Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 12, 2023

There are 2 speakers on the call.

Operator

Good morning, everyone. Welcome to SABESP's Conference to discuss our results for the Q1 of 2023. I'm Luis Roberto Tiberio. I am Fundraising and Investor Relations Director. Today, we have Andres Salcedo, the BEST President Patia Pereira, Economic Director and Marcelo Biaghi, who is Accounting Director.

Operator

Before I pass the floor on to Andre to begin the conference, I'd like to give some disclaimers. This video conference, which has simultaneous interpreting into English, is being recorded. The video will be available for download at the SPEPAS portal, where you can already find the results press release. Remember that questions will be accepted for the Q and A session. Please use the chat here on Zoom.

Operator

Our conference is scheduled to last for approximately 60 to 90 minutes, and we have set aside 30 minutes for questions from investors and 15 minutes for questions from journalists. Just to complete our opening remarks, I'd like to mention that any potential comments that may be made during this conference with regard to forward looking statements, projections and forecasts, both operational and financial, are subject to risks and uncertainties as they depend on the information that is currently available to SABESP. They do not constitute any kind of promise or guarantee. They involve risks, uncertainties and assumptions because they pertain to forward looking statements and as such may or may not come to pass. Investors do understand that general economic conditions and other operating factors may have an impact on the company's future results and may lead to results that are materially different financially from those that we forecast

Speaker 1

here. And before I pass the floor on to Andre, I'd like to

Operator

run a short video that we've prepared for you. Hello, everyone, and good morning to everyone. Thanks to Berio. I apologize for the technical hiccup in the beginning of the video, but it is available and in the material that we posted to the CVM. This video quite succinctly describes this new chapter that we are beginning as we build a company that is more agile, more innovative, that is closer to its clients that pays attention to compliance, to leveraging and value, and that is more significant to all stakeholders.

Operator

That obviously includes all of our investors and long term partners. After all, we've been at this for over 50 years, and we hope we will continue to be even more successful as we move into the future, especially given this extremely robust platform that we've built over so many years here at Saba. I'd like to thank all of you for your time. We are finishing out the first cycle of adjustments here in our Q1 'twenty three. Just as a reminder, if you don't know me, I am Andres Alcedo.

Operator

I am CEO of Sabeth. I formally joined the company in mid January, and Tarsisio gave me all the leeway I needed to assemble the company and its board, as I understood, this is focused on efficiency and provision of service. And that's exactly what we're doing here at the company. We've had some very intense days at the company. And the company is spectacular.

Operator

The staff here at the company are amazing. They are truly committed to quality of service. And this is what has allowed us to be so successful during these first 100 days as we create a platform that we believe will be the winning platform for the company and for the sector as a whole. As you can see here in this diagram, our focus is on clients, 1st and foremost, as well

Speaker 1

as operations and maintenance. We collect sewage and provide water, and we manage

Operator

all of these services as well. And with that end, we have created some specific competencies. And

Speaker 1

if you've had any contact with me already,

Operator

and you know that my goal is to simplify the management structure to improve decision making to improve and streamline our services and our centers and to make all manner of changes that will be of benefit to our clients and investors so that we can be efficient, so that we can work smoothly and now so that we can be more efficient and have a more centralized decision making strategy. We have formally approved in the latest meeting of shareholders, and we have formalized our strategic view,

Speaker 1

namely to focus on our clients and the regulatory schedule with integrated clients. Starting here on the left, on

Operator

this diagram, We have a strong position in new business and regulations. Our main focus there is to bring perspectives within the company and with our partners even closer to focus on compliance and regulatory and cost control. Within our field of work, this is something we're already doing, and we're also working on bridging gaps between our company and regulators. This is something we will continue to deliver over the coming fiscal year. So we have merged the 2 boards.

Operator

Previously, we had one for the Metropolitan and one for Regional, but all were under certain other administrative and back office departments. So we have unified everything and we have removed from the business unit every task that is not pertinent to their actual provision of service. And here, we see on the right the Economic and financial, board and investor relations as well. This department We'll still handle HR and our employee

Speaker 1

relations as a whole as well as compliance, strategic requests and white papers and similar sign wins.

Operator

The CFO is Katya, who has been assigned This role, because of her outstanding qualities and skills, and we are now integrating her into the new processes that are being

Speaker 1

designed. Furthermore, we have the Engineering and Innovation Board

Operator

on the top left, where we analyze and build solutions for expansion and planned CapEx. So, we have one board, 1 VP, that takes care of the OpEx, And we also have the engineering and innovation DP, who designs the most innovative solutions to allow us to have the most modern activities and services that we provide, so that we can help everyone with as much efficiency as possible. Additionally, we have created a new VP department dedicated exclusively to clients of the beef structure. This means that our client relations cycle is now going to be even better managed. This includes billing, services, reconnections and any kind of service that any of our clients need.

