Companhia de Saneamento Básico do Estado de São Paulo - SABESP

I have some highlights here in this slide. Having society and customers as the center of everything, being supported by all of the different areas in an intelligent, efficient way, and highly collaborative. The The estatization process was very intense. Over 18 months, we were able to run the company efficiently, maintaining service levels and the quality pursued by clients, by our service. There were challenges along the way. Drought periods, also rainy season that was very intense. We also, over these 18 months, We completely changed the company's structure with a reduction in the number of business units that we now call operating units. All of the activity in availability of water to our customers, collect and sewage and treatment of wastewater. Everything that was not part of this context was transferred to other units that can decentralization and rationalization process. Coordination was something that we identified early last year. We started designing the new structure in the first quarter. We got to the second quarter with a very clear view on what we wanted to do, implementation, and the communication with all of our employees, everyone, managers, superintendents, explaining why we were doing what we were doing, why the company needed to get ready for this transition, and anticipating What would happen? And this was very valuable that we planned it all out carefully. We built trust and the perception that the change was a positive change for the company that would create value, would extend contracts, and would merge everything into one single contract. So all of the different municipalities in one single instrument. And this is because we identified the regulatory gaps, we identified gaps within the company, and that we tackled over the journey. We did our homework. We adopted all of the changes that we wanted to adopt. So this is a process that I, it was a fast process and with very little noise in the company and in society, and we've been able to achieve many important things. A highlight, before I turn it over, or I turn to the next slide, one of the highlights here is that we were, the only privatization process in which the company was able to maintain debts with the guarantees of the government. Usually in a privatization process, the guarantee is lost. But our discussions with creditors like the World Bank and the Japanese Investment Agency, which is JITA, and the IBD helped us convince the government at different levels, and we were able to have legal support to keep the guarantees even after privatization. with credit lines with very good costs and good terms of payment for our activity. So this is just one example of how successful our silent work has been in the company, articulating at different levels with investors, creditors, partners, suppliers, and especially with the government and the privatization team. Over this journey, as well, we have some examples here. the establishment of the Shared Service Center, a new dividend policy aligned with the government view of having affordable fees aligned with investors. We did funding in a very good time, almost 3 billion reais, certified with a green brand for its sustainability. Our brew certification for the use of water, we also have the B3 certification. We provoked B3 to start the program of having the certification. And we were the first company out of Europe to have this. We were the first IPO of a company with that certification. And so we are the only company, water and sanitation and wastewater that is listed in the Brazilian stock market. Our regulatory agenda was also very intense. We've eliminated some problems of the past, some pending readjustments in the 2024 budget. tariff readjustment cycle, so much so that the two adjustments we have were above inflation because of those pending issues. Every quarter we've been dealing with any regulatory issues and we are confident that our plans will be fulfilled, especially after the start of the new contract. And All of this progress wouldn't have been possible without a complete reorganization of the company. We increased our capacity to run projects. There are 27 billion reais in contracting phase for investments to be made, especially in 25, 26 and 27, so as to be able to achieve the metrics that are established in the contract. There's robust program to clean up the Tietê River, which is part of the investment plan, as part of our contract obligations, with important milestones in 2026. We also plan energy management, which was one of the important points in our cost structure, with self-production, biogas production at the wastewater treatment plants, integral migration of our units into the market, the free market free energy market. And in customers, we also have plans. I will not go into details, but we've made great progress since we established the customer care office. So, next, this is a snapshot with a summary of this journey. We had the EBITDA margin of 40%. In late 2022, in the first half of this year, we consolidated margins above 50% of EBITDA. We had the highest EBITDA in any quarter in our history, 2.7 billion reals, showing this continuous improvement, this obsession for efficiency, execution discipline, plan what needs to be done, And there are two metrics in the table that we like to highlight, which is a good way to compare the company with itself and peers, which is cost and cash generation per cubic meter. So the cost and cash generation by each cubic meter. It was 252, the OPEX per cubic meter, 252, and