Companhia de Saneamento Básico do Estado de São Paulo - SABESP

My name is Louise Roberto Tiberiu. I'm the treasury and investor relations superintendent. And I would like to greet you and welcome you to our earnings results call for Q3 24. So today, we have invited Mr. Biani, who's the COO, and Mr. Daniel Izak, who's the financial director of investor relations and before. I give the floor to Daniel. I just would like to give you some information. This video conference is being interpreted into English and is being recorded. Those files will be available for download on the investor relations website for Sabesp, where the earnings results release is already there. And we will take written questions, our conference will last for approximately one hour, but some time left for answering questions from analysts and investors. And in order to conclude, we would like to clarify that eventual statements regarding the business outlook, estimates of operational and financial results, they are merely projections as such based solely on the expectations of FABESA's management and that are based on the information available and did not constitute any investment recommendation or performance guarantee. Such forward-looking statements are heavily dependent on market conditions and they are uncertain and because they obviously relate to future events and the ban on circumstances that may or may not occur, investors should understand that overall economic conditions, industry conditions, and other operational factors might affect the results, future results of the company, and might lead to results that can be materially different from the ones that were expressed in the forward-looking statement. So let me give the floor to Daniel, who is going to start with the financial highlights of Q3 24. Thank you very much, Tiberio. Thank you to all our stakeholders, in particular, our shareholders who are connected. And first of all, let me take this opportunity to introduce myself. My name is Danielle Slack, the new CFO and head of investor relations from Sao Paulo. I was born and raised here in Sao Paulo City, graduated in chemical engineering from the Polytechnic School of the University of Sao Paulo, started my career in financial market mergers called IGC, where I spent four years after that. I joined Heise in the US right after Warren Buffett and 3G Capital have privatized the company. And I might have been one of the first ones right after the approval of the antitrust in 2013. I spent 10 years across three different regions, mostly as a CFO and a little Less than one year ago, I left to Gambia, the largest thermal energy company in the country, where I had a heavily involved and business focused on improving sustainability for our country and making a positive impact for our population. Just recently, with the privatization process nearing completion, I received this invitation to join this very special project, which is the New Saab Espen. Since October the 1st, I have been here and I am ever more confident on our team's stability to bring universal sanitation to our concession area. Today we're going to talk about the Q3 results in a brief manner, because this is a result of the previous management. This quarter included a series of new events that are worth reviewing in general terms, which are better detailed in the performance commentary and the ITR. The first key point is the bifurcation of financial assets, which, according to IFRS 12, requires us to separate from intangible assets the portion that will not necessarily be compensated through tariffs over the useful life of these assets, but will instead be reimbursed by the guarantee authority after its expiration. Previously, the company did not need to make that distinction since It belonged to the company. However, in the new model, renewal requires a new bidding process, making this adjustment absolutely necessary. From the economic perspective, this adjustment represents a deferred revenue that was calculated by updating the regulatory asset base with the IPCA inflation index until the present moment. And that brought an impact of approximately 8.8 billion reals in gross revenue and the associated tax will be deferred similar to this revenue. We see this effect in all the quarters, although in a smaller scale, proportional to the RAB. And this will depend on the lifecycle, depending on the concession. The second point relates to transition. Naturally, with the shift from a state-owned to a private company, several management aspects need to be adjusted. So to add in this transition, we hired a PMI consultancy that supported us throughout the transition period. Additionally, we incurred in all the costs associated with the offer during Q3. Upon our arrival, we also took time to reassess the company's assets and the continuity of certain projects. and some legal proceedings. And we operated a couple of changes generating non-recurring effects of the operations. Excluding those effects and the impact of construction, the underlying result showed a significant increase of the net revenue around 7%, which translated into a 17% increase in the EBITDA. This boost was driven by not only a growth in the unit cost per cubic meter, but also sewage was 80%. Additionally, we generated operational cash, 1.6 billion, that was almost entirely reinvested in the asset base. So they'll be deeper into the results. The revenue increase I mentioned was driven by a 2% growth in volume. Half of this growth came from new connections and an increased consumption in the already existing And the other half of the consumption growth was in the existing connections. The remaining revenue growth stemmed from pricing and mixed readjustments. 