Companhia de Saneamento Básico do Estado de São Paulo - SABESP

Okay, good morning to all. Welcome to SABESP's video conference to discuss the earnings for Q3. My name is Mário Sampaio. I am Head of Capital Markets and Investor Relations at SABESP. Today, we have with us here Dr. Benedito Braga, Chairman of SABESP, Mr. Osvaldo Garcia, Financial Economic Director and Investor Relations, Mr. Marcelo Miaghi, Head of Accounting, Marcelo Sanchez, Superintendent for Regulation. Before passing the floor to Dr. Braga to begin the conference, I'd like to Give some information. First, this video conference is being recorded and the presentation will be available for download at our portal where we already have the press release. We will accept questions only in writing through chat.

Our conference will

It will be for an hour and 30 minutes, and we will have 45 minutes to answer questions from analysts, and at the end, we will have time for questions from journalists. To conclude, a small disclosure. We would like to clarify that any declarations made during this conference concerning the business Perspectives of the company, projections, operational and financial goals are based on beliefs and assumptions of the company's board and also information currently available to the company. Considerations about the future are not guarantee of performance. They involve risks, uncertainties because they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future results of the company and may lead to results that may differ materially from those expressed in these considerations about the future. Now, I would like to pass the floor to Dr. Braga Dr. Braga, you have the floor for the opening of this conference. Thank you very much, Mário. Good morning to everyone. It's a great satisfaction to bring to you on this rainy morning good news to all. We had very positive financial results, but I will allow our CFO, Dr. Osvaldo Garcia, to talk about this point to you. I would like to begin with three or four topics that are of your interest. Also, as a result of this good news, we have a rainy morning concerning the water safety. We are actually having a situation that is an extreme drought in the southeast of Brazil and this even affected the electricity sector and also, as Dr. Oswaldo may explain, issues involving cost of energy, that went up as a result of this extreme drought situation that we are having. And we were able to get a special authorization from the water authorities to bring from our reservoir in Jaguari, on Paraíba do Sul River, 40 million cubic meters. These are additional until the end of this year. An additional 40 million cubic meters until the end of this year, thus increasing our water safety. I also inform in this direction, talking about water safety, that the works for abstraction of water from Icapanhão River to the Reservoir Beativa Mirim in the Alto Tietê system may remove or may abstract 2.5 million cubic meters of water with a monthly average like this. The works are going very well, and in the first semester of next year, We will have the inauguration of this supplementary system. Now concerning rainfall, we had a month of October that was a little above average in terms of rainfall, but a month of November in the first two weeks, a November with little rainfall, but we still have hopes that In the second part of November, we may have more rainfall to recover our levels at the reservoirs without the need to have any extraordinary measures to guarantee the supply of water in the metropolitan region of São Paulo. In the interior, we had a situation in the city of Franca, In the month of August-September, we had to begin a rationing plan, but this situation is over and today the supply of water in the city of Franca is normal. So, in the other cities, 375 cities, the situation is okay concerning the supply of water. Another important piece of news, very important news, is the implementation of NETS at NETA. This platform will allow the new tariff structure that we have, this structure where we will have a single tariff for all our cities, and this will be applied In 2022, and reminding you that the minimum tariff disappears and we will have a fixed tariff for water connection and plus water consumption. So the person will only pay for what they use, but there will be a fixed fee in the new tariff structure. Also, through this new platform, Netat, we will have a different interaction with clients, much better interaction with payment via PIX, credit cards. In other words, a modernization, a very important modernization and update. Right now, we are implementing this system. There are some initial issues. For example, we have in our contact center, also we had a problem with fake news on fake bills from SABESP, but the Netto system has a much greater efficiency, brings us this greater efficiency and a reduction in delinquency due to The fact that we are working with taxpayer numbers, taxpayer numbers and ID numbers. Our corporate area did an excellent job, an important job, and we inaugurated this new era in terms of relationship with the clients and the monitoring of our So this is an important piece of news. We are modernizing the company. Now, concerning the new sanitation law and the decree that regulates Article 16 in terms of proving the economic financial capacity of the company as a result Of the goals for 2033 concerning 99% coverage with water and also sanitation, we are very comfortable with these issues. Yes, we will have conditions to prove our financial economic capacity, As a result of the following, our largest consumers, our largest cities will not need investments in CapEx. We had already foreseen getting to a situation of universalization before 2033. Also, I can mention here that, unfortunately, the federal government did not act on time in regulating this law and published this decree with nine months late. The National Water Agency regulated other indices that we will have to follow everything We are working hard and fast for everything to be done, everything that is from our part until December 31st and with this we will be absolutely in agreement with the new law for sanitation. Finally, I would like to mention that SABESP was the only company In the Southern Hemisphere to have an agreement with UNFCCC, which is the platform of the United Nations for Climate Change, where we are collaborating in this worldwide movement to increase the resilience of the water systems. We participated actively in COP26, taking our vision and showing that these discussions of the UN, the 26th, have focused a lot on the energy issue, CO2, the problems that will happen In the long term, in the future, but they were not concerned with adaptation, which is happening right now. You can see the issues concerning the drought we have in Brazil, and SABESP has been an example for the rest of the world, for the sanitation companies in the world, because It prepared itself. We adapted ourselves to climate change. So, it is with great satisfaction that we saw that the final report of the chairman of COP26 gave more importance to the adaptation issue. And not only this, the next COP that will happen in Egypt next year, the focus will be on Everyone adapting themselves and how this will impact and bring an improvement to the less developed countries in the southern hemisphere. Also, within this context of ESG, the company is alert, the company is getting stronger and stronger in this direction, ESG. Well, I believe you are more interested right now in hearing our CFO and the positive results in finance. So, Dr. Osvaldo, you have the floor. Good morning, Chairman Braga. Good morning to all. I thank you all for participating in this video conference to discuss the earnings of Q3 2021. Beginning on slide 3, we observe the total volume built with a growth of 3.7% in relation to Q3 2020. This considering the volumes of Mawa, which in this quarter is working in retail, and in Q3 2020, they were working not in retail, Well, this considering the volumes that are exempt from collection and also social and residential categories in shanty towns, going from 957.3 million to 992.7 million cubic meters built. This growth is greater in the sewer services, 4.1% in relation to the volume built in the segment of water that rose 3.4%. The most significant increase happened in the non-residential categories, where tariffs are higher. 15.7% in public, 7% in commercial, and 6.6% in industrial clients. In the residential segment, which represents the greatest volume in relation to the total, the growth was 3.2%. With the recovery of consumption We noticed a recovery in the average tariff with favorable impact on revenue.

