Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2023

There are 1 speakers on the call.

Operator

Good morning. Welcome to the SABESP Second Quarter earnings release call. I'm Tiberu. I'm Superintendant of Investor Relations. We have with us Andres Salcedo, the CEO of the company Katya Pereira, CFO and Investor Relations Officer and Marcelo Miyagi, Accounting Director.

Operator

Before I give the floor to Andrea to start this call, I would like to give you some information. This call has some Spanish translation into English and it's being recorded. The presentation and recording will be available for download in the Investor Relations portal. Questions will be asked only in writing in the chat box in this platform. Our call will last for around 1 hour and 30 minutes, and we will have 45 minutes for questions asked by the analysts 15 minutes.

Operator

Questions for journalists. I'd like to clarify that statements that may be made during this call related to business prospects of the company, financial goals are forecast based on premises of the Board of Sabespi and information currently available to the company and they are not recommendations for investment. Forward looking statements are not guaranteed because they involve risks, uncertainties and premises because they refer to future events and therefore they depend on circumstances that may occur or not. Investors should understand that general economic conditions, industry conditions and other operating factors may affect future results of the company, may lead to results that are materially different from those expressed in these forward looking statements. Now I'd like to give the floor to Andrea Alsaid, who will open this call.

Operator

Andrea, the floor is yours. Good morning. I'd like to greet the team who is here. Thank you to Berio, Katya, Marcelo, another quarter where we are really making a great effort to make all the changes and prepare the company for this new phase, a phase of a more agile, more competitive and more modern company. And I start with 2 main items here.

Operator

Conclusion of the PDI, which is the ESSENTIFIES dismissal program. And the purpose is to encourage employees who have been working for the company for a long time, who have contributed a lot to build the company that we have today, this company we're so proud of having in the state of Sao Paulo, making sure that they can have a smooth transition to their retirement. We've concluded the adherence to this voluntary resignation program, and it was very much in line with what we thought originally regarding the potential of this program considering the restructuring in our company. The restructuring of the company aims at centralizing processes, rethinking the company as a whole with a more integrated vision. And in this context, we identified a potential of reducing 2,000 jobs scattered throughout the whole company.

Operator

Considering this initial estimate, the adherence was very close to what we thought it would be. It was successful. So over 1800 employees registered and we finished this cycle of resizing the staff. Now we have to look forward and build the foundations for this new chapter of the company with this new management, with this new vision, which is more focused on customers, the environment and with a focus on value creation both for society shareholders and our employees. Also a piece of information we have published in the release in line with what we thought in the past, the payback of this incentivized dismissal program is very much in line with the market, so no surprise in this context.

Operator

Going back to the implementation of the new company structure with the support of shareholders, in April, we approved the establishment of a new executive office focusing on customers and the rationale of this focus started in 2 big fronts. 1, making sure ready and appropriate service with this basis of 228,000,000 customers looking at our customers has an opportunity of a relationship that can be expanded providing services and new businesses with an ability to innovate and also preserving the value of the company through a more efficient management of accounts receivable. And this has been the focus of our management. And now, we will have someone devoted to that. This will further be further enhanced in managing both flow and also with more sophisticated ideas in order to try to recover what we had in the past of credits.

Operator

So we have a big expectation and later we will give more details and we hope that you will be validating this because this is something really positive. This person and the profile we are adding to all the directors we already have. Now with this office focusing on this new structure and this new phase of our company still in line with the message we have been communicating, we are still very much focused on capital discipline, proper management and more efficient allocation of resources. In the Q2 and by the end of July, early August, We have 2 very important information that really show the commitment we have with the company. 1st was the first time in the history of sanitation in Brazil.

Operator

A state company won a contract in the city of Olimpia, it's an iconic municipality. They have a lot of tourism there, water. So it reinforces our position in an area of the state where we already have a good position. So we dilute costs there. It helps us be more efficient.