6.4% tariff readjustment in 2024, reduced by 1% and doused upon the completion of the privatization process, resulting in a net positive effect of close to 5%. The inclusion of the CAD ONUCO, the Unified Registry in the vulnerable tariff category, and that generated a negative effect of almost 30 billion with 0.5%. And all of that is the net of FAUS, which represents 3% of our tariff and belongs to a granting authority discussing the net revenue rather than the gross. Looking at the EBITDA, we saw an improvement in the unit cost per cubic meter, especially in personnel expenses, still reflecting gains of the PDI that we executed last year with departures. continue until June 24, accounting for 40% of the 167 million. The remainder was driven by the reduction on service costs, especially expenses incurred in 23 in order to meet quality standards for some municipalities in the network maintenance. With this mixed scenario, with a net cost increase of around 9%, primarily due to a 12% rise in consumption, and this increase was necessary for reservoir management during the dry period of Q3-24 versus Q3-23. On the positive side, we had a 3% reduction on the average tariff by optimizing the mix between a free contracting environment and regulated contracting environment, where the free contracting environment reached 55%. At the net profit level, besides the previously mentioned defects, we had a positive impact of 170 million rials. And this was mainly due to the new concession contract, which extended the use for FFR assets and with some gain in the financial results, largely attributed to the hedging strategy for foreign currency debts, which did not exist before. On the investment front, we completed 1.4 billion rials in this quarter. And we've made quite a few adjustments here, particularly in the terms of the procurement methods. Naturally, the company does need to undergo a formal bidding process, allowing us to break projects into smaller packages, contracting more candidates, and so on. With those changes, we anticipate being able to accelerate the CAPEX execution significantly in the coming months. However, we do not expect anything exceeding $6.5 billion or $7 billion until the end of the year, and we do not foresee any negative impacts on the EU factor, and the delay should be recovered by the first half of 2025. Moving forward and looking at our leverage levels, the company remains rather well within the covenants agreed upon the financing lines, and the return on capital and equity for the quarter accumulated over the last 12 months remains in line with the results from previous periods. Let me now give the floor over to Carlos Bernier, our CEO, and thank you, and we shall speak again during the Q&A sessions. Thank you, Daniel. Good morning. As mentioned, my name is Carlos Piani and I'm the new CEO of Zabesp. I took on this role on October the 1st and I was very proud and deeply touched by the sense of responsibility. It is a privilege to lead the largest sanitation company of the country, serving nearly 30 million people and directly impacting the future of not only the state of Sao Paulo, but of the country as a whole. For those of you who do not know me, I have over 25 years experience in Brazil and abroad, and approximately half of this time has been dedicated leading large companies, while the other half was focused on managing investments in public and private companies. And in those first 40 days, my priority was basically to define the main objectives for the newly privatized Sabesp. On the next slide, I would like to outline the key areas that we are going to prioritize. The new Subasp faces two major challenges. The first one is a very ambitious investment program aimed at accelerating the universalization of sanitation services with an over 60 billion reals planned investments. This investment also includes the obligation to serve new consumer groups such as rural areas, informal communities, and it represents one of the largest investment programs in the country over the next five years, and adjusting the supply chain to meet this demand will be essential. Secondly, adapting to the new concession contract, which presents some gaps between the regulatory parameters and the practical reality. The contract imposes various obligations, quality indicators, as well as annual tariff reviews instead of the usual four to five year intervals, adding further challenges for regulatory, financial, and engineering departments. In addition to these challenges, privatization enables the company to reach a new operational, commercial, and financial heights. Operationally, we need to do more with less. In a standardized manner, keeping quality while increasing water resilience to fight climate change, which intensifies floods and droughts. From the commercial perspective, we hope to expand our revenue protection initiatives that will fight losses and will increase the collection at the same time as we enhance customer experience and strengthening relationship with all the stakeholders. Now, financially, our challenge is to free up resources for the investments through rigorous cost control, and a very efficient capital structure. These resources will also be essential to growth in adjacent areas to explore selected M&Es that might add to our portfolio. In order to support this advancement, Sabesp needs a new foundation, which is centered on people, technology, and processes. We will implement an organizational structure that is aligned with our ambitions, with a skilled and results-oriented team fostering this high-performance culture. Technology will play a central role in it, and we might need to rebuild part of our IT structure and adopt new automation and digital transformation technologies. It might be fundamental to redesign processes and routines, incorporating regulatory, environmental and risk management perspectives in all our actions. Thus, these eight priority areas will form the foundation on which we will build