABESP, you indicated that they came out with a preliminary walk, which in my personal view seems low at 7.38%, right? And you have been suffering from higher delinquency. You have a little bit of demand destruction with unknown outcome on the revenue side for now, right? But you do have a rate review that is as early as May 2021. So my question is, do you see this potential delay in the rate review process happening in May, as it did happen in the prior two rate reviews for SABESP? And if you see any changes recently for the good, for the bad, you know, on the regulatory side, meaning on the approach of the regulator towards the rate review, and how they deal with the crisis, which is unprecedented. Any call on that phone will be super helpful. Thank you.

Lily, it's Rui. Just to start and maybe Tiba Tiberio could give you much call on that if he's on the line, I believe so.

Well, on the first side, we have seen from the technical notes

Very recent technical notes. The intention we can see through these notes is to hurry the process of the Tariff Review and in the event There are some indications of complications due to delays related to the COVID, the economic crisis and so on. Some indications of simplification of parts of the process in order to cope with the targets to conclude the whole process on on May 2021. But this is a preliminary approach that we expected that they will try to make all the efforts in order to conclude it on time despite all of the problems that we have been suffering, we and the world. So the answer should be to simplify some process rather than to postpone it, at least at this time. I don't know if Tiba has more comments on it or some questions.

Yes, Julio, I'm on the call and I think you've summarized it quite well. I don't feel like you could add anything on that other than we are Ready to comply with all schedules already provided by SASP. So we are working towards delivering the information as required right now in May. At the end of May we should be providing SASP with some historical information and by early July we should be providing comments on the methodology as well as on our walk. So that's about it at this point in time.

Okay, great. Thank you. And a follow-up question. On your regulatory asset base, there is a certain amount of assets or investments that have not yet been recognized by the regulator in your asset base. Do you think that in May 2021, there would be enough time to get to a review maybe of those assets, or the idea is to let the disputed parts go and decide about it later when you have more time, and then just make sure that the recent investments of the company are fully reflected in the RAP? rather than re-discussing what was invested pre-second rate review.

Do you want to take it, Muriel, or do you want me to answer that?

I'm sorry?

Muriel, do you want to answer that?

Yeah, yeah. Well, from our side, we are doing our best in order to have Both processes concluded by May 21. I believe that the hope of SABESP and the expectation of SABESP is the same. I cannot see a sort of interference in one process and on the other. We have time, we have problems, of course. to evaluate on the field some assets as an example but in the other in the other hand the discussion on the on the previous cuts in our asset basis is from our part is well known problem we have to go deep on it we are working hard on it and present our This will be the final announcement. In order to ask a question, please press star, then 1 on your telephone keypad.

Our next question is from Harry Daza from WAMP. Go ahead.

Hey, gentlemen. It's Hassan Daza from Water Asset Management. How are you, Huy, Mario? Good to hear your voice.

Yes. Doing well, Hassan.

Well, listen, a question for you, Huy. You know, in the past, You had mentioned in terms of the regulatory developments as per the RCSB calendar, there is a process where there is going to be some deliberations into improving the direct structure for certain customer classes. Like right now you have some customer classes paying a lot of and some customer classes paying less even though they could afford to pay more so there was some kind of a regulatory process to better align the target structure with the customers who can pay their ability to pay I'm just wondering where is that process right now where the best we can better align the target structure for and various customer classes. If you have an update on that process, we'd love to hear one, please.

So, Hazam, we are nice to hear you again and as always. And we are in the middle of the process to review our tariff structure. So, we are working hard on it, several issues in parallel. And yes, the timeframe is to the end of this year to have it concluded. So we are working on it. And so we have three different, two big movements. The ordinary tariff review, right? The second one is the review of our tariff structure. that's in place, we are working on it, discussing with SABESP and preparing our technical notes. And the third is one important point left behind, that's this call $6 billion left behind of our asset base. So the three of them are considered to be running in parallel. So, yes, we have a lot of work to do. I don't know, Thibaut, you want to comment where at the point we are on this last issue?

I can do one or two comments on that. I guess it's important to mention that the methodology that has just been published foresees that we should conclude this work as well as the work on the regulatory ethics codes by end of this year. So there should be a few months before the final compilation of the tariff review. which should occur in May. So we have a tight schedule, but we are working towards delivering our comments, our intelligent comments on that. We have already had a few conversations with a regulator on the tariff set, but there is no conclusion nor any indication of what could be the outcome of that. So there is still work to be done, but we are obviously working with them on anything that you ask.

