Companhia de Saneamento Básico do Estado de São Paulo – SABESP. (NYSE:SBS) Q3 2022 Earnings Convention Name November 17, 2022 9:00 AM ET

Firm Individuals

Luiz Tiberio – Useful resource Funding and IRO Officer

Benedito Braga – Chief Government Officer of SABESP

Osvaldo Garcia – Chief Monetary Officer and Investor Relations Officer

Marcelo Miyagui – Superintendent for Accounting

Convention Name Individuals

Carolina Carneiro – Credit score Suisse

Henrique Peretti – JPMorgan

Operator

Good morning, everybody. And welcome to SABESP’s Earnings Name to debate outcomes relative to Q3 2022. My identify is Luiz Roberto Tiberio. I’m the Useful resource Funding and IRO Officer at SABESP. As we speak with us, Dr. Benedito Braga, the Firm’s CEO; President Dr. Osvaldo Garcia, CFO and IRO; and Marcelo Miyagui, Accounting Officer.

Earlier than I transfer over to Dr. Braga, for his opening remarks, I’d like to offer some house-keeping directions. We’ve simultaneous translation into English and it’s being recorded. The presentation and the respective recording shall be accessible for obtain on the firm’s IR web site the place the respective press launch is already accessible.

[Operator Instructions]. Our convention will final roughly 1.5 hours and we’ll have 45 minutes for Q&A on the finish of the corporate’s remarks for analysts and traders and quarter-hour for journalists.

Concluding the preliminary directions, I’d prefer to say that forward-looking statements made through the firm’s presentation regarding enterprise outlook, working and monetary targets are based mostly on assumptions and beliefs of the a part of the corporate’s administration and in addition on data at present accessible to the corporate. They aren’t funding suggestions. Ahead-looking statements aren’t any assure of efficiency. They contain dangers uncertainties and assumptions as they seek advice from future occasions and due to this fact rely upon circumstances which will or might not materialize. Traders ought to take note of that financial situations, trade situations and different working components may have an effect on the long run outcomes of the corporate and thus result in numbers that can differ significantly from these expressed in these ahead trying statements.

Effectively, having mentioned that, I would like to show the ground over to Dr. Braga who will make his opening remarks. Please Dr. Braga, over to you.

Benedito Braga

Thanks Tiberio. It is an excellent pleasure to be with all right here right this moment. I would prefer to greet you all. And thanks additionally for collaborating and thanks on your curiosity as traders and as journalists and most people, who’re right here with us following our Q3 earnings convention name.

Beginning with the replace on the standing of the water sources this yr, we’re seeing a extra comfy state of affairs when in comparison with the identical interval of final yr. Early November 2021, the sum of the volumes saved within the reservoirs of the Metropolitan area of São Paolo was 39%. This yr, the whole quantity saved within the eight methods we’ve got for producing consuming water is at 45%. It’s a extra comfy state of affairs, however one which should be rigorously monitored because of a drier summer time forecast by the Local weather Forecast Heart of Columbia College, which might delay the rains that usually occur within the month of December.

When it comes to the corporate’s inner affairs, I would like to spotlight that the restructuring that we carried out by unifying the regulation oversight division and in addition the creation of the brand new enterprise division in July 2021 introduced glorious outcomes. Beneath Dr. Osvaldo’s management within the monetary entrance, SPEs have been arrange which have expanded the realm during which our firm operates, assembly the expectations of our shareholders.

As you all know, we’ve got just lately disclosed to the market the creation of three SPEs or particular function corporations or entities geared toward increasing the corporate’s areas of exercise, and in addition making the most of the synergies throughout associated processes to the sanitation actions.

We’ve signed an settlement to accumulate 20% of share at Foxx URE-BA, a particular function firm that could be a subsidiary of Orizon Valorização de Resíduos, a transaction that’s nonetheless pending approval by the Administrative Council for Financial Protection, a client protection company. URE Barueri will function within the thermal remedy of city strong waste with vitality restoration, including an put in capability of 20 megawatts and gross sales of roughly 60 megawatts with a remedy capability of 300,000 tons of city strong waste per yr and would be the first energy technology plant from the incineration of city strong waste within the nation and Brazil, and the so-called mass burning which has already been used internationally, in Europe, Japan, China.