Operator

And my role within this whole structure is to ensure that this whole machinery works as smoothly as possible and to ensure that we have strategic guidance. Therefore, linked Through the CEO structure, we will have data analytics and other strategies that are designed to capture intelligence using sensors and system automation as well as looking around the client environment to detect any kind of fraud or similar activity. We have a strategic view with clear targets. And the minute they're ready, we will be very pleased to share with all of you. Basically, from the organization standpoint, that's what we have.

Operator

We are an integrated company. We are one single cab fare. And we work in integration between our different departments so that we can deliver the best services for everyone. We've also begun the Integra Tiete project, and That is the fruit of many of the lessons we learned during the Pinheros River project. We are confident that we will be able to restore this additional river as well, and that includes the location where the 2 rivers join come together.

Operator

The first phase starts at Rio Pineros and goes all the way to the source of the two rivers and Phase 2 We'll go downstream toward

Speaker 1

Baduiri and the mid to lower Teate River region. We have

Operator

a number of other initiatives linked to environmental concerns as well. To give another example, in January, we broke ground on a new project, the PCJ Cantarera project. This is aimed at restoring river shorelines and it is in partnership with the environmental agency that looks after the PCJ region. We'd like to thank the entire staff for their engagement and for being so readily available to us every time we had to ask for help. When we saw the rain in the northern shore, Litteral Norte, there was so much destruction that occurred during a 3 day period And our public commitment to restore this region was very quickly undertaken.

Operator

We brought water to the Peru Barela region, And we will have completed this project by the end of the year, namely we will be adding approximately 6 1,000 new residences to our freshwater provision service. So those are quite a few million people who will now start receiving drinking water, clean drinking water from SABES. So I'd like to thank all of you for being with us. I think you can see we are truly committed to delivering results that are appropriate that are suited to the powerhouse that this company represents. And this is just the beginning.

Operator

We are truly committed. The company is responding very, very well to our challenges, and the team is amazing and thoroughly engaged. So, we're very confident that our plans to generate value, which includes the state government's initiatives, will be very successful over the next few months and the coming future. And so I'd like to thank all of you and wish all of you a great call. Thanks, Katya.

Speaker 1

Good morning. Good morning, everyone.

Operator

All right. Well, good morning, everyone. I'm Katya Pereira. And thank you, Andre, for the Introduction and thanks for the retro. Looking back over these past 100 days has been very, very interesting.

Operator

I love seeing what this board has been accomplishing over the past few months. I'll now share some results. The main operation that we have that gives us revenue is the volume. In the Q1, we had a 1.1% increase in the volume of revenue from the provision of water. Essentially, we saw an increase in industrial and public water.

Operator

What we are witnessing here is truly, it can be confirmed as a return to normal after the pandemic as people more and more people leave their homes and go back to industry. And this is great for us because the distinctive fees that we charge industries is very good for our revenue. So basically for commercial, Residential, these results are very in line with what we had to forecast. We have connections with new economies, new residential homes. This is already linked to the Novo Peneros project.

Speaker 1

Just as in the volume of water, we also see For

Operator

the residential, we also see for commercial, industrial and public. So, we can see an overall increase in 1.4 percent, and this has a very positive result in our revenue, especially due to the mix between the different categories in addition to residential. Next slide please. All right. So that was volume.

Operator

Well, now let's talk about revenue. During Q1 'twenty two, Our revenue was $3,900,000,000 and now in Q1 'twenty three, our revenue was $4,500,000,000 So this is a 13.5% increase. This increase is basically composed of 12.8 percent due to a fee increase in May 2022 and also the 1.4% increase in volume. So, as we can see, the fee increase that was approved by our regulator and the increase in volume Both contributed to this overall 13.5% increase in revenue. Looking at EBITDA, we see an 18.2% increase.

Operator

If we reduce revenues and cost of

Speaker 1

construction, Our margin essentially changes to 45%. This

Operator

truly shows that we have not only grown, but added value to the company. Our net profit is down by 23.4 percent and this drop is essentially due to foreign exchange variance. We saw a considerable difference in the foreign exchange rates between Q1 'twenty two and Q2 'twenty three. The BRL has devalued significantly compared to the U. S.

Operator

Dollar, which is where we hold our foreign currency assets, and this is why our net profit has dropped. If we look at our financial performance, On this bridge, we can see our net profit in Q1 'twenty two on the left and our net profit in Q1 'twenty three. We started with BRL976. We added BRL537 1,000,000 in revenue. Just as a reminder, that these 13.5% This increase is partly due to fees and partly due to organic growth of volume.

Operator

Then we have $6,000,000 in construction.

Speaker 1

We We had a $297,000,000 drop due to costs and expenses. Other revenues and expenses bring us

Operator

up by $12,000,000 Looking at net financials, which is basically Expenses on interest and foreign exchange, this represents a $600,000,000 drop. For income tax and CS tax, we have $113,000,000 up. And so overall, this puts us at 747 $1,000,000 in net profit for Q1 'twenty three. I'll give more details later on. Now let's look at costs and expenses.

Operator

As I mentioned, We went from As I mentioned, we had a 10.3%

Speaker 1

increase in costs and expenses.