Next slide, please.

Now, we'd like to see the slide with financial numbers. The revenue from sanitation services had An increase of 17.7% in the period going from 3.6 billion in Q3 2020 to 4.3 billion reais in Q3 2021, especially as a result of tariff increases applied on clients' bills. In August 2020, 3.4% and since May this year, an increase of 7%. The effects can be seen in the revenue in this quarter. When compared to the same quarter last year. Also, we add the increase of 3.7% in the total volume billed, which explains the relevant increase of the total revenue of sanitation services and the operation of water distribution and retail in the city of Mahua, which is now 24.7 million more In comparison with the same period last year, net revenue went from 4.4 billion reais to 5.2 billion reais due to the growth in the volume bills and the inclusion of the price increases mentioned, as well as with the revenue from construction that contributed for the growth of 132.7 million in the period. The cost Administrative expenses and commercial expenses, including the cost of construction, had an increase of 13.8%, going from 3.5 billion in Q3 2020 to 3.9 billion in Q3 2021. When we exclude the construction costs, the increase was 14.3% or 347.5 million reais. Adjusted EBITDA was $275.7 million above the EBITDA of Q3 2020, resulting in $1.8 billion in Q3 2021, a positive variance of 18.2%. Now, concerning the EBITDA margin, which does not consider the revenue and construction costs was a little higher, going from 44% to 44.4%. The net profit, net income, closed at 486.6 million, 11.1 above the profit in Q3 2020, which was 421.6 million reais. I'd like to stress that this increase was based on the revenue that grew In a more vigorous way, with the inclusion of recent price readjustments, a greater volume, recovery of non-residential segments, thus improving the average tariff, and despite the pressure on costs and expenses due to higher inflation, and also with higher interest rates and exchange variations. Now, we go on to The slide for costs and expenses. The costs and expenses when we did consider the cost of construction had an increase of 14.3% or 247.5 million. It's important to remind you that the analysis and comparison of this quarter with that of 2020 in some cases may lead to distortions because many activities were paralyzed or delayed last year As a result of the measures for social isolation, the expenses with personnel had a small increase, 1.8%. The explanation is in the salary increase of 7.75% in May this year, and medical expenses that were exceptionally low in the previous year. This variation above the Below the inflation of the period is due to the reduction of around 1,000 employees. The effects of the impact of the pandemic in Q320 can also be observed with different degrees of magnitude in the expenses with materials and expenses with services. In general expenses, a significant part of the growth observed of 103 million or 45.9% is explained by the expenses with court issues, 53.3 million, and the increase in accruals or provisions for payments to the environmental and infrastructure sanitation municipal funds, resulting in the growth of the revenue and the number of cities included worth 32.9 million. Expenses with electricity were also important. The average increase in the tariffs, ACR, was 30.6%. And the impact was not greater because we migrated part of the consumption to ACL, the free environment, where the price increases were not that high. In general, the expenses with electricity had an increase of 20.6%. Going from 311 million to 375 million reais in the period. Different from the revenue that already reflects the recovery in volume and average tariffs in relation to the same period last year, the estimated losses with credit and bad debts increased by 43.5 million, a growth of 57.9%. As mentioned by our chairman, due to the beginning of the operation of the new commercial system, we will have a more modern tool to approach and solve these balances that were not collected, were not received. Next slide, please. Financial performance. The graph for financial performance begins with the profit in Q3 2020 of 421.6 million and shows the movement of the results in the period. Net operational revenue grew 715.4 million due to tariff increases totally included growth in volume and improvement in the average tariff as already mentioned. Costs and expenses Peralta de Saneamento Básico do Estado de São Paulo to the devaluation of 8.7% and 8.3% of the Brazilian currency in comparison with the US dollar and the yen, respectively. A devaluation that is greater than the one observed in Q320, which was 3% and 5.2%, respectively. And also, another point, the impact of the higher interest rates and also IPCA index on loans and financing. Income tax and social contribution had a negative variance of 3.9 million, resulting from the increase in net operational revenue of 582.7 million, which excludes the effects of revenue and expenses with construction, the increase in costs and expenses of 347.7 million, and greater expenses with exchange variation, 141.5 million. The result was a net profit in Q3 21 of 468.6 million Reais. This result, although better than the one demonstrated in the same period last year, shows that the company still has the effects of the crisis that began in 2020 But we have recovered revenue not only due to higher tariffs, tariff increases, but also defects in the economy with the recovery in industrial segment and services. On the other hand, issues like delinquency have not followed the same trend and the strong increase in inflation can be seen in the cost of inputs. These are our comments, now we would like to go on to the Q&A session. Mário, you have the floor.