And that, after all, brings us an expectation to scale back landfills right here within the nation which, as you realize, result in totally different points, issues, and are more and more costlier due to a scarcity of areas in metropolitan areas, particularly in São Paulo.

We additionally arrange the Katerra [ph] SP Energia SA during which the corporate will maintain 49% of the capital. This SPE or particular function firm is targeted on photovoltaic vitality technology. We work on the development of 4 technology crops on floating buildings, the primary of which shall be on the Jaguari reservoir, the most important one in our system with a capability of 5 megawatts and scheduled to start out working by 2023 subsequent yr. We additionally will additional improve our technology capability for photovoltaic vitality. And utilizing distributed technology will add economies to the corporate and we’ll use sustainable vitality, thus lowering our contribution to greenhouse gases. Due to this fact, one thing that falls inside the ESG pillars, that is a matter we’re paying shut consideration to.

We’ve additionally formalized a partnership during which SABESP will maintain a forty five% stake within the SP [indiscernible] SA, a paving firm with the target of establishing a plant for producing and promoting chilly asphalt with a complete funding of R$40 million by 2023, permitting SABESP to make use of the fabric in our asphalt recomposition companies.

As a reminder, this can be a crucial downside that the corporate faces with smaller cities from the perspective of fame of picture. Cities say that the pot holes have been made by SABESP and the opposite means round. So with this new partnership with the non-public sector, it will assist us considerably particularly when it comes to rebuilding asphalt roads within the countryside the place asphalt may be very costly and logistically complicated for these type of work. So these are necessary steps in direction of the diversification and enlargement of environmental companies and reinforce our dedication to sustainability with ESG.

You will need to spotlight that the corporate’s bylaws embody the likelihood for SABESP to take part in actions reminiscent of planning, operation and upkeep of vitality manufacturing, storage, conservation and buying and selling methods of vitality, after all, each for the corporate, for third events.

Lastly, I wish to report that within the third quarter of 2022, we’ve got additional elevated the variety of residential connections to sewage assortment and remedy within the Pinheiros River Basin. There are actually 650,000 households linked a end result that has exceeded the preliminary purpose of this system by roughly 20%. Simply to offer you an thought, we’ve got made connections all through this previous 3.5 years that account to the scale of a metropolis like Porto Alegre or Recife capital cities in 3.5 years, simply to offer you an thought of the scale of the significance of these numbers.

And I would prefer to take the chance to say that earlier this morning, these of you who’re right here in Brazil, residing São Paulo and who adopted the morning information, this particular host was at all times very exhausting on everybody, together with on us. This morning, he was complementing SABESP on this work, which resulted as a consequence in having a cleaner Pinheiros River. As we speak, we’ve got fish and different fauna and folks fishing within the margins of the river. We even have in operation three items for high quality restoration items to additional enhance the standard of rivers, that is Piracicaba, [indiscernible] and [indiscernible], and one restoration unit in Cachoeira in assisted operation and one restoration unit known as Antonico, which ought to begin assisted operation by the tip of this month. Because of this fundamental sanitation work we’ve got completed our mission of bringing high quality of life to the poorest, the neediest individuals who stay in casual areas of São Paulo within the metropolitan space.

Effectively, that is what I had as opening remarks. I am going to now flip the convention over to our CFO who will convey us the superb monetary numbers that we skilled on this quarter. Osvaldo, over to you.

Osvaldo Garcia

Good morning, Dr. Braga. Good morning, everybody. And thanks for collaborating in right this moment’s convention name to debate Q3 2022 outcomes.

Beginning with Slide quantity 3, we see a rise within the complete quantity, which was billed of 8.8% for water and a couple of.5% for sewage resulting in a development of 1.6% compounded. As a reminder, the expansion of the sewage quantity above the water quantity is a mirrored image of the investments made lately to increase assortment and remedy companies which can be consistent with our funding plan. Driving this development have been primarily the non-residential classes.