Operator

This is broken down into

Speaker 1

staff, 11.4%,

Operator

as well as financial recovery due to inflation and also due to the change in load that was assigned to the company in 2022. There was also

Speaker 1

a change in our hired staff. So globally, this all adds up to 11.4%

Operator

more in staff costs. Just as a reminder that if we compare this with 2022, most of this was already forecast if we look at the second, third

Speaker 1

and fourth quarters of 2022. Now, let's look at the second column. General materials, this is up 21.7%,

Operator

which is essentially due to upkeep for our network. And this is what we've seen in terms of material growth. And the growth of material also brings with it the growth of services so that we can provide our job, so we can do our job and provide services to the clients that we serve.

Speaker 1

So, when we look at

Operator

our Prices, we are still suffering from the high cost of chemical product. We saw this last year and we still see The cost of chemical products and input higher. We are not yet back to levels that we were at before the war in Ukraine. We use many of those products for our water treatment services. Another portion comes from volume.

Operator

On the one hand, we have higher costs in treatment material. But on the other hand, we also have more revenue.

Speaker 1

We are in order to treat the higher volume that we've had as

Operator

a result of the heavy rain. We also We need to spend more in order to provide these services. Again, half of that comes from Volume, organic volume and the other half comes from the ForEx rates. And essentially, what we see, looking

Speaker 1

now at services, a 22.%

Operator

increase, and most of that is due to IT. We have invested heavily in computer systems designed to help improve the company do its job better.

Speaker 1

We are trying to create on interaction train to allow us to provide services

Operator

and that includes customer service as we put clients front and center and aim to restore our P CLD rates, what we had before the pandemic. Essentially, to summarize, we are investing on strategies that will improve our revenue, our provision of service to clients and guaranteeing our services so that there will be no more outages in the future. Now, as we provide more materials. Again, we also have to spend more money to provide these services. Looking at the middle, we have electric power.

Operator

And we saw that in the last quarter of 2022, we already had a drop and we continue to see that drop. We had a change in our mix, our product mix. We see now in Q1 that 50% of Our services are used by the open market. This means that there is a lower fee for the open market. And conversely, Consumption has dropped, but so have fees.

Operator

Ultimately, we've stayed at stable prices. This means that we are not forecasting any kind of water supply crisis like we had last year and the year before. There's also the ICMS Here, that was updated by the federal government. This is a benefit brought by the regulated market. So, to recap, we have improved mix as we migrate more of our energy to pre market pricing.

Operator

And in the regulated market, there was a drop in the front. For general expenses, still in the center, we had a 12.8%

Speaker 1

increase. This is from $279,000,000 to $315,000,000

Operator

And One reason is that we have increased our revenue. As a result, we will also see an increase in our expenses because these expenses do include city taxes and most of this increase is explainable

Speaker 1

by municipal taxes. Next, depreciation and amortization. We have increased our asset base. And so as we increase our assets, so too will we see an increase in depreciation.

Operator

Next, we have a drop in PE CLD. This has been occurring over many different quarters now. So, we have an 8.4% drop in PECLD cost. This is due mainly to Strong investment and commitment by all of our team. We have strong depression that is already occurring in the Q1 as a result.

Operator

This also has an impact on services. Additionally, we have some partners whose services we have contracted and who help us bill our clients. So, what we see here is a combination, a composure of many different

Speaker 1

initiatives that ultimately aim to reduce PELCLD costs. We are as Andre mentioned, we are working to create a number of different Programs, for instance, we're going to have an open day where we will We

Operator

received many different visitors and investors, so we can talk to all of them and explain everything about our accounts.

Speaker 1

This is probably going To

Operator

be even more important in July as we see the addition of PIX payment. This is going to be very, very convenient for many of our customers. And that's the facility. We also had a drop in tax expenses, Fiscal expenses, a 14.7% drop, even though it is a smaller level. Next, please.

Speaker 1

For financial results

Operator

and net debt, As I mentioned, we had we benefited in Q1, 2022 from a very positive foreign exchange rate, and this brought us 512,000,000. This is no longer the case. So, as we can see, the greatest change did come from foreign exchange variance. Let me just check my data. The U.

Operator

S. Dollar to BRL was 4.75

Speaker 1

Our IA didn't have very much variance, but the major impact was

Operator

revenue that we had last year That was due to foreign exchange variation. And this revenue, this ForEx revenue is no longer the case anymore. As we see, most of our debt is in yen and dollar. We have very we control very closely the level of debt that we have in yen and in dollars. So we had 1,861,000,000 yen compared to 743 in the U.

Operator

S. Dollars. So, as we look at our financing portfolio, We have 28% debentures, our infra debentures at 14%, BID is at 12%. So, As you can see, our portfolio is very diverse and this supports our investments. This is a great aspect of SABESP because we tapped into a strong multilateral market with projects that support our strategy to deliver our services.