Operator

And we have very high expectations that this first case, which is a symbol of this new company, it may add further contracts to our base. And we also had the right to exercise in the context of the sales Iguazas did of their assets and 2 of these assets were assets where we have a minority shares or minority interests. And one of the rights we had was to have preference to acquire interests of Iguaza and the same conditions offered by the buyer. We deeply analyzed the assets and our conclusion is that in this capital discipline, considering other opportunities we have, exercising this preference right wouldn't be the best choice. So, we will remain in the position where we were.

Operator

And then, we will start the negotiations so that asset management is as efficient possible both for Sabespi and for this new partner. And the result we will present today or Katya will present today is the result that is according to the commitment we have had with you over this journey starting in January, the so we we established in March and now we have a whole team. And around 7, 6, 5 months of work. We managed to present the results we're looking for in the Q1. The Q2 with further advanced in terms of operational improvement, efficiency and reviewing processes, mapping value leverage both short and long term and a corporate vision, a vision of not only centralization, efficiency and change on decision making focus, it will be more centralized, but also bring strategic topics so that they become central in corporate terms.

Operator

We have created an area which will is dealing with strategic points, giving a direction to the company, where we want what are the goals we want to achieve? And we're also working very hard. Well, we have been doing it and we will continue in the Q3 of identifying opportunities and the situation the company is right now in terms of, carbon footprint and the greenhouse gas balance, so that we can really show society that the role played by Sasbespi in the environmental and social agenda, and this is very dear to us in a vision of circular economy, integration, people who are at the margins of society. So, this social vision is something very strong in our company. And we have an amazing capacity of taking basic sanitation and water supply and basic infrastructure to low income people.

Operator

Additionally, and connected to the customer strategy, we have a digital transformation area and data science area. The rationale here, these are 2 different areas. 1, looking into the company, looking for opportunities involving data monitoring, automation prediction of failures, leaks that may happen. We have a lot of data available in our company. And the idea is to organize the data so that it generates intelligence for our company.

Operator

And on the other hand, the rationale is to look at our customer base, looking outside the company, the amount of data we have and how we can use this data for the benefit of the company so that we can provide better services to our customers. So, we have a big potential here, looking for opportunities for better recovery of credit, predicting bad debt and also looking for new services, new products to be provided to our customers on the left side of the slide. And I think all this information partially materializes. In the progression of the EBITDA margin of our company in the first quarter, this was very different from the previous quarters. And the second quarter confirmed this progress we have had in our company with a focus on operational improvement, improving management with focus on efficiency and a focus on generating value.

Operator

The contracts of our company are medium to long term, 6 months, too many years. So, most of the efficiency we have been generating in new contracts will be captured over time because it's part of our nature to have long term contracts. That's it. Once again, I'd like to thank the whole team, acknowledge the role of all and our coworkers really embraced this agenda of modernity, innovation, competitiveness and efficiency. We have a very nice challenge, which is to transform this company and really be at the vanguard of sanitation in our country and all directors Katya, Sabrina, management, Bruno, regulation new business, Rover Bao, integrating the whole operational team with this vision of 1 single Sebastien Paolo Violante with a long term a medium and long term vision bringing together innovation with the CapEx we have to deliver.

Operator

So I would like to congratulate all directors. I cannot name everyone here, but again, congratulations. This is only the beginning. We are really happy and cited with the ability we see in the company to do more and better for shareholders, employees and our customer base. Thank you very much.

Operator

Good morning, everyone. I'm Cachap Pereira. This is the 3rd time I'm here talking to you. I'd like to thank Andrea. Thank you, Andrea, for this opportunity and for this challenge that has been presented to all directors and my financial team represented here by Tibario, Investor Relations Officer and Miyagi, Accounting Director.

Operator

Thank you all for the great job. Let's take a look at the numbers. I have to show you the figures, starting with operational performance. In this quarter, we had an increase in water build volume, 2.2 percent sewage, 3.1 percent, showing our focus and the investments more for sewage, both collection and treatment, trying to reach the universalization goal, so more sewage. If we put them together, we have an increase in volume of 4.3%.