The Industrial class, with a variation of seven.3% in water and 10.2% in sewage. Public, with a variation of 13.3% in water and 17.4% in sewage. The Industrial class confirmed a rise of three.5% in water and 1.1% in sewage. The Residential class remained steady flat in water, and we take 1.2% development in sewage. This combine contributed to the rise within the common tariff within the interval, positively impacting the revenues as we will see on the subsequent slide.

On Slide quantity 4, sanitation service revenues internet of taxes elevated by 16.9% within the interval from R$3.9 billion in Q3 2021 to R$4.6 billion in Q3 2022, because of an enchancment in combine and to a tariff readjustment of 12.8%, which has been in place since Could 10, 2022. EBITDA elevated 19.5% from R$1.8 billion in Q3 2021 to R$2.1 billion in Q3 2022, pushed primarily by a rise in revenues proportionally greater than the rise in bills. Web earnings elevated 130.7% coming from R$469 million to R$1.1 billion in Q3 2022. Subsequent slide, please.

Ranging from a revenue of R$469 million in Q3 2021, we noticed a optimistic variation in sanitation revenues internet of taxes of R$670 million, with a extra favorable combine and impact of the complete software of the 12.8% tariff changes. Prices and bills grew R$377 million in comparison with the earlier yr or 13.6%. I’ll go into element about these numbers on the subsequent slide.

The web monetary end result confirmed a optimistic variation of R$639 million, primarily because of financial and alternate — international alternate variations pushed by the decrease valuation of the U.S. greenback when in comparison with Q3 2021. The devaluation of the yen, the autumn within the IPCA from plus 3.02% in Q3 2021 to minus 1.32% in Q3 2022. And in addition, the non-recurring occasions associated to the core settlement with the federal government of the state of São Paulo entered into in July 2020.

Revenue tax and social contribution bills elevated by R$319 million, the equal of 134.2%, and that is linked to the improved outcomes. As an final result, we’ve got a internet earnings of R$1.1 billion.

Occurring to the subsequent slide. On in comparison with the identical interval of final yr, prices and bills have elevated by 30.6% excluding development prices, transferring from R$2.8 billion in Q3 2021 to R$3.2 billion in Q3 2022, nonetheless below the influence of gathered inflation within the interval. Personnel bills rose by 12.3%, reflecting an adjustment for inflation of 12.9% on salaries, wages, labor, taxes and advantages, and in addition on social safety obligations utilized since Could 2022. Bills with supplies, each basic and retreatment, elevated by 35.9% and 82.6% respectively, each because of the improve in costs and in addition because of greater consumption.

Bills with companies confirmed a rise of 21.7% with the next highlights. Annualized contractual readjustments related to the upkeep actions of the water and sewer methods would indicate extra paving bills, extra spending on our buyer relationship channels, reinforcing effort to enhance delinquency ranges.

As well as, there was a higher use of waste, transportation companies from the water remedy crops and in addition from the sewage remedy crops because of the enlargement of this service, as talked about earlier on this convention.

Prices with electrical vitality have been decreased by 4.2% or R$15.7 million, regardless of the consumption having remained steady. That discount got here from the tip of the appropriate [ph] tariff, because it was known as, that raised the typical value of vitality in Q3 2021 and in addition from the discount within the tax burden on electrical energy payments, which have been carried out in Q3 2022.

The estimated losses with uncertain receivables, or PCLD in our terminology have been R$136 million, a rise of 14.5% when in comparison with Q3 2021 reflecting, amongst different components, a rise in income in accounting estimates. Keep in mind that in relation to the earlier quarter, Q2 2022, during which the expense reached 253 million, there was a discount of 46%. The development is that the business actions and the restoration of the service sector will assist scale back general defaults or delinquency charges.

Industrial actions to curb delinquency persevering with to be carried out, and so they embody the intensification of water disconnection actions, sending warnings to customers with overdue payments and in addition the enlargement of entry to digital companies. We’ve intensified these actions, however the nation’s financial state of affairs is a vital element that weighs on the discount. With inflationary strain on household earnings, some clients find yourself prioritizing paying the payments which have greater rates of interest, and so they come over to you. Subsequent, please.

