Companhia de Saneamento Básico do Estado de São Paulo - SABESP

Everybody, welcome to SABESP's video conference to discuss the results for the 2020 results. 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 accompanied by slides is being transmitted over the internet through the website www.sabesp.com.br and through the MZI2 platform. The presentation will be available for download on the same portal as well as the results released. We remind you that the questions will be accepted to the speakers only through the videocast platform. Our conference will take approximately one hour and 30 minutes, and we will reserve up to 45 minutes for questions and answers from analysts and investors. 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 depend on circumstances that may not 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. Let me start by presenting our speakers and my colleagues. Okay, so today we have with us Mr. Cui Afonso, Chief Financial Officer and Investor Relations Officer, also Mr. Marcelo Miaghi, Head of Accounting, Agnaldo Pacheco, Head of Controller, and Luiz Tiberio, Head of Tariffs and Costs. Let me start by making some considerations on the slide. uh and so let's get started um okay great so let me before we go to the slides let's uh let's make a brief uh an introduction we'd like to start saying that 2020 was marked uh by a number of unprecedented events that are essential to understand in order to analyze the results of any company in any sector of the economy These events take on a particular dimension for SABESP and the sanitation sector, which we will highlight below as an outlining condition for the results presented by the company last year. The prospects for the economic recovery in Brazil in early 2020 were highly uncertain and were radically reversed when the World Health Organization cleared COVID-19 a pandemic in early March. The global spread of the virus created a double crisis, one in public health, marked by efforts to reduce the contamination rates of the virus and adapt to hospital structures according to the demand of each country and region, and another in the economy arising from steep reductions in domestic and external demands, which resulted in recession and widespread deflationary pressures. The combined effects of these double crises began to be perceived as of the second quarter of the year. Social distancing measures, higher unemployment rates, lower tax collection and the increasing public debt led to a sharp decline in GDP projections and a scenario marked by high uncertainty, volatility and low confidence from all economic agents. Under this scenario, the company's revenues began to drop, delinquency rates began to rise, as did financial expenses. The lower availability of public and private credit impacted the company's business, which faced the situation from its particular condition as a supplier of an essential service in the fight against COVID-19 pandemic, that is, the water. By not overlooking Regular water supply to the population, SABESP played an active role in facing the crisis on several fronts. First, the company temporarily exempted payments of water bills for the social, resident and social. In favela residence categories, it benefited more than 2 million people who lived in the most vulnerable situations of society. The company also allowed customers in the commercial and service categories to pay their original debt installments, and furthermore, directed by SABESP, the company also postponed the stairs readjustment, which was scheduled originally to occur in the first half of the year, but was implemented in the second half. Second, SABESP boosted carbonation in its reduced water supply to be used for cleaning and sanitizing surrounding areas of hospitals and emergency rooms. The company also promoted the distribution of small water tanks to households without preservation capacity, installed public wastes, basins, and drinking fountains, In the areas lacking infrastructure and distributed food baskets to reinforce food availability to the population in these locations. The