Operator

This is a very powerful value multiplier. This allows us to bring improvements from our CapEx, multilateral projects, our own projects, which are thoroughly connected to these different agencies' goal. Now looking at costs, and we'll also see why our financial expenses are up. 50% of our debt is linked to CDI, the interbank rate here in Brazil. This went up considerably if we consider the Q1 of 'twenty two with the Q1 of 'twenty three.

Operator

This also explains why we saw an increase in our financial matching between income and expenses. In addition to the high in the CDI rate, we also had our 30th debenture that was issued. And as a result, we accordingly had a number of different movements in the indebtedness field. Next slide please. I'd like to mention one more thing.

Operator

I don't have a slide but I do want to bring it up. The latest destructure review is now in effect from 13.6%. This has come into effect on May 10. So starting in the next monthly cycle starting now in May. We had a 9.56 correction.

Operator

And part of this result comes from an amazing review, 156.

Speaker 1

And we can see and we can close part of the regulatory gap that we had. We have found a number of different strategies, and ultimately, we have gotten approval from them. So now in May, We are going to

Operator

have very much more resilient finances. Well, we are now open to any questions you may have.

Speaker 1

Thank you, Katya. Thank you, Andre.

Operator

All right. Now let's move to the Q and A session. Just as a reminder, I'd like to mention that we will first answer questions from investors and analysts. And secondly, we will have a space dedicated to questions from journalists. As you know, we have the Q and A feature here on Zoom.

Operator

So please use that mode and we will answer all your questions. We have 3 questions. The first two are very similar from Enrique Pierrette and Rafael Magano. I'll read them out and then Andrey and Katja, thanks for the conference. Could you give more details about PDI, including the program's cost, the forecast for savings and payback and what is the estimated cost for the announced DDV and what is the expected payback time.

Operator

Yes. Thank you, Rafael and then Enrique for your questions. Of course, we did have internal forecasts for the total cost of P2V, but we will only we'll limit ourselves to only posting the adoption rate because there could be some fluctuations due to adoption rate. But specifically, for Sabas, the transparency portal shows salaries for every single employee. So I think it's much easier for people who want to study and analyze the company to see our specific values there.

Operator

The payback can vary, but we do expect it to be somewhere between 12 to 15 months. This is a very typical payback time for a program like this one. And for our projections, we will announce these to the internal Our internal public, our employees and the unions as well will publish that later today. Our union relations are very strong now. As soon as we finish the cycle of talks with our internal public and unions, then we will discuss with

Speaker 1

the market. But we'll talk to them first. All right. Thank you, Andre. We have

Operator

a question from Erong Reim. He says, considering that the new governor of the Japanese Central Bank is reviewing his monetary policy. This administration will not consider Any possibility of acquiring derivatives? Will this administration not consider acquiring derivatives to keep foreign exchange rates and interest rates as they currently are. Thanks, Aaron.

Operator

Yes, we are looking at

Speaker 1

derivatives. Our goal is to never miss Any potentially interesting or attractive

Operator

strategies to keep these rates at good levels for us. So, yes, we are studying these possibilities. The next question also comes from Aaron. The summary of accounts receivable from clients that are over 3 60 days old is near record levels posted in Q4 of 'twenty two. Could you please give some information about how this number will be reduced over time?

Operator

And should we expect that a great Percentage of these accounts receivable that have already expired, that have already Have been defaulted on will drop during some point in 2023? And if so, when will this happen? Well, this is exactly the purpose of that open day, as I mentioned. This is exactly what we hope to accomplish. We hope to have good adoption rates from these defaulted clients.

Operator

I can't say exactly how much we will recover over this year, but the company is focused on reduction. That means reducing this type of inventory that has been defaulted on for over 3 60 days, as well as new accounts receivable. And for those, we do have a strategy and to keep them fail for as short a time as possible. So, these are the targets We've been working on and across many different departments here

Speaker 1

at the company. We are aiming to secure an improvement there. Looking at our forecast now, we hope to continue improving even the

Operator

accounts that have been provisioned for. So these numbers, they are accounted for in our reports, so they will not have any impact in addition to their accounts. Thank you, Katya. The next question comes from Guilherme Lima. He asks, have you ever had any interactions with the IFC about modeling studies?

Operator

And when do you expect these studies to be completed? And do you believe that there will be an impact to

Speaker 1

the fee structure? Thanks, Guilherme. Yes, we have been speaking with the state government and have been participating in meetings with the IFC,

Operator

especially to give our opinion about the company's contracts and to give information about these contracts as well as to give our opinion about a number of different the value levers that the privatization process could potentially give the company, clients and cities. Within the scope of this analysis, the progress this is going to be a very broad analysis, going to look at the company profile as well as investments that will need

Speaker 1

to be made and other topics. This will give us a strong regulatory forecast

Operator

and also a forecast about the scenario, namely what regulatory models could be adopted and so on,

Speaker 1

as well as the benefits and challenges for each one.