the future of Milsabe SP solid, a foundation that will enable us to face new challenges and to achieve a new level of efficiency and sustainable growth. These priorities will guide our actions and will shape our path forward. On the next slide, let me highlight some of the initiatives undertaken within our first 40 days. First, we focused on the investment program for 2024. After privatization, the company began transitioning from a public procurement model to a private one, which was accelerated upon our arrival. Today, we have implemented an investment process which is very well defined, continuous monitoring and a dedicated negotiation team We have reviewed contracts and fragmented large projects into smaller packages to attract more suppliers and minimize execution risks. Secondly, we've addressed the gap between regulatory and actual revenue due to discounts for large clients. After an internal review, we decided to terminate approximately 500 contracts to keep discounts within the limits of the new concession contract. and we are negotiating contractual adjustments with the remaining clients in order to meet regulatory parameters. Finally, we have defined the new management team, and based on the priorities of Miroslav Bespy, we have redesigned the organizational structure, blending internal talent with market professionals. The new management team is actually outlined in the following slide, as you will see. In the new organizational structure, I oversee 10 directors, Four of them come from then Sabesp and six from the market. In addition to this 10 directors, the internal audit superintendent reports from the administrative perspective to me, but from the functional perspective to the board of directors. And Daniel, that you met, worked with me and Kraft Heinz in Canada. And I fully trust him and I'm very happy that he accepted the challenge to join us. Gustavo. who's been leading the procurement and corporate services, will manage over 60 billion rials in investments planned for universalization, and we have worked together at Equatorial. Robert Val is another homegrown talent from the operations areas, is now head of the engineering and innovation department, and is responsible for executing the universalization investments. Josué, who's the Director of People and Management, brings his experience in large corporations like Ambev and will assist in managing our goals and incentives and will be the guardian of the new culture. Deborah, the Director of Operations and Maintenance, is an internal talent and has become the first woman to hold this position in history. She was also the first female superintendent in the operations area, previously managing two business units. Raphael? who is the director of projects and new businesses, has very extensive experience at BNDES and has joined the company around two years ago, where he coordinated various projects related to privatization prior to my arrival. Maria Alicia, who is the legal director, she actually started her career at BAT, Sousa Cruz Groups, and brings vast experience in regulated sectors. And finally, we have Samantha, Director of Institutional Relations and Sustainability and oversees our institutional relationships and sustainability issues. And she has an extensive experience with all our stakeholders, having served as Deputy Secretary of Sanitation and the Secretary of Environment, Infrastructure and Logistics, and played a key role in the company's privatization process. Additionally, we have finalized the selections of the directors of customer and technology, the regulatory director, and they will be formally announced at the end of the year. All with these two appointments, we completed a highly qualified leadership team that is aligned with our objectives. In a summary, after these first 40 days of adjustments and definitions, we now have a strong and well-prepared team in order to execute the initiatives that were prioritized with focus and determination. Our commitment is pretty clear. We want to advance towards universalization and achieve a new level of efficiency, innovation, and sustainability for the new SABESPA. Let's now move to the Q&A session, and I'd like to thank you for your very kind attention. Thank you. Thank you, Piani. So let us start with the Q&A session and we do have a few listed here and if for whatever reason we fail to address your question, please make sure you send it to us by email and we will address them accordingly. The first question comes from Guilherme Lima and he goes, good morning, we've seen a couple of news about the beginning of the gap reduction of the commercial programs. Could you please put us up to speed with the progression? How much of the client base has been communicated? How are you assessing the litigation risk? And can we start to envision relevant effects in the last quarter of 24? And can we expect the closure of this gap in 25? Hello there, Guilherme. Thank you for your question. This is Daniel. And as we saw on the press, we have notified approximately 500 clients of those. Well, altogether, 500 to 600, I could say. And before we notified those clients, we basically did a legal analysis with a consultant who was sourced for that. And then we sat down with the regulator. And once the regulatory agency endorsed, we are just moving on by following up the contract execution, a potential termination. With regards to the timing, we, for a while, stated that we hope to have this gap bridged by the end of 25, and we keep that expectation for the moment. Thank you. Next question from Maria Carolina Carneiro. Good morning. I have two questions. One, about the measures to promote efficiency, can you please highlight how is it that the commercial fronts on debt renegotiation have contributed to improve the revenue percentage if the strategy has to be continued? And number