So, everybody listening here? I just unmuted. Hello? Okay, I'm taking over here. So, we would like to begin our Q&A session.

And with this, before that, I would like to see the questions

e investidores. E na sequência, nós vamos abrir uma loja de jornalistas.

Como eu já comentei antes, em função da limitação de tempo, é possível que algumas perguntas que a gente receba não sejam respondidas. O que a gente pode fazer é decidir. Então, eu vou começar com a primeira pergunta aqui. A gente vai estar preparando

Let me get ready for this first question.

I will check with Dr. Braga. The question is from Marcelo Gonçalves. He asks many questions concerning tariffs and price increases, indicators, period. When will we have the tariff structure? Dr. Braga, please guide us. The implementation of the new tariff structure will happen in April next year and will be implemented in May, will begin in May. But I see here that there are more detailed questions On revenue and so forth, I will ask Osvaldo and Marcel to answer these questions.

Marcel, I will try to answer. Please supplement. Concerning the revenue, the amount is R$ 17.5 billion.

And if SABESP has an expectation in relation to revenue this year, what I can say today, that it is a little below the required revenue, but only at the end of December will we have the final number. We believe it will be a little lower, but not very much lower. Now concerning The period of evaluation of inflation, I'd like to say that our P0 was February 2021, and therefore, since the Agency will treat this in March, let's see the index that will be used so we can adjust for inflation in the period. This will be discussed in April and implemented as of May. Now concerning tariffs, the Chairman already mentioned, the new system will be implemented in May 2022. Would you like to supplement, Marcel? No? Perfect. The next question is from Gabriel Tieto. How is the process concerning a possible privatization of the company Dr. Braga, farewell. Always reminding you that this topic of privatization is up to our controller. It's not up to us to discuss this point. I would like to say concerning the progress It is what is public. Our economic minister has said, everyone knows that the privatization committee of the government is analyzing this topic for the company's status and intends to hire the IFC to prepare a study. This is the information that is public and everyone knows. I have no additional information apart from what we read in the press. Well, we are awaiting more questions. For the time being, we had Marcelo Gonçalves A question from Marcelo Sandri. The question is, please give us an update about the investments in the new Pinheiros River. So, please talk about the schedule, amount invested, measurement of results, and expectations involving conclusion. Well, it is a great pleasure to answer this question. We connected 428,000 users of the 530,000 savings for this project, Rio Pinheiros River. We have the concrete hope to finalize Until the end of 2023, all the 533,000 savings, apart from the quality recovery units for streams that feed the Pinheiros River. We have five stations, total investment 1.7 billion. We are only paying According to results, we have 87% of physical part working ready, but in terms of finance, we're close to 30-40% in terms of payments, because the payment is only made when you have the results in terms of connections, and quality of water in the streams that feed the Pinheiros River. So, it's a project that is going very well, very successful, even during the pandemic. We are going beyond the forecast, as I mentioned. The forecast was 85% in October, and we have 87% ready. Okay, we have a question from Daniel Kravitzky and the question is, please comment on expansion plans for operations, participation in auctions for sanitation and expansion to other states. The company is very Connected to new businesses, expansion, Dr. Osvaldo in the financial department has a superintendent allocated to treat this topic of new businesses. We are looking at this topic with great interest. We are We are focusing right now on the universalization and to reach the goals that we have in our program for 2033. As I mentioned in my initial speech, we are observing this. We have outside consultants for M&A to help us. We are competing for Eurolandia to take care of the city next close to Franca, where we are already present, but maybe Dr. Osvaldo can supplement with some comments in terms of new businesses. Chairman, Mr. Chairman, supplementing this information, It's basically what you mentioned. Our focus is in serving the 325 contracts, improving our economic and financial capacity and CAPEX. But, of course, after January 1st, when we have the confirmation of the financial capacity in the other companies, we expect some action. Especially new businesses were focused in looking at the opportunities first with priority to our states, São Paulo, and then other businesses participating in auctions together or together with other companies. Okay, we have a question from Caroline Cabreiro. from Credit Suisse. The question is on the implementation of the new tool for collection that Dr. Braga mentioned. Specifically, she wants to know how long will it take to implement this new tool and expectations to decrease PDD, which would happen in Q4. The tool is already working. What we are improving are the better ways to collect, more modern ways to collect, which should happen in the next two, three months, in the beginning of the year. At the beginning of the year, we will have more news about this using WhatsApp, Using PIX for payment, all these modern tools for payment, and also more effective ways to reduce delinquency. But the tool is already working, but these upgrades that it allows will happen in the next three, four, five months. Thank you. Right now, we don't have any new questions. I understand that the system identifies whether these are analysts. Dr. Braga, can we open the floor to journalists?

Yes.