Operator

I don't have a detailed calendar yet. This hasn't been mapped out or scheduled in that degree of minutiae, but It has begun. And what I can answer about your question is that we are working in that direction. Thanks, Andre. The next question also comes from Guilherme Lima, who asked, with regard to the gap between realized and regulatory revenue.

Operator

Could you please comment about where you see this difference and what you're thinking about in terms of strategies

Speaker 1

to reduce The GAAP? And do you

Operator

believe that in 2023, you are likely to reach the required revenue? Where are the inefficiencies you aim to improve during this year. I'll start answering and then Marcelo and Katya, you can add

Speaker 1

your thoughts. Now, the main goals of our regulatory agenda is to tackle these gaps. A significant part of this has been addressed when we published in December the real updates, and we have another update now in May. This is aimed at ensuring that the designs that the AR, CESD made will be matched. We do not want to have any kind

Operator

of issues owing to formatting for information completeness. There are some other initiatives too. For instance, the ARCFP does not consider

Speaker 1

Bill that need to be reissued because every utility issued 10,000,000

Operator

bills per month, and some percentage of those 10,000,000 will incur some kind of printing or reading error. This has an impact on revenue, as well as other factors like the mix between billing and consumption, the mid pandemic and post pandemic changes as well, the return the gradual return to normal, as we mentioned, and also the fee tables for the vulnerable clients and Standard Clients. We are working with many fee professionals Here at the company, to create this, we will discuss with agencies as well. And if there are A few points that have not been explained that are more complex, we will work on them with a specific deadline.

Speaker 1

Now, we also as far as operations,

Operator

we have a number of concerns that the AAR CSP As not truly understood, our goal is to open up a technical discussion with that agency and show them that our cost Strategy is very appropriate, is very fit for purpose, and we will aim to help them see things from our perspective. This is a very complex agenda. Many of our players are very anxious and they want to have their needs met. So, we believe that this review phase will start seeing results next year. Thank you, Andre.

Operator

I don't have anything to add. You taught me very well. No, that was 10 out of 10. All right. The next question comes from Jean Pimentel.

Operator

It's also about the same topic of revenue. He's asked, Good morning. As you approved the RTE, you mentioned that you see the GAAP closing for regulatory revenue. Therefore, what is the size of the gap that you estimate that will still remain, the gap being between revenue and regulatory revenue? And how do you hope to finish closing that gap?

Operator

I hope we answered that question in the last question. And if not, Joao, please add to your question, and we will answer in just a few moments. Is that okay? All right. Next question now.

Operator

Andres Sampayo asks, good morning. What is the status of discussions with regulatory agencies about applying the new fee structure.

Speaker 1

Well, Andre, this is included in

Operator

the regulatory schedule that we've begun. We are the discussions about the fee structure are included there. And we hope that by simplifying the concept of our provision of service, we will see more improvements to our revenue. There is some work that we need to do there, but the different levers, specifically for the standard and vulnerable fees. We understand it makes sense.

Operator

So, if we can guarantee that the company's financial balance is protected, we will be happy to work with the regulatory agencies there. The regulatory agency says it's going to happen during the 1st semester of 2024, right? Yes, this is on the AR CESP website. And question from Kayo Gaumano. Good morning, everyone.

Operator

I have two questions. First, could you explain a bit more about SABESP's investment plan in this new administration? And if possible, could you tell us where we stand in renegotiating contracts with city government? Thank you. Good morning,

Speaker 1

Caio. They're okay, they are 2 different questions, but

Operator

I can answer them both with different degrees of depth. Well, our CapEx was published last year and we did not see a significant need to change that now in the Q1. What we did do is review our CapEx prioritization. So, we are focusing particularly on making investments that bring the company more money, more value. That means investments in modernization, which can either reduce costs or increase revenue.

Operator

We are investing in increasing our network and reducing our losses. They also have a positive impact. And the other investments, which are desirable investments, but which can wait and which do move toward universal Unification, they are being perfected before we can actually start investing on them because we're going to invest a lot of time and effort to make sure that Mayors and city governments understand us and, if possible, even can anticipate some targets, some contract targets. This is our number one priority. We must ensure that the company complies with utility programs and also with any type of commitment linked to the environment or labor security.

Operator

After that point, other than those two aspects, We are prioritizing all projects based on the perceived value that they stand to bring us. And based on that analysis, we are prioritizing them, all based around CapEx. Secondly, Where do we stand in renegotiating contracts with municipal government? We believe that the state government has

Speaker 1

already has standing agreements with

Operator

city government.

Speaker 1

Let me take a step back. Talking about privatization,

Operator

we can potentially generate value in a number of different ways as we renegotiate contracts as well. Therefore, the best way for us to share those gains with the public sector There are many. They include anticipating or reducing fees, anticipating

Speaker 1

or increasing investments and paying concessions

Operator

in a number of different manners, in a variable or fixed manner. Some of these conversations have begun And we are not taking part in these conversations yet, but we understand during our discussions with the state government that this is a political agenda. And at some point, They will complete their technical analysis, the AFC. And so when that occurs, then we will have numbers, concrete numbers. And as soon as we have those, we will share the best as the executor of the contract, the city governments and the state government as well.