two, if you could comment on the news about the potential negotiation of discounts that were given for industrial clients and commercial clients, how are you going to go about that number of clients in which this negotiation can indeed happen? Well, I think the second question has been addressed. But the first one is still standing. Yeah, thank you, Maria Carolina, for the question. And now, okay, as for your first question goes, we have the PLCDs in three sources. We have the legal entities, natural persons and other agencies. So from this first group, we engaged in important bilateral negotiations. We managed to reduce considerably. And with the firm, the man that we just mentioned, we hope that this will be considerably reduced as well. Now, on group two, we have been moving on with those large fairs. and for that negotiation or auctions for that negotiation. And very soon we should have a new director ahead of that department that is going to start the action plan. And number three, the new concession contract, when we look at it from today's eyes, it basically gives us some more leeway space in order to contain potential transfer amounts. that might reduce and shrink this last subgroup. Of course, this is an ongoing analysis, and we hope to implement that, whatever comes as a result of that strategy. Next question comes from Bruno Amorim. Actually, three questions, he says. Good morning, Bruno Amorim from Goldman Sachs. Question number one, is it possible to make comments on the opportunity to add new cities to the state of Sao Paulo? What is the size of this opportunity and the timing for adding those new municipalities? Second question, could you please comment on the discussion status for the potential recognition of the RAB Capex? And three, what's the appetite of the M&A participation in new auctions outside of Sao Paulo in face of this challenge to execute the current CAPEX. Thank you, Bruno, for the questions. What I can tell is that we would be very much interested in opportunities in the state of Sao Paulo. Now, the size, of course, will depend on the opportunities. And if we have a good deal on the wholesale, it's up to Sao Paulo. But on our end, at least, we are pretty much interested in embracing all and any opportunities that might come up. With regards to the delay of the recognition of the base, as managers here at Sabesp, we have started these conversations with the regulatory agency. We have no control over the timing, but we have expressed our concerns opinion with regards to this topic, and this discussion is therefore underway. This hasn't been shelved, and as soon as we have concrete answers, we will communicate the market. With regards to outside Sao Paulo, and again, with that challenge you mentioned in mind, well, what I have to say is that we will assess all the opportunities, and on the short term, The short-term opportunities, they differ considerably from the mid or long-term. And if we do consider as a smart move, we will try to pitch this to the board and the market. But the base case scenario would be for us to proceed with the universalization and the transformation we have you know, just joined 40 days ago. It's really too short. But the opportunities, they materialize, not necessarily in that window when we can execute them. They have their own maturity. So what we will do is remain alert to all opportunities and we will analyze this risk return balance. And if it makes sense to us, we will go ahead and tell the market. Thank you, Piani. Next question from Marcelo Sa. I wanted to understand the depreciation. Is this new level recurrent? How is this depreciation lower now? Can we say that the tax base deduction will be lower and that might mean the payment on the tax income? Thank you, Marcelo. This is Daniel. and i'll be pretty straightforward yeah so this is definitely a recurring thing and it is a consequence of the extension of the concession contract and we will cope with all the other contracts uh with the same period and this is having an impact on our tax base so we will pay more income tax. So, yes, it does have a fiscal impact. Thank you, Daniel. Carolina Carneiro has a follow-up question to us, saying that we mentioned 400 contracts and that were terminated with regards to the revenue gap. How much does that represent? Yeah, additionally to what Daniel mentioned, I mean, those contracts that we've communicated determination, they lead the discounts to below the 300 million limit that was prescribed by the concession contract. So we are below that. So the next section is from Vladimir Pinto. Good morning. I hope the new team manages to deliver the contracts wished results and in the dividend distribution uh are you intending to do any non-cash items that have affected the results in particular the eight billions and the um financial assets well thank you uh valdi we actually we see that as profit right and for the purposes of income distribution we will have to um take another decision more towards at the end of the year, but we see those financial assets as profit. Thank you, Daniel. We have Tiago Betonico, and he goes, good morning. Could you please, for the detail, the announcement this Tuesday that Sabesp decided to discontinue the investment forecasts for 24 to 28? Thank you, Tiago. Thank you for your question. And In reality, the forecasts we had here at Saibesp, they were actually somewhat outdated before the privatization. And now upon our arrival, we are basically reassessing the investments and opportunities. So we decided to remove that guidance because we didn't want to keep, you know, a quarterly target to deliver investments, as Bjorn said. I mean, our mission here is to deliver the privatization. So we are much more interested in the EU factor, whether I did 1 billion KB or 900 million EBIT after a month. So that's the mindset.