financial impacts brought by the crisis affected the company revenues as the second quarter, as of the second quarter of 2020, in which billed volumes for non-residential categories fell abruptly, while volumes in the residential category increased, but at Ferris, that are, on average, 50% lower on the residential category. The volume of water produced rose slightly, 1.2%, but not enough to mitigate the drop in revenues due to the lower average turfs and the change in the mix of billed volumes, as mentioned, among different consumption categories and regions. So, that management did not hesitate to take measures aimed at adapting the company's expenses to the new scenario. Expense budget reductions in the amount of 450 meetings were implemented, and the program to reduce its staff by 8% was maintained. This effort resulted in a 2% reduction in costs administered to them selling expenses, excluding construction costs, depreciation, and amortization, an estimated loss with doubtful accounts. Simultaneously, with the cost adjustment, the company took over actions to preserve its gas position during the highly uncertain period. Despite highly selective and credit-restrained markets, SABESP managed to raise 4.5 billion reais by issuing three debentures. We added 3.5 billion reais and complemented our funding requirements with a 550 million reais loan from the IDB-UNS. In addition, we signed a standstill operation with the BNDES to postpone the payment of 131 million of debt servicing due in 2020 and use the instruments of guaranteed insurance to avoid a cash outflow of 223 million in some of the legal proceedings we had. At the same time, actions aimed at reducing the foreign exchange exposure of the debt we initiated in 2019 were intensified in 2020 in view of the impacts of the crisis on the economy and its effect on exchange rate volatility. In May 20 we exchanged 494 million dollar IDD denominated, dollar denominated debt. We exchanged it for a real denominated debt in an amount resulting in an amount of 2.8 billion reais and in September we prepaid with reais A $250 million error bond that was to mature in December last year. Along with these amortizations carried out in 2020, the company foreign currency debt was reduced by more than $900 million. As a result, foreign currency debt decreased from 48% on December 31st, 2019 to 21% on December 31st, 2020. In summary, the company proved to be quite resilient in the unfavorable crisis conditions that marked last year, overcoming obstacles on the operational side as well as on the financial side, and in terms of accessing capital markets. This was possible to a great extent because of the engagement of our staff, with approximately 5,900 employees working from home, and the remaining frontline employees adopting strict health security protocols. There was no customer service interruption for the population as they were directed to our virtual agency. Strategic suppliers were also mapped to ensure the regular delivery of supplies. We also reorganized our teams to take advantage of the low urban traffic and intensified the maintenance work necessary to guarantee service and water supply at this crucial time. Management efforts along with employee engagement allowed the company to maintain investment levels, enter into an agreement to supply water at retail level with the municipality of Mauá, a city with a population of approximately 500,000, also to participate with robust and technically detailed contributions to the third tariff review process and the tariff restructuring proposal made by ICESP. At the end of 2020, SABESP resumed its profitability, significantly increasing any projected dividend distribution expectation after the first quarter result, as we will see below. Having said this, now let's go and start the discussions on the results for 2020. Three, we can see a 3.1% increase in total billed volume for the year of which 2.2% was for water and 4.1% for sewage, excluding Mauá, Santo André, and part of the exemption given to the social and favela categories, the increase was 0.9%.