Operator

The state creates the infrastructure and the municipal governments bring value to their residents. Thank you, Andre. The next question comes from Miguel Rodriguez. He asked, could you talk about the process for to normalize ECLD initiatives and timing, although it's better than in the last quarter, it is still higher than the normalized levels. Thanks for your question.

Operator

I think I have answered a great deal of them. Our initiatives have we've begun many initiatives to reduce Our indebtedness level, remember that during the pandemic, we were not allowed to cut Any water supply or reduce it in any way or even

Speaker 1

to strike their credit. So,

Operator

After the return to normal, we did receive authorization to start cutting the supply of water to outstanding defaulted clients. So, we have begun suppressing and cutting provision. We also have the open day, as I mentioned, in the middle

Speaker 1

of the year. And improving

Operator

the repayment Schedule for clients, ultimately to ensure that a greater percentage of the defaulted clients will start paying their payables. I think we will see a recovery, strong recovery. This is not going to happen this year, but it will happen. We before the pandemic, our default rate was very low And we are working on every opportunity with our peers as well to make sure that we get there. We'll have more details about how strong our recovery is based on each of those initiatives.

Operator

And as Andrey mentioned, We are looking at our data. We are using data analytics. We're also studying the efficiency and effectiveness of each of these initiatives. So, we are implementing many actions, many interventions, and we're going to have a detailed analysis of all of them. Thank you, Katya.

Operator

The next question comes from Jean Pimentel. Actually, he thanked us for answering his previous question. And now he has another one. Given the importance of the city of Sao Paulo for the success of potential privatization. Is this conversation between SABESP and the city government already going on?

Operator

I'm very glad, Jean, that we answered your previous question. Yes, we do have these discussions, but at the very, very highest level. So, we have the mayor and governor who are discussing, and they are talking about the potential of privatizing SABESP. We are scheduling and attempting some contact with them. We have a number of different procedures to onboard the city government, and the first of those is joining the RI.

Operator

So, I and a number of my colleagues are working on that. The RI has a specific structure and we understand that it is not the most appropriate structure for giving a proportional representation to all the different cities. So, we're working on that. And from there, we do have a road map, sequence of steps that involves other city governments as well. And that's designed to ensure that everyone is on the same page as the discussions about privatization go on.

Operator

Thank you, Andre. We now have a question from Gustavo Fabrizio. He says, good morning. He suggests allowing questions to be made verbally. He says, recently, some meetings, We received announcements that the company hopes to cut $1,800,000,000 in OpEx.

Operator

Could you give more details about how you arrived at

Speaker 1

this number? Good morning, Gustavo. Just to give you some context,

Operator

This announcement occurred in the during a governor's speech here in New York during a CEO conference that was promoted by a bank. This is certainly something we Desire, we want to improve the company's performance as much as possible. Now, as A state owned company, we do have some limits. There is room for improvement, but it would be premature to give a number right now, and it would probably be the wrong number. We can't give a precise number yet.

Speaker 1

Now, for a non state company,

Operator

those numbers can be given more confidently because our margins and the benchmarks that I've Dean, in my experience in privately owned companies, has a special a particularly a strong

Speaker 1

fee lever. So, these numbers are more relevant. EBITDA margins

Operator

tend to rise compared to revenue. They would go from a high level to an even higher level. And the company's profitability really takes off as we can see in other private companies. But today, Zabast cannot reach them because we are tied down due to a number of different factors: hiring and workforce, services, service structures, the outsourcing of services. So, we basically, we work at the highest possible level.

Operator

Now, if you want to know whether we will reach The $1,800,000,000 level, I certainly hope so. But as we become privatized, that is certainly going to occur. Next, I have thank you for Your previous questions? I have a number of questions. I understand that solid waste is a very relevant field.

Operator

What could you tell us about SABESP's plan in that business line? Absolutely. Not just solid waste, but sanitation as a whole has long been looked at from The stance of how much value it could provide, for instance, the creation of biogas or bioethane, which we can use as fuel even. We have been using it in the city of Franca, biomethane in all our vehicles. We have reclaimed water,

Speaker 1

reused water. This

Operator

is a sector that is very sensitive to capital because the water Network needs to be improved over time, over the long term. We believe that The metropolis here in Sao Paulo has a huge potential. The sewage treatment system In the ABC region, it has a lot of potential, not just there, but in many different regions. There are many different strategies that we can employ. For instance, Fertilizers, I was recently at a talk in Germany where we were looking at Sludge as a source of revenue and no longer something that is sent to waste and dumps effectively.

Operator

But for each aspect, We reached segment. We have specific analysis. And for solid waste, we do have studies that we are studying starting In Badu AD, this is a waste to energy project that is beginning. This is Sanitation is a segment that is poorly addressed right now. And If we are given leeway to do so, we will certainly start working as we have been, for instance, by charging cash collection fees.