Transferring on to Slide quantity 7 we’ll discuss monetary bills and debt. We see an enchancment within the monetary results of R$639 million, primarily pushed by financial and international alternate charge variations that went from a unfavourable state of affairs of R$313 million in Q3 2021 to a optimistic variation of R$348 million in Q3 2022, given the popularity of R$325 million for the financial adjustment on the 215 settlement with the state authorities of São Paulo because of the aforementioned core resolution, which occurred in July.

Simply as a reminder, in March 2015, SABESP entered in an settlement with the federal government state of São Paulo. An settlement that dates again 2008 when the corporate, the state and the DAEE, the water division entered into the third modification to an settlement with the federal government, whose goal was to equate the worth of debt associated to retirement and pension supplementation advantages which was lined by an outdated regulation, Legislation 4819 from 1958, which have been paid by the corporate because of an obligation set by the federal government. And that has not been reimbursed by the state to SABESP.

On this settlement, the property that make up the reservoir of the Alto Tiete system got as a provisional cost as a part of the debt. This occurred in 2008. Nevertheless, a lawsuit was introduced by third events towards the federal government, saying that it couldn’t switch the reservoir to SABESP because of a registration problem, property bids of a number of small holders within the area and so forth.

In different phrases, because of this lawsuit, it was not potential to switch the reservoirs to SABESP. Due to this obstacle, the state, SABESP and DAEE, the water division, signed an settlement in March 2015 to exchange these reservoirs by the cost of that debt installments. In July this yr, the sentence was issued that stops the definitive switch of the Alto Tiete system reservoirs to SABESP.

With this, in accordance with the settlement signed in 2015, the state of São Paulo should make the cost to SABESP of the financial correction credit score in 60 installments along with the principal quantity, which had — which was being paid, proper. These reservoirs aren’t a part of our asset base, and there shall be no interference in any way with the availability of water within the inhabitants.

Going again to this matter, the monetary bills noticed a rise of 10.7% because of the improve in rates of interest on debentures, primarily because of the recognition of rates of interest from the twenty ninth and thirtieth debenture points.

Lastly, I would like to spotlight the discount of yet one more share level in our alternate charge publicity, from 15% to 14%. The element of the debt which is backed to international forex. This displays assets on the blue mortgage with IFC to the tune of R$760 million and from the IDB Put money into the quantity of R$466 million, which have been structured in native forex. In different phrases, they don’t create alternate charge publicity.

So these are our opening feedback. We’ll now transfer on to the Q&A session, and I am going to flip the ground again to Tiberio.

Luiz Tiberio

Thanks, Osvaldo. Thanks, Dr. Braga. So we’ll now begin the Q&A. The primary half is geared to analysts and traders, after which we’ll have a while for journalists. If because of time limitations, we’re not capable of reply, we’ll tackle questions at a later second off-line. Our IR staff stays accessible for that.

We’ve acquired — Carolina requested a few questions truly, and I am going to learn these inquiries to you and then you definitely’ll sort out them. I am going to learn the primary one, after which we’ll reply the second query after that.

Query-And-Reply Session

Q -Carolina Carneiro

I’ve 2 questions. Primary, the extent of provisions for uncertain receivables dropped in Q3 when in comparison with Q2 2022. I would such as you to touch upon that and say whether or not that’s already reflecting the stabilization of the brand new methods and practices? And if we are able to contemplate {that a} normalized degree, or we should always count on to see even higher ranges going ahead?

Uncertain receivables, I am going to maintain that. That is a query, Dr. Braga. Are we going to learn each questions one after the other? One by one. Okay.

I am going to flip it over to Osvaldo course, our CFO.

Osvaldo Garcia

Okay. Girls and gents, the quantity for uncertain debt complete of receivables for Q3 did drop when in comparison with Q2 pushed by our effort, our strict self-discipline to scale back default ranges. And we imagine that that degree will get nearer to pre-pandemic ranges within the second half of subsequent yr, 2023. These actions are assumed in place are being carried out, and they’re a part of our alternate and our business system. You have been appropriate. They usually have been displaying good outcomes. We count on to see some variations, however we do imagine that beginning within the second half of subsequent yr, 2023, these numbers shall be near what we had within the pre-pandemic interval.