So, let's wait a little. Let's see if we receive questions in order to clarify points. So, we will wait a little. Mário, one point involving logistics. The only way to receive questions is through the Q&A or do we have Other ways to receive questions from analysts and journalists. Only through the Q&A. Questions only through the Q&A. I didn't see Caroline's question. Caroline is an analyst. She had difficulty to ask her question. She is an analyst. She has contact with the company. She sent it through WhatsApp and I read the question. Okay, we have more questions. Dr. Braga, Dr. Osvaldo. The question is from Juliana de Garibia. How are the How are the recent changes having an impact on the company? How is the issue of costs? How are the costs? Very well. This question is for Dr. Osvaldo. Okay, Mr. Chairman. Well, in the macroeconomic system, we had an increase in interest rates. This will have an impact on our costs with Thank you very much. Thank you. The drought, the scarcity of water in the reservoirs. We are looking at this very careful, that's why I mentioned this point, but the costs are under control and within the goals that we have projected. Pressure exists. We are working now for this pressure not to have a great effect. Okay? I believe we have another question, I believe was already answered. Arlan Cravaniani, he asks whether SABESP intends to participate in sanitation auctions. This was answered, maybe we can have more comments. Well, myself and Osvaldo we answered, we're alert, we're looking at The possibilities, we may participate as if it does not affect our current contracts. Now, with the new regulations, we have an important challenge. Marco mentioned this possibility of new businesses. but also there are serious issues because we have goals with our current contracts that's why we're focused on reaching the goals in our contract but as Osvaldo mentioned we are alert we're looking at the opportunities if we can have important financial results enabling An acceleration of the universalization in São Paulo, we will consider the opportunities. Mário, it seems that I said that we would deliver the new Pinheiros River at the end of 2023. No, I did not say that. If someone understood 2023, they understood it wrongly. 2022, next year, clean Pinheiros River. from our viewpoint. Okay. Dr. Braga, next question. Marcelo Gonçalves who will ask the questions about revenue. He asks for details and clarifications concerning the required revenue. Is it 17.5 billion for 2021? And based on prices of... Is this based on prices of February 2021? Is this net revenue? In the two cases, the answer is... Yes. Okay. Waiting for more questions. Reminding you that those who are listening to the translation in English are invited to ask questions. You may ask questions in English too, so please feel free to ask questions in English. SABESP is innovating. Mário SABESP is innovating. In the past, we We used two of our periods to have the report in Portuguese and then in English. Now with the Zoom technology, today we are doing at the same time the call and also the virtual meeting in English and in Portuguese. So we are more efficient now. Yes, and this cut the cost. of our conference calls. Well, let's see if we receive more questions. Yes, we have another question. Mariane Moraes, could you detail the strategy, how the company is financed, new loans, potential buybacks, Osvaldo, please. This would be better answered by you because you are responsible directly, so please. Well, let me answer. Mariana, thank you. I will answer it the following way. The company has an intense process of refinancing and loans. We have tried to diversify the sources of loans apart from the ventures. And with incentives, we have sought multilaterals from the private markets. We had an operation at the end of the year, almost a billion reais was being invested. In reais, not in foreign currency. Actually, this is a trend. The company, guided by the board and the council, is trying to reduce as possible the exchange rate exposure. So, our strategy is to diversify and anticipate the loans. Now, concerning and potential buybacks. We will see this when opportunities arise. But certainly the company does manage its debt and it can in the future maybe pay off the loans that are very expensive