Moving to the next slide.

Let me just come back here. On slide four, let's overview some financials and highlight some financials. Starting with revenue in 2020, we had a 6.1% reduction in gross revenue and a 1% reduction in net revenue. As you can see in the graph, In comparison, construction revenue was significantly higher in 2020, which largely mitigated the impacts on net revenue. The drop in revenue is explained by the one-off effect from the debt agreement with the city of Santo André in 2019, in the amount of 1.261 million reais, compared to the debt agreement with the city of Mauá in 2020 in the amount of 193 million reais, this resulting in a negative variation of 1,068 million in gross revenue. In addition, the tariff adjustment rates of 3.4 applied in August 20 was not enough to offset the reduction in revenues from the non-recurring events, including the drop in the average tariff arising from the change in the consumption profile, as already mentioned. If we exclude construction costs, the company's administrative and selling If we also exclude the 247% increase in estimated loss from doubtful accounts and the 14.4% increase in depreciation and amortization expenses, or expenses decreased by 2% or 152 million reais, All this as a result of the efforts to reduce costs during the period. Due to these variations in revenue and expenses, adjusted debidad decreased by 14.5%. But if we disregard the non-recurring effects of 20, and duplicate the agreement with Mauá, and the other non-recurring events in 19, which includes the reversal of the provision with the retired tax and agreements with Santo André, Guadalajara, and São Leonardo do Campo, The variation in EBITDA actually deposited by 1.1%. Finally, the net profit for the period of 973 million was 71% lower than the net profit presented in the previous years. On slide 5, analyzing 2020 quarter by quarter, we note that starting from a loss of 658 million in the first quarter, mainly due to the devaluation of the hell of 29% against the dollar. We ended the year with almost one billion in that profit, which means that the company generated 1.6 billion of profit in the last nine months of the year. Although below the value obtained, The profit obtained in 2019, the profit in 20 can be considered is very good given the adverse impacts brought about economic and health crisis. In addition, also 2019 represents a specifically high basis of comparison due to the difference in the one-off effects of the debt agreements that we mentioned related to Santo André and Mauá. Let's move on to our next slide, the slide 6, where we show costs and expenses. The main increases in expenses were related to estimated losses of allowance for loan losses of 247% in the amount of 360 million reais, product of the economic framework already described by us. Appreciation and amortization also increased by 14.4%, or 256 million reais. Treatment materials increased 9.1%, or 28.4 million. Electricity rose by 6.5, or 74 million. And finally, tax expenses had an increase of 5.7%. The most relevant reductions, on the other hand, in expenses We are for general expenses at 15.2% with a value of 179 million reais, personnel of 1.2, sorry, 1.3% or 34 million reais, services of 2% or 36 million and general materials of 3.3 or 9.1 million reais. Well, the details, I'm sure you can find them in other variations and discussions in our earnings release. Let's now go to the next slide. Here we show our financial performance, which summarizes all that we have explained so far. We started with an income of 3.3 billion in 2019, which was greatly impacted by the one-off effect from the Santander Agreement, plus the pre-pandemic economic context. Net operating revenue decreased by $186 million due to non-recurring effects in 2019 and the drop in the average tariff in 2020, which was partly offset by the construction revenue costs and expenses, including costs. Construction costs increased by $1.2 billion Other operating revenues and expenses, including equity results, was positive by 136 million. Our financial results fell by 2.1 billion, mainly due to the depreciation of the health. by 9,567,000,000 due to the lower taxable income, which partly offset losses in the results. And finally, net income totaled 973,000,000 reais in 2020. On the next slide, we will briefly comment on some of our performance indicators for the first quarter of 2020. The following performance management indicators show basically gross revenue, operating expenses, and EBITDA, all of them per bill cubic meter. The historical series is presented since 2014, as you can see, based on quarterly financial data disclosed by the company, excluding non-recurring and relevant In order also to maintain the indexes of the period with the same price base all the indicators were calculated in average values for fourth quarter 20 and adjusted by the EPCA inflation index. So in this case gross revenue per cubic meter has been increasing gradually in average terms in relation to the previous quarters in 20 although it's still below 19. Operating expenses per cubic meter bill has been stable in the long term. In the first quarter of 2020, it decreased over the previous quarter of the year and was also lower than in 2019. Last, heavy data per cubic meter bill ratio reinforces, once again, The growth trajectory in the period. The index for the first quarter of 2020 improved in relation to the previous quarters, returning to the same level that it was in the fourth quarter of 2019. Let's now then move to the next slide, talk about COPEX. So, despite the uncertainties and volatility that we still experience, in 2020 we were able to practically maintain the expected level of investments for the year and exceed that of 2019. In 2020, the total book value of investments was 4.4 billion. If we disregard from this value the extraordinary effect of the agreement with MAWA, the value