Carolina Carneiro

Okay. Thanks, Osvaldo. And the second query from Carolina Carneiro is the next. We might such as you to touch upon the final two investments introduced the acquisition within the share of URE-Barueri within the paving firm. What’s the rationale behind that funding? And why make an M&A on this second once we are about to alter administrations within the state degree?

Benedito Braga

It isn’t due to the second. That is one thing which has been in our agenda, in our radar for some years now. Once I opened this name earlier, I complemented Osvaldo on — as having the ability to give attention to that matter, to tick that merchandise and to actually materialize that. And the rationale behind it’s that from the perspective of strong critiques. That is in our bylaws truly. Sanitation is just not solely associated to consuming water and sewage remedy, it additionally entails strong waste and in addition drainage. So all of that mixed is a part of our mainstream actions.

And from the purpose of your finance, after all, that is smart, has to make sense, for us to determine the benefits coming from that partnership with the non-public sector that’s there. And with that, we’re contributing to scale back the variety of landfills within the space. So all the things alongside the strains of the ESG, that is very, crucial for us at this second for the surroundings to scale back additionally greenhouse gases coming from methane produced at landfills, and so forth and so forth.

So in relation to the chilly asphalt entrance, I believe I did point out some great benefits of that partnership. We can have a know-how at our disposal which is able to actually assist us, particularly within the nation aspect of the state. And naturally, you should use it within the capital metropolis too as a result of when it comes to logistics, it is rather more fascinating.

However maybe Osvaldo can soar in and add one thing to my feedback on the monetary aspect, talking to some great benefits of having entered into this partnership.

Osvaldo Garcia

As to the asphalt, along with the anticipated returns, which is greater than that coming from the regulators, we count on a discount in value additionally. So we’ll enhance the standard of companies and a discount in prices. Value discount is the corporate’s mantra primary, proper? We wish to present companies at glorious ranges however with managed prices. In order that’s key for us, and that’s consistent with the corporate’s insurance policies. It made no sense to attend to execute that. It has been engaged on — has been labored on for two years now.

As for the URE-Barueri, alongside the identical strains, we’ll purchase at first know-how and we’ll be capable of discover that market throughout the 375 cities the place we function. So that is simply the primary steps, and we hope to have fascinating returns going ahead. Financial research present good ranges of return, as I mentioned. So we count on that that extra income will contribute to the corporate in order that we are able to meet all targets we’ve got set for 2030.

Luiz Tiberio

Okay. We’ve acquired one other couple of questions from Henrique Peretti. [Operator Instructions]

Henrique Peretti

So from Henrique Peretti, two questions. Good morning. Primary, the consumption combine, and as a consequence, the tariff combine. Are they already again to the pre-pandemic ranges? Osvaldo?

Osvaldo Garcia

Sure, the reply is sure. These ranges are near what we had in pre-pandemic intervals. A small hole to be alter, however we’re fairly near what we had earlier than the pandemic. Financial exercise has just about resumed the degrees, each in Industrial and Industrial entrance. Public sector continues to be lagging a bit behind, however that is solely regular and this shall be normalized ahead of later. We must always see the order combine in place ahead of later, as I mentioned. Thanks.

Henrique Peretti

And concerning the following. Any information concerning the implementation of the brand new tariff construction? And is the present income inside the income cap for 2022? Thanks. Our regulating company is extraordinarily curious about the truth that this construction be carried out subsequent yr.

Benedito Braga

That is precisely at — President, Mr. President — from Could this yr. The regulating company delayed the brand new tariff construction, and we are actually ready to listen to from the regulating company. So it will — we count on this to occur this yr, 2023.

And that has loads to do with the second a part of the query, which has to do with the income cap. The second half, the corporate has to do with the implementation of the brand new tax construction vis-à-vis the income cap. Sure, it’s about to be carried out. We count on to see this occur this yr, and it’s key for us to have our revenues reaching the anticipated ranges.