Operator

So why could we not add this new service through the company's structure. So I certainly agree with you, but I can't give a definitive answer now because our analyses and studies are still ongoing. When they are complete, I will be very happy to share with you. We still have more questions. They keep coming in.

Operator

Daniel Krawitski asks, hello, do you see any impact on the company coming from the changes to the legal landmark for the sanitation that have been proposed by the federal government? Excellent question. The impact is positive if we look at the margin, the adjustments that were made to the legal landmark. Now, some of these discussions are setbacks. They include a new deadline for proving our financial capacity.

Operator

But other than those, they are overall, they are very positive. Our targets for the year 2023, We currently have 24 cities in that category. So, as a company that is committed to our society, We plan to propose to those 24 cities that we review the contract such that We can deliver a contract that is strongly beneficial to all parties involved. And rest assured that Sebest will give as much attention as we always do to all of

Speaker 1

our services. Atos Nolasco asks, good morning.

Operator

I have a question about the PDI. Is there any outlook about replacing employees who left through the PDI. Do you believe that this is ideal headcount level for the company? Also, could you give a little bit more texture about the average wages for the employees that are expected to join the PDV? Hello.

Operator

Well, we will not we do have an estimate, but we will not publish those. We'd I think we you will likely be more creative than we can in terms of possible scenarios. I want to make something very clear. First, we reviewed our strategy. And as we did so, we redesigned the company's corporate structure.

Operator

When we did that, we found a strong opportunity to improve our processes and this developed into a need to reduce the company's fixed payroll. So, those 2,000 employees came from our first assessment, the first wave where we looked for a CSC and

Speaker 1

transferred some of them and

Operator

made our payroll more efficient. These numbers are not final, though we could certainly potentially increase the number of staff over the next 12 months. Thanks. Andre, we have approximately 20 minutes left here in the call and there are a few different questions still to answer. The first comes from Gabriel Francisco.

Operator

Do you see Change in efficiency for the services being provided as a state government or alternatively, If the PTV is held, could we expect this line to

Speaker 1

increase? Certainly. Our Vision is very clear with regard to our staff,

Operator

as well as with regard to energy. We are not only migrating to the open

Speaker 1

market, But we also hope to have an RFP

Operator

During the 2nd semester, we generate our own energy. This should be completed by 2026, and this will have a significant positive impact in reducing our expenses. We believe that centralizing contracts and establishing better relationship with our suppliers, namely to understand what their pain points are and improve our ability to meet fluctuations in demand as well as that includes both water and sewage and also continuous use. Now those products, they varied significantly because of global supply, The war in Ukraine, the energy issue, oil derivatives, oil products, all of this had a huge impact And we're going to keep working to be more efficient. But as a supply stake here, There are certain limits to our efficiency.

Operator

With regard to our employees, yes, we're going to have more outsourcing. But as we look at unit prices,

Speaker 1

there is room for growth as well. So, we might Increase our outsourcing while we see a drop in prices.

Operator

This is certainly possible. In some cases, we can reduce without Having any kind of drop in the quality of our service, this is something we are starting to look at now. Thank you, Andre. Romulo Brett, first, thank you and congratulations for your results and the presentation. With regard to the covenant renewal in privatization scenario, do you have any interest in changing the fee model to become closer to regulatory PAR?

Operator

Well, I think as the company looks at the privatization structure, If we focus on value and the fees and pricing, It's clearer than if we look at the other extreme, which is regulation. Those if we look at regulations, There are specific parameters. So, this is going to be included in the analysis that the IFC will undertake With support from regulatory, this will be submitted to the state government and to ourselves, so that we can all debate what is the best solution and what are possible solutions. So, to be very, very practical, I think that's the easiest way. Yes, If we were to migrate to a parametric Regis, the table, we certainly would have an easier time of generating value.

Operator

I don't know if we'll get there, but we're working with the public sector to reduce the subjectivity that is present every time we look at these

Speaker 1

structures. So, something along those lines will occur, but to what degree, that's something that I cannot to give

Operator

you a definitive answer about today. Thank you. Antonio Juncker has 2 questions. The first is, in addition to the fee issue, which This earnings call helps to address, does the company believe there is an important gap in revenue due to measurement flaws, old meters and as a result On under billing, what's the best way to work on that? And the second question, from an administrative standpoint, what management positions can the company used to draw more people and to be more attractive on the market?

Operator

And is there a specific number of seats that need to be filled? Thanks for your questions. We do have a cycle. We change the water meterings Regularly, the simpler ones have a 5 year shelf life or useful life, product life, so to speak. After 5 years, we changed those meters.

Operator

There are many different types of meters, including the ultrasound based meters. They are more expensive, but also much more precise, and they last 10 years. Now, this is a significant more expensive meter. This is the Cooper ones are R50 to R100 each and the ultrasound meters can cost as much as R1000. So, for the greatest number of our clients, we use the simpler water meters because we believe that it is not economically viable for the vast majority of our clients to keep investing in more advanced meters.