The next question comes from Ileana Yang.

Thank you for opening this opportunity. Could you please share with us the analysis of the supply chain and the sector? Will SABESP invest 12 billion in the year of 25? And what are the areas and regions of priority for the next 12 months? Thank you, Ileana. Well, in the year of 23, it's estimated that Sabespi has reinvested 30% of the CAPEX in the sanitation sector. So, of course, when we round up the other figures, this will represent much more. So we will need everyone and everything. We don't have, you know, silver bullet for that and if we can invest yes we can and equatorial for instance invested 11.3 last year so yes it is possible but we have to tie it up the room first if you will then to just do our initial housekeeping here understanding you know what was done and just throwing our secret sauce What I can say is that the initial focus on the short run are the works connected to Integra GT, the largest works really. And within those works, the sewage treatment expansion plans that are multi-year works. So we would need to start it now because it takes two or three years for them to be finished. And one of the actions we have taken was to basically terminate some contracts instead of turnkey projects we decided to go for a shorter and smaller contract in such a way that we would expand our service provision consultants universe um if compared to what we would have otherwise so we are moving forward we have a pretty clear roadmap of what are the next steps and we think that this investment for next year is totally doable Thank you, Gabriel Francisco. Good morning. Two questions. Could you please say more about the efficiency journey and the general expenses and service lines? What is the largest gap that you see with regards to private companies? Could you further comment on how you plan to offset the delay on the works of the year? And congratulations. Thank you. Gabriel, this is Daniel. So let us start by the first one. So we've just arrived, right? 40 something days and we are still putting together our budget for the next year. It's going to be a great opportunity for us to understand and challenge a couple of gaps and we'll basically try to see how much we can bridge them. And I'm sure we'll have many different opportunities. And when you compare this to other private companies, and we run a comparison with the local market, and given our scale and size, we compare abroad, and we envision some other opportunities in the service. For instance, let me give you a simple example of the company needed to run public contests, and whenever that wouldn't happen, it would source services. So now maybe we want to reduce the overprice that we've been paying as a margin to third parties. So we have many opportunities when we analyze the expenses breakdown. We basically have personnel and services, as I said, and electric energy. I actually mentioned this mixed source environment, free against regulated, so we will just continue with that. Now, with regards to the delays the construction works. Let me tell you what happened first. When we arrived, we had the 70-day period, 70-something days where we experienced a transition period. And obviously, that period was neither comfortable to those who were here before, because they didn't know whether they were going to stay. And those of us who were coming and just getting on board, we were uncertain whether we could approve it or not. So what we are doing is we are speeding up some of those hirings and sourcing processes. And as Piene mentioned, and I myself, I said something about this. We are basically changing the way we source. It used to be a bidding system. It's no longer like that. And we tried to add as much as we could to the services and everything that was involved with that. Now, after the privatization, the company is starting to deliver project ahead of the deadline. We started to fragment that into smaller packages and looking at things like direct procurement of materials. And this is related to Ileana's question. that Piano has just answered. And of us, for instance, buying and doing our procurement in an aggregated manner, we will definitely benefit from that. And to have more people benefiting and providing services. What we want is to have this ecosystem, a supplier's ecosystem, which is ever expanding. And we hope to be able to offset this delay. And when we look at this, our hiring figures, we are on the way to compensating that. We have another question here about the income taxes. Oh, sorry about that. Thank you. No cash effects, Gabriel. Although this is a great question, I mean, neither Our assets lower and the liability, this is going to be consumed as time elapses. We have addressed this, but I will still read it. Could you say something about the gain expectations on the OPEC's efficiency after privatization and the detailed headcount, third parties' materials, treatment materials, and electric energy? Yeah, so let me just explore a couple of different avenues that I haven't done before, and we have now a reference shareholder that knows a lot about that and is helping us on this strategy. With regards to treatment materials, we are resorting to a management consulting to help us with the BMI, and we have started to map our supply chain, not Well, it could be as simple as just renegotiating prices or extending the contract time, but in a highly regulated