As we speak, we’re nonetheless under that cap. But when till the tip of the yr we’ve got not recovered, there are safety mechanisms in place. When it is under 97.5%, this shall be offset within the subsequent tariff readjustment to occur in Could 2023.

Luiz Tiberio

Okay. Thanks on your solutions. [Operator Instructions] I believe the outcomes are good, and clear explanations. There is no such thing as a room for doubt individually, proper, for questions.

Benedito Braga

That is a pleasant remark, Tiberio. You probably did a great job.

Luiz Tiberio

Effectively, as soon as once more, if there are different questions or feedback you wish to make, you are able to do it off-line or now utilizing the Q&A. We will then, on this case, transfer on to the Q&A session for journalists, okay?

Benedito Braga

All proper. Keep on.

Luiz Tiberio

[Operator Instructions] That concludes our Q&A session. I believe Dias [ph] has a query. Okay, Dias [ph]. Sorry, I have never seen her.

Unidentified Analyst

[indiscernible] from Valor Economico Newspaper. I would prefer to ask concerning the RSU, strong city residues. Any new agreements nonetheless to occur on this yr?

Benedito Braga

Not for 2022. It is what we’ve got for now. It takes about 1.5 years when it comes to evaluation of assessments. So no, none particular proper now. We do imagine that nothing we’re having nonetheless this yr.

However simply to make sure, that is simply first steps. And we do count on that for subsequent yr, may have a couple of, greater than what we had this yr. And in addition, Tiberio has already talked about, the great outcomes converse for themselves and in addition the motion we’ve got taken into preventing delinquency, lowering prices. All of that leaves us all very excited with the numbers we’ve got simply introduced.

Luiz Tiberio

Dias [ph] has thanked on your reply. [Operator Instructions].I believe numbers appear to have left our viewers very happy and pleased, proper? Our public, our target market. Sure.

On this case, Dr. Braga, I flip the ground again over to you on your remaining remarks, if you’ll.

Benedito Braga

So Osvaldo, I am going to — speak after Osvaldo.

Osvaldo Garcia

So I would prefer to thank the entire staff on your professionalism, your exhausting work. A particular thanks to Miyagui and his staff, and our staff and monetary workplace who labored exhausting for this announcement, this name and for us to have the ability to be — to have this degree of transparency of high quality and saying outcomes. So this presentation was easy however fairly easy. And thanks, Mr. Braga.

Benedito Braga

Okay. On our finish, we’re fairly happy and proud of the outcomes for Q3. The monetary staff has labored actually exhausting, and I would like to enhance on their devoted exhausting work. I imply, Osvaldo, Miyagui, Tiberio, the entire staff, Pacheco [ph] Marcelo. I do not wish to neglect anybody, proper? And I’d say, it is my white — my gray right here implies that I am going to neglect a few names. So really feel complemented in your exhausting work and competence, everybody. That is what makes this firm — or permits this firm to ship good monetary outcomes, and in addition ship. And that is extra necessary; ship outcomes that are necessary to the inhabitants.

SABESP serves 28 million customers. And with the work we’ve got been doing all through this era, connecting extra folks, extra households to the grid, to the gathering and remedy of sewage and particular, as a result of the waterfront is nicely taken care of. That spells high quality of life to all these folks. Once I began, I talked concerning the Pinheiros River Basin. The river is now stunning and clear.

However I would like to emphasise to all of you, women and gents, on the different finish of the display to say that those who benefited probably the most are the neediest, those who stay within the favelas, within the slums, and the neediest a part of town the place river would take sewage, proper? Not anymore. As we speak, sewage is handled and serving to protect the surroundings and enhancing the standard of lifetime of these folks. In order that’s a takeaway I would prefer to convey. And in spite of everything, persons are benefiting from these good monetary numbers, and a great monetary efficiency permits us to raised serve our clients.

Thanks everybody, and this ends our assembly for right this moment. Thanks. And I want you good travels to these of you who’re leaving now.