it's now 235, the first half, 24%. so a nominal decrease of 6.7% considering the cost performance. We will be able to reduce the nominal cost in the company, which reflects in EBITDA per cubic meter, which was 1.86, it's now 2.57. We have historic and it's the highest ever when adjusted to inflation. So we are very happy with the performance and the company is still being run with great quality, even after we've had the termination plan that was concluded in June this year, reducing the number of employees from more than 12,000 to close to 10,000 employees. So the company is being well managed, well run, in a new ownership context, which now, in addition to the state of São Paulo, there's also the Equatorial Group, with 15% stake and signatory of investment agreement with the government. And we are confident that the experience of this new shareholder and its successful history of company integration and turnarounds of state-owned company is going to be very valuable for us to continue this process and become even more efficient and be able to optimize our results. And we worked hard in this preparation. We prepared the company for this transition. and we are ready to interact with this new shareholder. Since the end of last year, we established a group in the company that also was in touch with the government and mobilized us to think about what would be required for the D plus one plan the day after. So challenges that would be in terms of people, people retention and talent attraction and also what kind of incentives we could adopt so that individual performance would be recognized as people create value in the company. So we are working on that and we will be presenting this to the new management, the new board as soon as the This plan is ready as soon as we are allowed to do that. In terms of processes, we are updating our ERP. The new SAP version is expected to be deployed early next year. It's a very robust process, very comprehensive. Our SAP today is very customized. we are migrating to SAP, which is less customized, which makes us more effective in the use of SAP. And some other process, another process that's important is the transition of our procurement system, which is very state-led today, more bureaucratic, and we will be able to establish contracts now as a privately owned a private sector company, which is going to be much easier for us to do procurement without doing away with the discipline of being unbiased and looking only at the benefits of the company, trying to be more competitive in our RFPs. We have a protocol that has been designed and then validated by the board that is monitoring the transition. And for the new projects, there's a transition from what was not concluded into now this new private procurement requirements. That's going to be processed in the coming months. And there's a process and way of establishing the relationship with the stakeholders. There's a number of relationships you have as a state-owned company that is going to change with the new management. There's ORI, a new organization that we established a relationship with this organization that represents the government, there's municipalities, there's the regulatory agencies, and a new contract to be implemented. We are doing that very carefully, and we've been preparing for that since the beginning of the year, and this process of execution of these adjustments will be continued with this overview of the board and shareholders.

Thank you.

And we begin the 100-day plan. As soon as there's alignment with the new management, we're going to be implementing the 100-day plan. That includes a number of activities and, of course, one of the highlights, the change in the procurement process and the implementation of all of the obligations that come with the new contract. These are some of the highlights of what our journey has been like in the past months to achieve what we've achieved. And I'll turn it over to Caio, but I know that there's going to be some noise yet. There's adjustments and tests that will be done, but I'll turn it over to Caio to tell us more about this journey. Thank you, Andrea, and good morning, everyone. Happy to be here with the Sabes team, Andre and Katia, this earnings call. The customer office was established in August. It was planned and executed in the first half of last year, but the customer office itself was established in August last year. Part of the work there had been executed before, but mostly by Katia. But now with this customer office, we've been able to be more focused. The customer office strategically represents this strategic statement that we focus on customer. And in terms of processes, it means that we centralize all of the commercial processes. We identify, we realize that there was a lot of value to be captured from this process itself. Centralization, so in a way. Yes, we are celebrating our first anniversary and we are happy that we've had very positive results. And so it's a very quick overview here of what we've done and what you can expect. Collection is is a game in which you need all of the stages to be well oiled up. That's what we call the collection rules. So we started with what's basic, improving our messaging and also adopting negative reporting and also protest is when you have to work with corporations and corporate customers. So always trying to be more efficient. Also, the focus on credit recovery is an obvious one that we started to attack. So we did three fairs, so to speak, with more than 1.5 million agreements executed that have been supporting credit