environment, it would still be very tough. So those are things and options that we might try to analyze, and we are analyzing. logistics and other elements like that. And sometimes the supplier and the vendor themselves, they have a location which is closer than ours. So obviously, we are not just stopping at this first tier. We are going forward a second and a third tier if we notice that there is important value to be captured there. Well, the next question is from Fernanda. And the construction, before the acknowledgement of Q3 24 of the financial assets in $8.8 billion, the construction revenues were together with construction costs. And now, after this recognition, what is the expectation Well, the margin was 4.3%, and we always assess that. This is an ongoing discussion with the auditors. We didn't see anything different from those 2.3%. And I'm talking about specifically the construction revenue sector. And Guilherme Lima? Could you please comment on the payment of dividends? Have you ever discussed with the state administration about a payout alteration strategy? No, we haven't. No, the rules are very clear and we did not engage in any conversation in that direction. Arthur Pereira? Good morning. About the dividends policy, I believe that this policy can be revised, depending on the anticipation of the deliverables and the universalization targets. Well, again, we've reached the end of this initial 40 days. And we have bigger fish to fry, I should say. And there are no ongoing conversations in that sense. We have two other questions, one from and what is it that the new management managed to identify in terms of opportunities and gaining additional value through associated revenues? Well, we barely started on this journey. little time has elapsed since we took over control, right? So there are many initiatives that are underway or that at least have been, if not implemented, they have been idealized. And so we are basically investing on the planning of 24, sorry, in the planning of 25 more than in gains of the second half. And so that's the segment. of complementary and ancillary revenues that are part so we are addressing this but I have no comments for the moment and we will certainly uh be able to give more color in the next call um Juliana asks two things how is the Are you having any difficulties implementing the new culture? And the other question is, can you see the possibility of gains coming from other assets such as selling property? We were very warmly welcomed and the interactions are great. We had the chance to talk to a pretty broad And of course, it's natural for people to be a bit uncertain, and it's a transition phase. We understand, we are pretty much empathic towards the anxiety of some of the employees. Well, so far, what I can say is that the privatization model that was adopted allowed all the employees to get to know the model and the purpose before deciding. So it was a mutual, let's say, deadline for us to get to know one another. Now, on the net side, I mean, we understand people get anxious. I have nothing to complain about. And it's definitely much better than the expectation. Now, vis-a-vis to the estate and properties we are running an assessment on the non-operational and of course there there are contract rules to be observed and partitioning those games in case we sell those assets and and this is part of our initiatives and if we have something to release to free capital from assets that are not relevant or useful, we might do it. So we had one perspective when abroad, but now we are on the way to validating this before putting the plan into action. Another question from Marcelo Goncalves, and he says, About the impact of this 4% negative tap therapy view. The is this review relative to the whole period. Or should this impact increase. On the fourth quadrant. Yeah, actually, in our ITR, we try to be as clear and transparent as possible because this is for everybody for the shareholders to be able to clearly understand that so in order for us to calculate this file usp one step behind this is the practiced tariff minus the balance tariff so we got what was um publicized which was 24.22 percent and When the privatization happened, we had a 1% tariff reduction. So we used 3.22% for this 3.25%. And this figure will remain the same for Q4 until at least we have a more clear indication. And this is actually new to them. And occasionally any tariff readjustments that will take place maybe in the future. So for the time being, 3.22%. Thank you, Daniel. And with that, we have reached the end of our session. It's the last question and i would like to give the floor to piano for the final remarks so dear friends let me first thank you for your participation for your questions i mean we have we've taken the position you know only a few days ago and obviously it's our obligation to universalize and more than that uh to transform this to a different level um and this journey is just about beginning and we are going to appropriate what was being done before and to speed up in order for us to better serve the population of Sao Paulo and to generate sustainable value to shareholders. So thank you for your trust and support and confidence and let us tell you that our team is deeply committed to making a difference And I count on your support during the coming quarters because we still have a lot to deliver. Thank you and see you in our next earnings release call.