in relation to what the market is offering. The debts we have, almost all of them CDI, allow us to I believe that in general terms, this is it, reminding you that the company has access to public multilaterals. Recently, we received approval from Confiex for the next step for financing of $200 million. It will be in the end. with JICA, the public bank that does international development from Japan, and this is also in our pipeline. So, we have many loans from the public bid and World Bank. may later be converted to rice. So, we have a robust situation to guarantee the liquidity of the company and also guarantee the capex of the company to reach the goals and deliver the clean Pinheiros River on the date that Dr. Braga mentioned. Thank you. Mário, it seems that Juliana Rocha asked the question and Juliana Rocha Juliana Rocha, journalist from Read at 11.46. I did not receive this question. I will read. I will read the question. I apologize. Journalist from Read Intelligence. Her question details about my initial comments. SABESP does not wait to have rationing. What is the scenario for 2022? What levels do you expect to have during the droughts? Well Juliana, during these years, We had three actions, three movements. One, to increase the infrastructure. Second, reduce losses of water. And also to have conscious consumption from consumers. We were successful in these three. That is why today we can say that we have no forecast for rationing of water. We are in November. We're expecting more rainfall this month of November and also during December and January, which are the rainy months. There is a difference in climate forecasts between the research institutes, some saying La Niña, others do not foresee La Niña. La Niña means that we would have a dry summer, otherwise we would have a normal summer. So, there are uncertainties. What we have in terms of expectations is the average. What happens more frequently, and therefore, right now, we are not seeing difficulties. Now, we will have no difficulties if we have A dry summer, because we have alternatives to face a challenge like this one. We have experience to use technical reserves. We already use them. For your information, Cantareira Reservoir has a technical reserve the size of the full reservoir of Guarapiranga, which is The third largest system producing water in the metropolitan region of São Paulo. Therefore, we, right now, we don't see the need for rationing water. Now, if we have a different situation, for example, in Franca, we did this. Why? Because there, next year, In the first semester, everything will be okay. It rained there, we had no more problems, but when we had a more difficult situation, it was necessary to ration the water so people could fill their water reservoirs in their homes for their basic needs. But we don't have this perspective. In São Paulo. We don't see this as necessary in São Paulo. Okay, now I received a question. Let's continue. We have no further questions, Dr. Braga. Let's wait another three minutes to receive questions and Do we conclude or do we wait more? Dr. Braga, Osvaldo? So let's wait another three, four minutes, and if we don't have questions, we can close the conference call. We have 106 participants in this meeting, and certainly those who had questions have already asked their questions. Okay. Very well, Mario. I believe we have no more questions. Yes, we have a question. Diego Nascimento is asking, will you announce dividends?

Dr. Oswaldo.

Well, the dividends foreseen are the minimum, and this will happen when we close our year-end report. We will define the company's profit, and there is no, we don't intend to change this. 25%, which is the minimum dividend. We have a strong investment plan, Thank you to all the participants. I would like to thank our directors and our CFO, and I'd like to say that we continue working hard on our challenges, especially to meet the goals and everything that is in the new law. We will continue in reducing costs So this is what our company intends to do in the near future and all those who participated may be sure that we will make our best efforts for our results to be greater, both financially and in terms of the improvement of the standard of life of people that we serve and and we supply water and sanitation. Thank you.