reduces to 4.1 billion. Now, 2019 CAPEX book value was 5.1 billion. If we disregard the 1.3 billion value of the agreement with Santander, this value drops to 3.7 billion. In such, comparing this value with that of the 2020 of 4.1 billion we just commented, we can see that the amounts invested actually in 2020 increased in relation to 2019. Also, comparing the forecasted CAPEX value For the year of 2020 last year, on a cash basis of 3.5 billion, with an actual value of 3.3 billion, you can see that even in these very adverse conditions, disbursements with investments were quite consistent. Now looking ahead more specifically for the period of 21 to 25, The forecasted dispersal with Quebec adds to 21 billion, of which 61% is sewage, or 12.8 billion, and 39% or 8.2 billion in water, considering that the investments forecasted for the expansion of the water security during the 2014-2015 water crisis. are concluding with only the reversal of the Itapaião River remaining, and it should be completed this year. The mix of investments in sewage collection and treatment is currently higher than on water, which means that we will be investing more in sewage collection and water, and this already starts this year, 2021, with 58%. Let's now comment on the tariffs. First of all, we would like to congratulate the technical work performed by the Regulatory Agency and the way it has been conducting the tariff review process with predictability and transparency, which makes us believe the process is balanced and is based on strong technical grounds. On February 8, two preliminary technical notes were released, one addressing the proposed calculations for the P0, the maximum average tariff and the tax factor, and the other addressing the proposal for the tariff structure review. After these technical notes were released, public hearings were held to discuss these topics. We highlight that the T0 disclosed in the amount of 4.8413 TI's per cubic meter was calculated over the measured volume and not the billed volume, which is what we normally report. Also, the number was net of 15.7 taxes, making the comparison with other results or previous results, company results, a little more difficult. Although everyone here is aware of this, another important point we draw attention to is the proposal for the new tariff structure, which shows implementation beginning in 2022 with a gradual wrap-up of the tariff until the end of the cycle. We also understand that you have already hopefully read our contributions on both topics, but again, we can cover them later in our Q&A session. Finally, we emphasize that our set is expected to complete its studies and publish its final technical note with the final numbers by April 9 this year. Next slide. Regarding the water situation in continuity to the conference we made in our last conference call, the third quarter 20 call, rainfall indexes remain below the historical average. Despite the rainfall being lower than expected, we can observe that the water storage from the water sources that supply the metro region of São Paulo is still very much under control. The construction of the São Lourenço water production system and the Jaguari-Achibainha water interconnection increased overall São Paulo metro region water security systems Precisely to cope with the experience of water stress. To give an idea, were it not for these investments, in July 20, the Cantareira system would have to reach the level by which we would have to draw water from the technical reserve. But that didn't happen. But we would like also to take the opportunity then, right now, to bring a point that must be remembered and considered by you when analyzing the situation of water availability and the production systems in the metro region of São Paulo, more specifically, the weight, the relevance that each system has in the total supply of the region. Before the 1415 water crisis and investments made to increase water security work Average for 49% of the region's supply. If added to the weight of the TNT system of 17%, both alone covered more than 65% of the demand. As you can see in the slide, this has substantially changed. Today the distribution of water is more flexible and less concentrated in the TNT system as compared to the past, which brings much more water security to the region and makes it possible to face dry periods as well as the one we saw last year. The last comment with no slides, we would like to highlight then before we go to the Q&A session, is that on March 17th, Congress approved the maintenance of the executive vetoes to the law 14-026, the new sanitation law, With this, the sanitation framework as it stands today should provide a clear scenario for the sector to reorganize itself and grow in an accelerated mode. As we have mentioned several times, the approval of the vetoes that prevent the renewal of the program contracts for an additional 30 years As a low impact for SABESP, today we have at risk for renewal only eight contracts representing 0.26% of our total revenue. All other program contracts we hold were renewed before the law was approved and are insured or we have them secured for an average period of 26 years. with the largest actual contract being the one with the Municipality of São Paulo that is valid until 2040, almost 20 years. For this reason, we must continue to carefully and actively monitor the discussion and definitions of decrees and regulations that must be arrived as a result of the approval of the law. Pending the definition, for example, are the transition rule for municipalities that have Thank you very much. Okay, so here we are. Let me see if we have questions coming in. Just give me a second. Doesn't seem that we have questions. Okay, guys. Okay, we have one question here. It's from from Wellington Management. The question is, what is the difference between accounting and cash topics? Which one goes to the left?