recovery and with the impact on PCLD. Also, in addition to that, there's an initiative that is as or more effective than agreements when you do the math, which is an innovation that we have of the unified second copy. So a person is there. reading the meter for the customer. If there's a debit, they issue a second copy, merging all of the debits and generating a code line so that customers can pay that in one single payment. So we have very complex systems. But at the same time, there's some low hanging fruit that helps us. And it's just changing in management approach. So you can make processes more efficient and have good payback. Another agenda that was implemented and that's been effective is the negotiation with the large debtors of the company. Municipalities, for instance, with larger debts and over time we did this effort trying to do something very well structured also from the point of view of establishment of guarantees to mitigate credit risk that is incumbent on you after this renegotiation because it almost always includes installment payments. because of the centralized management, you can gain scale and have, for instance, a commercial intelligence unit, which is something that we introduced in this customer office. We are not very flexible. We were not very flexible in terms of procurement, but we've been able to, or even hiring, but still we've been able to hire someone that's helping us find out where we can improve in terms of data usage and commercial management. Another important step in this collection rule, which is a required one, is cut management. It's inevitable. You need to have some level of service discontinuation to be able to control bad debt. And there was, again, a growth there. And the figure is not important for the cut itself, but it's an important step in the collection process. And to conclude, I'd like to say that these achievements were there in a state-owned environment in which we had so many restrictions. Now in this new world, that opens up for us. We will be reviewing the collection model. The collection model was decentralized, more than 20 contracts. And we are in a transition. It's more than 20 contracts in the past business units that we are centralizing. And this is the reason why I mentioned and Katia will stress that debt reduction is a journey. where we expect some volatility because there's a change in processes, changes in contract models. We are happy with the performance this quarter, but it's important to mention that this journey might see some volatility along the way. And based on business intelligence, we can clusterize. collection rules and this helps us manage collection costs, which is an important driver we are looking at more carefully. So going beyond just collection and look at what you spend to try to collect. This is an important part. Go on acceleration of credit recovery, negotiating with major debtors and using more tools for that. The company as a state-led company had some challenges in pricing when you look at who need good pricing to be profitable. And now we are going to be more flexible. And so because of that and because of specific financial instruments that can be used and also with the use of digital platforms and work with partners, we will be able to really have a better credit recovery strategy. Also, there's a mission around the expansion of payment methods. For instance, the use of credit cards, especially for installment plans that we offer to mitigate credit risk that we can negotiate. So that's the strategy now, to mitigate credit risk, and we think that credit cards can be an important lever for that. And to conclude, there's a number of other points on our... And there's, for instance, Sabesp Com Você, Sabesp With You program, which is our evolution of... communication channel onto a nominate channel platform where we can have an end-to-end view of a customer journey and we can be more efficient in our customer care and more cost effective as well. There are important opportunities there relating customer care cost and the use of more digital channels. And a number of initiatives that we see there And IoT, hydrometrics, and fraud management, these are all value levers that little by little this office will be adopting to better management and create value. So thank you, and I'll be happy to take your questions later on, and I'll turn it back on to André. Thank you, Caio, and congratulations for your achievements. I'd like to share one of the highlights here, something we worked hard on, which is organizing CAPEX and prioritize CAPEX correctly and increase our ability to invest in new projects for contracting and execution. In 2023, 6.4 billion investment this year. The plan is 8.1. Next year, 11.5. This was announced last year. And our plan includes now the investment plan of the new contract offer. So the curve up to 2029 reflects the new URAI contract with all of the municipalities. Today, and water and sewage for 2026 are contracted. There's investments being made in improvements of 1 billion. That's the great parts that you see in the 2024 bar. We are contracting for 2025, 6, 7, and 8, a volume of investment of 27 billion. And this is a build-up of projects that were announced in the past seven, eight months, so beginning in December until the end of this process as a state-owned company. So we're making the most out of these transitions and migrating the bidding processes onto competitive procurement processes in the private process using RFPs and this will accelerate contract establishments. So we expect that we'll