Companhia de Saneamento Básico do Estado de São Paulo - SABESP

Good afternoon, everybody. Welcome to SABESP video conferencing to discuss the results for the second quarter of 2020. My name is Mario Sampaio. I'm the head of capital markets and investor relations. We will inform all participants that this video conferencing is being recorded. The presentation accompanied with the slides are being broadcasted in the internet. through the company's website and the MZIQ platform. The presentation and earnings release will be available for download on the same portal. Questions made to speakers will be accepted through the videocast platform only. But before we proceed, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. The forward-looking statements are based on the beliefs and assumptions of SABESP management and on information currently available to the company. Forward-looking statements are no guarantee 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, 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. Let's move and introduce everybody that we have with us. Let's start with Mr. Rui Afonso. is the Chief Financial Officer and Investor Relations Officer. We also have with us Mr. Agnaldo Pacheco. He's the controller, company controller. Mr. Marcelo Miaghi, Head of Accounting, and also Mr. Luis Tiberio, Head of Costs and Tariffs. Now I will present the highlights for the second quarter, starting with some initial highlights. Let's start saying that this was in a typical quarter with the most intense month of social isolation due to the pandemic which aggravated by the economic context or of high stability brought adverse effects for the company. The effect of exchange rate devaluation on foreign currency debt had a relevant impact in the result. The consumption of commercial, industrial and public customers in categories that have a higher tariff decreased and delinquency increased. These facts added to the bill payment exemption for customers in the residential, social and favela categories, along with the postponement of the tariff adjustment, made the scenario even more challenging for us. We didn't stand still during this time and kept things moving. On the operational side, we reduced costs, secured markets by signing contracts, 13 municipalities in the quarter and concluded the important negotiation with the municipality of Mauá, which was previously served on a wholesale basis and which had a historic bad debt with SABESP. From a financial point of view, we concluded the 25th and the 26th The venture local bond issuance, adding them up, sums to close to 2.5 billion in capital raising. We also reduced from last quarter, previous quarter to this quarter, our effects exposure from 55 to 34%. And we have advanced in negotiations with other institutions that can provide funding for the company's strategic project and debt refinancing.

So let's go now to the numbers, starting on slide three.

We will begin on slide three, where you can see a 2% reduction in total built volume, 2.1% in water and 2% in sewage, excluding the volumes in the recently included municipality of Mauá and Santo André, The volume from the wholesale and also from the customers in the residential, social and residential favela categories. However, as expected, the consumption makes change among the categories. Volume in the residential category increased by 0.7%, while the commercial, industrial and public categories were strongly impacted by the new dynamics arising from the COVID-19 crisis. Volumes fell by 18.4% in the commercial category, 16.7% in the industrial category, and 24.5% in the public category in the second quarter of 2019. The migration of consumption of the categories with the higher tariffs, the commercial, industrial, and public, impacts directly, obviously, the average tariff prices and consequently our financial results. Let's move now to slide four. Here, let's highlight income total 378.2 million reais in the second quarter of 20 compared to 454.4 million in the second quarter of 19. Although being heavily impacted by the COVID crisis and consequently by the worsening of the global economic scenario, The expense containment measures implemented in the first quarter together with the agreement signed with the municipality of Mauá resulted in a positive bottom line in the period. Adjusted EBITDA increased by 28.4% from 1.3 billion in Q2 2019 to 1.58 billion last quarter. Net operating revenue grew by 10.9% from 4 billion in second quarter 19 to 4.43 billion in second quarter 20. The agreement signed with the municipality of Mauá led to a positive return of 193.6 billion. As for the cost administrative and selling expenses and construction costs, the increase was 4.9%, excluding construction cost effects Expenses fell actually 6.6%, contributing to an increase in the operating margin. The adjusted EBITDA margin was 35.7 compared to 30.8% in 2019. The adjusted EBITDA margin was 42% in the last 12 months. With the rise also of revenue and construction costs, that is, this considering them, the adjusted EBITDA margin was 45.7% in second quarter 2020, compared to 36.7% in second quarter 19 and 8.2% in the last 12 months. Now let's go to slide five. Here we will analyze costs. Compared to the previous year, cost administrative and selling expenses and construction costs increased 157.6 million, or 4.9%, as already mentioned. However, excluding construction costs and also, as mentioned, costs and expenses fell 6.6% from 2.52 billion to 2.36 billion. Compared to the previous year, nearly all expenses, as you can see, fell. Some of the most significant decreases were the $113.3 million or 14.7% in salaries and payroll charges and pension plan obligations, mostly and mainly by the reduction in medical expenses and of the consent for the retirees and the fact that the salaries were not adjusted this year. The drop in general expenses also contributed significantly with a reduction of 134.7 million or 39.7% due to lower provision for payments of lawsuits. Closing of lawsuits with the Municipality of São Paulo in the second quarter of 19 due to the agreement signed and reduction also in the transfer to the Municipality Fund of São Paulo as the Municipality revenues fell during the period. It's worth noting the 45% or 36.4 million year-over-year increase in the expenses would allow us for doubtful a quarter. However, it is less than what we provision actually in the first quarter of this year. Let's quickly then go to slide six. Let's analyze the changes in the results. Net income fell by 76.2 million. Net operating revenues by $434.6 million. Costs and expenses, including construction costs, grew by $157.6 million. Other operating revenues and expenses, including equity, grew by a positive $111 million. Financial results fell by $519 million due to the real hell against the dollar and the yen. Finally, income tax and social contribution fell by 55.5 million in the view of lower taxable income recorded in the quarter when compared to the same period in 2019. Let's now move to slide 7. On this slide, we will update on the company's initiative to guarantee the execution of investments and refinance of debts during this year. As we mentioned in the call for the first quarter of 2020, BNDES opened a program that provides for the suspension of debt service for a period of up to six months. We managed to suspend the debt service for five months, which is equivalent to a total of 130 million reais that will not have to be dispersed this year and that will be added to the principal of the debt that will be paid in the remaining terms of the contract. So, something very attractive. Also, in relation to BNDES, we obtained an advancement for the 12-month period that will go into our cash immediately now in July. It went in July, actually. In the case of the program, the same similar program that provides for the suspension of debt services with Caixa Econômica Federal, the social bank, we have already requested and are actually waiting for a statement from the bank. With regards to the IDB, Inter-American Development Bank, and the World Bank, also both multilateral institutions, we requested advances in reframing of projects that, in case they are approved, And now we are actually waiting for them to come back to us with their appraisal on what is possible or not to move on for this year. We will have something, but we want to know how much this year. On the side of funding from the capital markets, on July 10th, the 26th, the venture issuance We issued the 26th debenture in the amount of 1.045 billion reais. This debenture was structured according to law 12.431, in this case then being classified as an incentive or an infrastructure debenture, as you can see by the terms we obtained. So, being specific, the debenture First series in the amount of 600 million reais with interest rate at EPCA plus 4.5 per year, seven year with maturity. The second series was issued in the amount of 445 million reais with interest of EPCA plus 4.95 per year and maturity in 10 years with prioritization and the 8th, 9th and 10th year. As a reminder, the company has already mandated IDB Invest for a loan in reais of up to 600 million reais. The structuring process is advanced and once completed, we'll add resources for a cutbacks and to support the company's liquidity.