The first one could be by Mr. Miyagi, and then the portion applied to the left.

Okay, good afternoon everybody.

Talk about the difference about the accounting numbers and the cash numbers is because the mainly because the borrowing costs are capitalized in the while the construction is in progress so

Sometimes, or most of the times, we don't have the cash affecting these borrowing costs, so this is one big difference.

Also, some contracts, performance contracts, are also recognized in the accounting numbers, but we do not extend money while it's in progress.

Tiberio can talk about this.

Okay, so let me take from this. Actually, it's very likely that your question is associated with what should I consider for the regulatory asset base, I suppose, right? And the main answer to that is the regulatory body will consider an increase on the regulatory asset base once When the construction in progress moves to an asset in service rights, it gets operated. So it's neither cash or accounting-wise. It's when it moves from a construction in progress into the operating asset accounts. That's the moment when it triggers an increase in the regulatory assets.

Is that clear? Any other questions? Okay, we have one more question coming in. Let's see. It's from Hassan Doza from Water Asset Management. The question is, can you please highlight and talk about the remaining key differences between SABESP and ASSESP at this time? In regard to the TER and P0? Rui?

Very quickly, and then give the floor to Mr. Tiberio to complete in more details. We have several different aspects. That, of course, we have differences of methodologies and approaches with our SESPI methods, etc. And we take a lot of time to discuss even the main ones. We have hundreds of pages of considerations. But I can summarize starting by saying that the final number of the tariff hike that is needed to reach the required revenues for SABESP, in our view, should be applied in Very closely to the financial and the preliminary target hike. I mean, we can even agree with the growth number for the target hike needed to achieve the required revenue. For the whole period of the next four years, the tariff cycle, but we put attention, we need to re-emphasize the need to close the gap between the economic and the financial concrete application of the tariff initial half. That is our first and, I believe, more comprehensive difference between what we propose and what RCSP is proposing in It's a preliminary note, technical note. We have some others. Maybe we can choose one or two, Tiberio and share with Mr. Hassan Doze.

Okay, I can do that. Actually, our document commenting on the preliminary notes has more than 100 pages in there. Obviously, it's quite a long document, but really, you could summarize the content in a few, I would say, five or six subjects. First, we have commented on volume, we obviously included a few contributions on OPEX, and one that is quite important is the recommendation of prior period We made a comment on that. That's quite important. We want the regulator to consider this amount that is almost 3 billion reais that he is recognizing right now. We ask the regulator to consider that backwards and not from this point forward. So that's one of the main requests we've made. And obviously, as we mentioned, even though the P0 calculation seeks to deliver an economical balance, You need this economical balance to be translated in the financial year-by-year balance as well. Once the regulator has calculated 484 HPE for us, but has deplored the application of this adjustment over the years, given the new tariff structure, obviously we are balanced in economical terms, but we are not exactly balanced in our financial year-by-year basis, so we added a comment towards that as well. and then another few minor items given adjustment from compensation in regards to execution of prior plans as well as impact on our sales needs given the COVID-19 pandemic. So I'll say those are the main ones summarizing it in a very, very short time.

Sorry, I was on mute. So we have one more question here from Liliana Young from HSBC. The question is, what are the chances of a delay in the rate review tariffs restructuring agenda and hike implementation? And if the proposed tariff hike for May 2021 comes as is, is to add below inflation,

What are the risks to your CAPEX budget?

Another question. Could you please give color and your appetite for new service contracts out of the São Paulo State at a time, year, when you are still undergoing a change in the tariff structure and when you seem to be getting a relatively low one-digit tariff increase this May 21?

Thanks.

So we mix two things here. Related to the increase and related to the expansion of markets. So, Julio, pass the word to you.

Maybe Tiberio could start with the first one and I'll talk a little bit about the second question, right? So, the type of implications of the initial proposal process. And second, I'll talk about the market expansion appetite for SABESP, right?

Okay, I can do that. Yeah, indeed your reading of the technical notes are right. I mean, we should be getting a tariff hike of mid-two digits, and the proposed tariff adjustment In the first year we should be carrying, based on the initial proposal, we should be getting mid to low or low to mid When did it increase? Actually, I think 45% increased. We made a comment on that, so we said that obviously it shouldn't be the case. Even more, if you were to consider the fact that we are increasing our CAPEX, our CAPEX program for the next four years, and many more. That's the basis of our contribution. Obviously, we need to understand that if we are moving from one therapy structure to another one, which should bring a more competitive environment for SABESP to the non-residual customers, someone is going to pay that. And obviously, if someone is paying less therapy, On one side of the equation someone else should be paying more so that you still match this equilibrium. It doesn't make a lot of sense if you were to do that at once, right? I guess we all should agree that some type of transition period should be considered. Whether this transition period is four years, six years, ten years, one year wouldn't be the case, but it's something to discuss. We obviously want the economical balance to be as upfront as we can and we want any difference to be capitalized so that there is no loss for any SABESP shareholder, right? So if we are not to get the full amount that we should in the first year, obviously then we should be We should be having this portion that is not being achieved, capitalized, and included in the next few years of the cycle. So, that's kind of how we look at it. I don't feel... It's a very smart guy, he's going to access the financial market, so I don't feel that even though we do not reach 15, 15%, 12% of whatever the final figure is going to be in the first year, companies will still be financial, if I may use that word, and obviously We shouldn't compromise the ethics for that. That's the deal at this point in time.

Okay.