end the contracting of these R$26 billion that will support us in the goals for 2025, 2026, 2027, 2028 and 2029. As you can see there, the gray bar over the years because our projects are multi-year projects. So in 2024, It was planned two years ago. 2025 was planned last year and so on and so forth. So once we conclude the contract of these 27 billion, we'll migrate to the orange bar, which has been modeled. We're going to be seeing how we can anticipate these investments in the coming months. So this is how we've been able to organize more clearly our investment plan, and it's very important. So it includes linear sewage and water pipelines to support vegetative growth and also new growth. Large wastewater treatment plants. There are three big ones, São Miguel and Barro Fundo. There are three mid-sized ones, one in Guarulhos, And all of the projects in the countryside and the coast with expansion of a network and increase in our resilience and increase of water availability in the coast and connecting systems in Paragrande, São Vicente, Paragrande, etc., so that we can exchange water flow along the coast so that our service can be more resilient irrespective of the season of the year. So... Last year, in the restructuring, we organized the engineering teams in one large unit, and this is yielding fruit as of the second half of the year, last year, and this year. So, it's a 27 bill. Everything is being modeled based on marketing knowledge. And from the bidding process, we are migrating to the RFP process, which is much more more simple when compared to the state bidding process. So we are confident that in the near future we will finalize contracting these investments, and then we will be looking at the next cycles, 26, 27, 28. So that's it for me. Thank you, and later on I'll be happy to answer your questions. Thank you, Andrea. I'll turn it over to Katia now. She's going to be giving us the financial highlights. Good morning, everyone. I'm happy to be here with you once again with good news. Consistent performance quarter over quarter. Revenue grew by 11.9%. This increase in revenue was driven by increased rates or tariffs. 9.6 was the tariff in May 23, and then the effect of the 6.44 rate of 2024. So the average there, there's 8.4% increase when comparing Q2 23 to 24. So 8.4 regarding increased rates. There's also positive volume impact. There's increased volume both in water and sewage that also drives growth in Q2, and Q2 was dry, very hot, considering it was winter. So when we look at our volumes for the second quarter of 24, it's aligned with the first half of the year. So volumes were maintained, which is atypical for this period. And when looking at demand, we see that it grew higher than 10%, cubic meters ranges, which has important impact on revenues, which also drives EBITDA. So, what we see there in EBITDA is a combination of volume growth and rate increase, and at the same time, all of the hard work we've been doing to become more efficient in cost management. As Andrea mentioned, this is the highest EBITDA of a quarter in the history of the company. So... comparing to 2023, it's a 35.5% increase in EBITDA. There's an adjustment there, so as to make sure that the figures are comparable. So it eliminated non-recurring effects. In the second quarter of 2023, there was the provisioning, total provisioning of PDI at that time, nearly 530 million reals. So we adjusted for that so that we can compare figures. And still with that, Even with that adjustment, there's 35.5% increase. And that income, we did the same adjustment there. And there's a 5% decrease. Basically, the income effect there is because of financial effects. There was a support in 2023, in the second quarter, because of the appreciation of Rial before the U.S. dollar. So there was a positive impact of effects of nearly $300 million. And so that was the positive effect in 2023. In 2024, it's the opposite. The Brazilian currency is now weaker. It started in April. It lost value. And the hedging strategy that we had was such that offset part of the FX impact. And we did the operations mid-April. which is when we had all of the derivative contracts approved and signed, and the approval of moving forward with the execution. So we offset part of the FX impact with hedging operations, and today the 530 million that we have in USD denominated are covered. And you see some KPIs that we can compare the company here. With itself, it's important that we use these KPIs to challenge our different groups. We see revenue per cubic meter, EBITDA per cubic meter, and OPEX per cubic meter. So, over time, we challenge ourselves to be more efficient and trying to grow EBITDA per cubic meter. It's an easy metric to understand. Everyone understands what it is, and... We've been seeing results. As Andrea mentioned, if you look at growth, and there we see the average of the past 12 months, and Q545 at the end of Q224. And if you look at 22 to 23, we see nearly 10% increase. And then we can see this gradual increase every quarter. And the same also when we look at EBITDA. EBITDA is being increasing consistently. With implementation, a lot of the strategy that we designed in 2023 has led to that. As I mentioned, that was a 3% increase in water volume and 3.3% increase in sewage volumes and 1% increase in new connections. So growth driven by residential customers and demand migrating So you see growth is driven in the above 10 cubic meter range, which is a higher average rate for us. So this is the second quarter of 2023, bridging us on to where we are today. So it's a 600 million growth in revenue for the reasons I just mentioned. Construction results are now zero costs and expenses. The benefit of 607, we removed 530 because it was a non-recurring event, and we adjusted the EBITDA, and we see the 77 million positive effect. And basically, the gains we had on the cost line were driven by the PDI result or the IDP, and capturing the gains of people who left us, so there was a drop in personal costs, and there's also the positive impact of PCLD, as Caio mentioned, and that led us to a cost reduction in Q2. Other operating incomes, last year we had the penalty for contract noncompliance, and then when compared... 