Operator

So, we use mathematical formulas to compensate for the expected inefficiency. We measure the amount that is provided to the network and the amount that is measured and keep track of that. The current fee structure

Speaker 1

currently, the usage that is Measured is usually less than

Operator

the service or the volume that is provided. So, as we change and update the fee structure, it will become more important to have more modern water meters.

Speaker 1

To your earlier question, I think So, I think the first answer has been addressed. For your second question,

Operator

The best has fixed hires and freely provided hires, and that includes the at the superintendent level, advisers and assistants to the board and directors. In total, this is something like 150 for different positions. Thank you. Marcelo Sandri says, congratulations for the results. I'd like to ask if the Nova Rio Pineros program has been completed and if the BDO metrics have been reached as well as the sewage connection completed and the CapEx?

Operator

Thanks. As far as I know, it is very far advanced, very far into completion, but has not yet been fully completed. We can potentially follow-up on this question with the operations team, because I don't want to run the risk of giving you an answer that is not precise. I don't have Those numbers available right now, I apologize, but please send an email to our IR team and they will be happy to answer. Lastly, I think we've completed all the questions from analysts.

Operator

And now let's move on to questions from journalist. Tayu Hirata has 3 questions.

Speaker 1

1st, About the investment plan, what investments are being postponed? 2nd,

Operator

in the scope of Integrity Ate, what is the value that Sabast will invest? And 3rd, about the discussion around the sanitation landmark, How can this discussion impact the best? Well, Thijs, please, if we haven't fully answered the question, Please do feel free to add to them. I do believe that I did answer your first question previously. We are prioritizing investments with regulatory and environmental commitments, and therefore, an agenda that focuses on creating value.

Operator

This is spread out around the state. So, we don't have anything specific that will be postponed. We are just rearranging the normal flow of investments here at the company. And emergency investments, I should mention, this is important, this is all within the concept of planned CapEx. CapEx is earmarked for meeting emergencies, And this could be at 0.

Operator

We would operate normal.

Speaker 1

So this is not included in the reprioritization pipeline. Now,

Operator

to answer your next question, it's a complex What we've agreed to and what

Speaker 1

we've committed to with the Environmental Secretaries, I believe

Operator

this is R980 1,000,000 reels, but I'm not positive. They do include all the different deliveries. Pardon, the volume is 4,000,000,000. We will, at some point, need to speed up some deliveries that haven't been matched to our schedule, and that's where we'll invest the most of those funds. As for your third question, I think I've answered it.

Operator

If not, Please add to it. It's essentially positive, ultimately with thanks to the possibility of postponing certain contracts. That's what we're interested in as a service provider. Andre, that was the last question. No other journalists This call has now Been running for 80 minutes.

Operator

So, if you'd like to give some final thoughts? Of course. Thank you, Tiberio.

Speaker 1

Firstly, of course sorry to interrupt.

Operator

A new question has just arrived From Alberto Alaricin. Hello. I understand that SABESP is intensifying billing action. I understand that SABESP is intensifying billing and supply cuts for defaulted clients. Could you give us some more details about what sectors are the main focuses there?

Operator

Well, To answer your question, we are not prioritizing any specific sector. We are looking at our volume overall and we are following our goals. So, we are allowed to cut service after 90 days. That starts counting after our notice, and we are going to do that for all defaulted clients where we can. All right.

Operator

Thank you, Andre. Now, your final thoughts? Well, thanks. I think this first quarter has been able to show a little bit of what we can do here at the company. Our goal is efficient management.

Operator

We want to work toward the company's goals and results and to make sure the company provides its service with an extremely efficient manner. We want to improve our company profile and positioning to be closer to clients and employees. We have a very intensive Internal communication channel, it's a simple administration. It is not Very it doesn't have a huge hierarchy. It's more flattened than before.

Operator

We have fewer people between

Speaker 1

the lowest employees on the hierarchy and the C levels. We have

Operator

a commitment with the state government that is fully aligned with the privatization program. This creates a lot of value for society, for our employees. SABESP has the potential to improve its efficiency level, its service provision, as every company does, and we're working on that. Now, if Sabast can be freed from its chains that it has because of being a state owned company. There are a number of resources that They are limited and we hope to become a company that is a player, not just in Brazil, but even more powerful.

Operator

This is a journey that I certainly hope we can complete within deadline and our deadline is next year. This transformation will be strongly positive for society, for everyone who is involved in this process, and especially for our employees. The amount of opportunities we will gain with this expansion is unparalleled in the company's history. So, that's where we're working toward. We are striving to simplify and modernize the company to integrate it, to improve our processes.

Operator

And this will happen and we will empower any impact of potential privatization, assuming the public sector decides to move ahead with that. And we believe that, that will be strongly beneficial for everyone who has any dealings or interactions with SABESP. So that's it. I'd like to congratulate the team. We will deliver more and more Congratulations to all company employees and outsource employees, third parties as well.

Operator

This is a very enriching journey. We have the potential to transform the Brazilian sanitation sector. Thank you.

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Earnings Conference Call
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q1 2023
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