Let me ask you one more policy question. You know, as you might be aware, in the electric distribution sector, the government is setting up a fund to help with the account receivables that might be, you know, that might be a way to alleviate any cash working capital I know, obviously, from your perspective, you are a very well-capitalized company. Your credit metrics are very solid. But I was wondering, do you think that kind of a measure, that kind of a facility might be useful also for the water sector? And if it is, any thoughts as to What could be done to have a similar facility set up by the government or by the state for the water sector? So if need to be, companies can draw from that kind of facility?

You mean, if I'm following you, Hazam, you're asking me if the government, you mean the federal one, right? uh could provide funds or conditions special conditions for the water and sanitation sector in order to to deal with the this pandemic economic crisis is that correct yes specifically specifically how the government is

is helping the electric distribution sector by setting up a facility which can help companies if customers are delayed in paying their bills. It's almost like a facility to help with working capital, things like that for the electric distribution companies. And I was just wondering if such help could be extended to the water industry.

Okay, you are comparing us with the electricity sector, right?

Yes, in terms of the government's effort for COVID-19.

Okay, in the government's attitude. Well, as we commented before, the electricity sector is something, it's quite, the electric sector institutional structure is quite the inverse The structure of the sanitation, water and sanitation sector in the sense that we have in that sector one concession power, this other one, and hundreds of companies below in generation, distribution, and so on, and transmission. In our case, in our sector, is quite the opposite. We have thousands, 5,700 and something, concession powers in municipalities, in some cases in connection with the states, in metro regions, and then we have just one company that is responsible to provide water and get the sewage untreated. So we don't see the possibility of the same movement in the sense that the federal government could provide funds, as they have announced recently, to the whole system in order not to, say, rise tariffs or to compensate In our sector is different because I cannot see the possibility of say municipalities or states that's in a very bad economic position, fiscal position. to provide those kind of funds to compensate the delinquency or revenues dropping of our companies. But in the other side we have, and we mentioned during our call, Mario said it, that the multilateral banks and the public banks here, Caixa Econômica, BNDES, The IDB, the World Bank and the IDB are providing some possibilities in order to get more liquidity during the crisis or more access to some special lines of financing for say Water treatment material example. Very concrete. That should be very important. We don't have the evaluation until now, but there are dozens of negotiations that we have taken with those banks that will help us to cross these bad periods. Not to summarize it, I cannot see funds coming from the concessional powers because there are thousands of very bad fiscal positions, but I can see help from the multilaterals specifically and in some cases from the public banks for the sector.

That's helpful. If I can close with one additional question for you, Huri, is can you provide an update on the privatization legislation? Obviously, you know, a lot has changed because of the pandemic, COVID, in the last two, three months. So where do you think the privatization legislation currently stands and what do you think What is the timeframe to potentially revive that legislative process?

You made, as always, a very difficult question to be asked because not us, but nobody knows exactly the interactions of those two very tightly connected crises. It's difficult to know the extension or the rebound. Remember right now people in Europe are talking about the second wave or the third wave of this pandemic. So what we have been done is take the measures immediately in order to constrain our budget, in order to provide more liquidity to to create, say, a buffer of liquidity to cross the period that we can see. Of course, we cannot see longer than this year. It's very difficult. As everybody, it's difficult to forecast like that. But we, quarter by quarter, we are adapting. We are anticipating the drop on our revenues or the higher delinquency we probably will see in front of us and adapting

Time by time, every quarter to the reality.

Got it?

Our next question is from Liliana Yang. Go ahead.

Liliana?

Hi, sorry, I was on mute. Quick question, please. Is Cache Economica also giving you some better conditions for payment of the laws, or it's just mostly BNDES here?

Mario, I believe that you can answer that question, because Cache Economica are negotiating with them also, yeah?

Yeah, yeah, Lili, Caixa is one step back from BNDES. They're both opening the opportunity for companies to waive the debt servicing for six months. Obviously that the value, the amount will be added to the total debt. So in that sense will be, quote, funded, financed for the period. We are, in our case, working with both to make sure that we fit on the conditions precedent. But overall, it is, yes, a very supportive measure for those to, for the sanitation sector. So yeah, there is something out there.

Excellent. Thank you.

You're welcome.

At this time appears to be no further questions. I'll turn the conference back over to SABESP for their final remarks.

Yeah, I'm here. Okay, we'd like to thank everybody to participate in one more conference call of results and a very special one. Again, in the middle of a huge crisis, I'm giving you all the information we have that we are dealing with this crisis and we are open to questions and to numbers in our IR department. Please contact Mario, Angela or the team. We are open 24 hours a day to Thank you very well and see you next quarter. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.