2022 and 2024, there is this decrease, but this is something that was not recurring over this year, which is good. It means that our suppliers and operators are providing the services as contracted. Financial results is what I mentioned before. When you look at net, it's 448 million. Of those 448 million, most of that is from FX impacts. In 2023, we had the benefit, we had the positive impact of 283 million. That helped us. So, FX impacts were positive in 2023. Now, in 2024, in the same period, there's 216 in FX variations. So, that's because of our debt. We hedged the operations, and for FX variations, they hedged. covered 50%. And why 50%? Because when we closed the operations, the US dollar was becoming stronger. So we've been able to offset 50% of FX variation by the end of March of 2024 until the end of June. So 50% coverage, given our contract term. It was very effective when we started the operation. So we've been able to offset FX variation. just with the increase in interest rates because we swatched foreign interest rates into Brazil. Another impact is the increase of the 2.9 million that entered in March and last year, also the second half of the year, 1 billion of the IFC. So that increases our basis, our debt basis, and of course that increases our financial expenses and income tax and social contribution. There's a negative effect because of higher results. And then that brings us to an income of 1.2 billion in the second quarter. More details. There's a 15.5% decrease in expenses comparing Q2-23 to Q2-24. So we already see the results, the gains of the IDP when we look at the composition line. There's a decrease of 8.4% in the second quarter. And we still see many people left in June. And so as of July this year, we will see full capture of this value that we had estimated. And the 15% basis that we mentioned of reduction is based on figures of May 2023. After that, In February this year, for instance, there was a 2% in the career plan and 2.7% of compensation adjustment in May. So because of that, there's an increase in payroll expenses, but this strategy will lead us to 15% gains considering base date of May 2023. And this is going to be fully captured at the top of June. General supplies, expenses are down, so we are managing inventory and materials very carefully, so overall supplies and treatment supplies. Looking at what we have centralized, designing strategies to decentralize warehouses and procurement. And treatment supplies, we see the effect of a reduction of use and also price reductions, prices increasing. are down for the most important inputs we use. In addition to that, as of last year, our new plants are more flexible and can use different treatment supplies that we can choose according to price and we can capture value in our procurement strategy and also in the consumption and use strategy. That was $20 million Growth in services, it's not much, but we are looking at that closely to see how we can integrate that with a full CSC integration, which is the shared services center. And there's many contracts that are still being integrated, taking into account the original end dates, and we see many opportunities to accelerate this process going forward. So there's a small growth, but that's managed, and we are working hard Hard on that line. Electricity moved sideways virtually, and according to our strategy, and Andrea mentioned as well, we are increasing our volume in the free market, so 66% of what we buy is in free market, and 34% we buy from the regulated market. So there's an increase of our use of free market energy, and there's the benefit of the lower prices. There's still some 30% of energy that we buy from the regulated market, and then there was the price impact that we see in this quarter. And we see a breakdown of overall expenses there. And we see that the major impact in this group is its contingencies or allowance for doubtful accounts. We see that considerable decrease, and when you look at the municipal fund, we see the increase driven by the higher revenues. Depreciation and amortization we see comparison 7 billion that we added to the basis. Consequently, there is a higher level of depreciation and amortization. Looking at allowance of doubtful accounts, there is a significant decrease compared to Q4 last year, Q2 last year, and then there were many agreements that Caio mentioned with a major account, adding to 76 million. So looking at that, we're talking about looking at year-to-date, 2.9, which is a less than 2023. But here we see in the graph below, the first or the second quarter of 2014, 1.2% of the revenue. In the year today, 2.3%. If we look at, if we don't consider that non-recurring event, it's less than the 3% that we ended in 2023. As was mentioned, that might be some volatility. because this initiative is structural, and also we are working with some specific cases to recover our old liabilities. Looking at