Julio, it's up to you now.

Alright. Alright. Well, first, Liliana, I would like to remind everybody that SABESP actually is Being very effective, proactive in maintaining and expanding market share the last three years. During the discussion of the new regulatory framework for sanitation in Brazil, we have been able to extend big municipalities, and indeed municipalities assuring contracts like remember Guarulhos, Yadema, Santo André and lastly Mauá but those we have been able to assure contracts with dozens and dozens of medium-sized municipalities during these years and today we are not right now We put close attention in our neighborhood in São Paulo. We are now approaching the cities outside São Paulo, like we did in Casal, now there is Sedai and some other We are analyzing very carefully, like our CEO has mentioned during our conference call this morning, but with conscience. We are a big company, we have not just to expand, we also have great opportunities to We have a lot, a lot, hundreds of municipalities, millions of clients and possibilities to expand our profitability in science and some power market share. Of course, we will take, as Mr. Braga has said, a careful look at new opportunities, but they have to be profitable and look not uncertain, because we are not desperate to expand and deteriorate somehow our good position in the market. That's between these two milestones we have to take our decision.

Sorry again, I just want to make sure I don't miss any questions here. I think there's one more from Jean-Jean. Let me make sure I get it here. Just a second, please. Okay, there's a first one from Jean-Jean. I think the question is the same. The question was, what is the difference between accounting and cash capex? Which one goes to the RAT? That's the one I... Yeah, I don't seem to find it. Yeah, I don't seem to find it. Okay. Yeah, the question continually, over the long term, are there the numbers that are close to the accounting context that go to the RAB? There's a big difference between accounting and cash. I think that was just complimenting. I think we answered that. And if we did not, well, François, ask again, or we can explain later, of course, in a call, however best for you. Okay, let me check, are there any more questions? No more questions? Okay. Let's do this. Let's finalize our call. So the word is with you for, wait, seems to be one more question. Yeah, there's one from Lili. Let's work on that one. Okay, thank you. Okay, yeah, so there's one more from Lili. The guaranteed revenue target set by the regulator It seems to be a great idea, but seems to come with a risk of underperformance if your actual revenues come to be 5-10% below the revenue target. So, what are the chances and key risks for your revenues to come short of the targets and what's the rationale of having such a high range Plus or minus 10%? And can this wide range narrow? Got it, guys?

You want me to take that, Julio, or do you want to make any comments before?

Yes, please, your time.

Okay, so that's a great question. Actually, the regulator has defined the range to be In the first year, plus or minus 5%, then 7.5%, then 10%, right? So, it is indeed a huge range. and it's only the portion that goes over this limit that should be somehow compensated in the following year so it's only what's off this limit that gets compensated so indeed the assured revenue is something it's a good idea in a period in a transition period so indeed it is a good idea the fact though is that The range doesn't seem to be right. And we made a comment on that. Actually, our comment was that for the first year, given the fact that there is no New tax instruction that in the first year we are actually going to still be billing our customers the same way that we were billing before and we are not getting the entire percentage increase that we that the physio was pointing at we said okay so if you're not getting the the first the entire revenue for the first year then the range should be zero percent So, everything that is off, below it or above it, everything that is off the R$16.5 billion that is the required revenue for the first year, should be compensated in the following year. And then, for the upcoming years, when you have a new tariff structure getting in place, we propose 2.5%. Up or down 2.5%, so that gives us a full range of 5%. We believe that plus or minus 2.5% is something that would grant the equilibrium for the company. Plus or minus 10% is we haven't really received any indication that there was an economical compilation underpining that choice. We didn't find it. So, our contribution is to go for 2.5% for the second, third, and fourth year, 0% for the first year.

Okay. We don't have any other questions on the pipelines. Let me give you guys 10, 15, 20 seconds here to see if you still have some questions before we finalize. So, let's just wait a while then. Seems no questions. So, just asking the backup team. No other questions? Confirmed, right? So, Rui, the word is with you for the final remarks.

Alright, I would like to say to all of you it was a pleasure. To meet you all, to share our efforts in order to secure our results in such a very, very difficult time for all of us. With SABESP, with Brazil, and with the whole world. We hope to see you Thank you very much. See you soon.