tax expenses, basically they are moving sideways, no changes. Investments in the first quarter of 2024, we ended with 1.4, now the second quarter, 1.3. Aligned with what happened in the first half of 2023 with a strong recovery in the second half of 2024. So the team is working hard to deliver on the CapEx commitment this year. Looking at our debt now, our indebtedness level, net debt, just at the debt level is around 150. So 153, so there's room for leverage. And the strategies that we have there, as a decision that, not working with primaries, because there's room for leveraging, supporting our CAPEX with that, and of course, with our own funding over the years of contracts. Adjusted EBITDA over financial expenses, we are doing very well. 570 against 280. So we're very comfortable, if you look at our covenant. Our indebtedness level is slightly higher. It was 15.8, now it's 16.6. This is net debt because of the 31st issuing in March. Net debt. You see there local currency and foreign currency, but foreign currency debt is fully hedged. This is an important point. So the strategy of decreasing volatility... and ensuring predictability of results. And this was delivered the second quarter. And that's it from me, Tiberio. Thank you, Katia. We can now begin the Q&A session. We will start with the questions by analysts and investors. And then questions from journalists. We've received some questions already. And there are some questions that are similar. I'll try to consolidate that. Guilherme Lima has two questions. He says, we see a growth of average rate of 5.3% when compared to Q1 2024, which looks strong. even consider the 6.4% adjustment of May. Can you tell us what are the factors that explain this growth? Is it the mix makeup? Okay, you can answer this question first. I think I answered that in my presentation when I spoke about the increase in average rate. There is the rate adjustment or the tariff adjustment, when we compare first and second quarters. But there was a growth. The second quarter was stronger in demand and there was also the positioning that when we look at demand rates of those that use more than 10 cubic meters. So that also increased the average rate automatically. So basically that's the answer. That's why we had this growth when comparing Q2 to Q1. We don't fully capture the 6.4% increase. The full rate was as of June, partial in May, and that's combined with also the consumption range effect. This is one point. And also the increase in connections in the first quarter. So increased rates, application rates, and consumption range. These are the reasons. Second question. Could you comment on how you are looking at the merit of the topic of reforms and cancellations of 2024? We saw that the regulatory agency established this inspection of values that could be rebalanced in the future. The potential correction would be for 2024 or the whole cycle? In case it's for the whole cycle, what would be the total amount to be rebalanced? Thank you for your question, Guilherme. This is a historical demand before our CESP. We've been discussing with our CESP since the beginning of last cycle. And they recognize that this issue requires greater understanding, but there's no estimates in terms of value or when this study is going to be concluded. This is good news that They are looking into our demands and we spoke about our contract and report. The 2% of our revenues goes to reforms and cancellations. So we would use that figure as a basis. But we can't confirm that that's what they're going to do and we can't give you any estimates of what our CESP is going to be deciding. Thank you. Daniel Travitsky has two questions as well. The first question is similar to Marcelo Sá's question. So I'll read Daniel and Marcelo's questions. And André can give them one single answer. What do you expect in terms of the organization of the company as soon as Equatorial becomes a shareholder and reference operator? Do you know what is going to change in the short term in terms of team and what are the needs first initiatives for efficiency. And Marcelo asks, what are your interactions with Equatorial like for the time being? Is there anyone from Equatorial already working at Subesp to learn more about the company and this transition with the CADE approval? Can you already have that or do you need a board to be appointed before that happens? Well, Marcelo and Daniel, because of this pending CADI approval, we couldn't have interactions with anyone from Equatorial. We can't jump the gun, as lawyers call it. Now, that's been the approval, and we are waiting for the guidance of our lawyers to see what kind of interactions we can have with Equatorial, because it is a 15-day process. period in which people can challenge the authorization. So, we need to wait for that before Kadhi's decision becomes effective. So, August 23 is when this period ends. I think it's Friday. So, on August 26, we formally conclude the process of approval by the antitrust agency. So it's a gray zone on what can be done right now, and our lawyers are guiding us on what can be done in this period. And as of August 26, we expect that there's going to be a general assembly to appoint the new board members according to what's provided for in our bylaws. There's going to be a nine seat board with representatives of different stakeholders, also independent board members. And then the new board members will maybe appoint new executives. We have no visibility regarding that. What we've been hearing informally from Equatorial is that they're also looking into it.