Operator

Looking at the graph, the main growth came from residential in ranges above the minimum, which is up to 10 cubic meters. And this brings has a positive effect as we're going to see later when we talk about revenue. It brings a more positive In fact, because these are higher tariffs after 10 cubic meter. In addition to that, to this build volume, we had a growth in new connections. Water, 44,000 new connections at this quarter and 48,000 new connections of sewage, volume growth, growth by consumption and also growth through new connections.

Operator

It was a very good quarter when we look at the growth compared to the previous year and compared to the previous quarter, the Q1 2023, showing that we are capturing improving volume through the investments that are being made by the company. Financial highlights. The main highlights, revenue for sanitation and water supply. We had a growth of 19%. Basically, what we have here, 2.6% increase in volume.

Operator

We had impact of the tariff. We had a tariff raise on May 10th this year, 9.656 raise and we have the capture of the tariff fully after June, we still have the impact of last year's tariff, 12 point 56% when we'll look comparing quarters, we see positive impact in terms of tariff, 11.88%. Additionally, as I said, we had the mix that contributed to the ranges where our build volume grew. With that, our revenue goes up because the average tariff is higher. When we look at EBITDA, which is a reflex of increased revenue, we don't consider here the IPD and we reached an EBITDA of DKK2.2 billion, a growth of 47 point 1 percent, a very significant growth comparing 2022 to 2023, the same quarter.

Operator

And also margin, EBITDA margin without construction, the Q2 2022 was 37% and now 45%. So, increase in value and looking at the margin, we also had an increase. When you look at net income, we see the same increase. Net income here has the impact of this program of incentivized resignation. So without considering this voluntary resignation program, we had an increase of 76.1.

Operator

We went from RUB422 1,000,000 to RUB744 1,000. So we will be talking here of an income of almost RMB1.3 billion, an increase of 200%. So again, when we look at each indicator will impact the next one, but the message is very positive, both growth in revenue, capturing volume with the position of the mix, tariffs, considering our base of assets and also EBITDA and the care we have been taking with cost management, trying to achieve efficiency and integration of processes so that we are able to see the whole, thus being able to make strategic decisions and net income going the same direction. So comparing income, 2nd quarter 2022 comparing with this quarter, results of construction. In our statement, we still have that information.

Operator

So we are putting it together here to neutralize the effect. The effect is almost nil and bringing here costs and expenses for this voluntary resignation program. When we look at the impact, the negative impact in this quarter when compared to last year's, we see an increase in costs, 150,000,000 530, which is this voluntary resignation program, which is not a recurring event. It's highlighted here because it's not a recurring effect. So this will not happen later when we really close this process in this period, when these employees will leave the company as has been scheduled for 1 year.

Operator

Other revenues and expenses, here we have penalties to suppliers. This is basically what we have in this item. When we look at net financial results, here we had a very positive contribution in the formation of our net income, which is 373 coming from exchange rate variation which we had in this quarter, we had a devaluation of the U. S. Dollar around 5% and yen to above 12% and that contributed so that the share of our debt that is around 3% generates this positive exchange rate variation.

Operator

So out of the 310, 370 3 come from exchange rate variation. Some of our contracts also had monetary variation, so we had that impact. From the point of view of financial expenses and revenue, we also had impact because we had new loans. 2 entries of new loans starting in the Q2 2 bid invest, 1 July 22 and the other one May 23, so both totaling BRL940 million. So we had an increase in the basis and we had this increase in financial expenses and when comparing interest rates, we also have an effect from the interest rate.

Operator

2nd quarter 2022 compared to Q2 2023 went from 12.88 percent to 13.5%. So we had a significant variation in interest rate and also considering our contracts in the U. S. Dollar from a level of rate of 1.5 to 5.1. On the one hand, and this net financial items, we had this effect of R372 1,000,000 of monetary and exchange rate variation and R73 1,000,000 of financial expenses.

Operator

When we look at social security contribution and income tax. Well, it's a result we have increased income leading to more taxation and most social security payment neutralized by this program of voluntary incentivized resignation program, leading to the BRL744 1,000,000 which I showed you before, this was one of the highlights in this quarter. Now talking more about expenses. Expenses with staff personnel in the Q2 2022, it was BRL776 1,000,000 and now a total expense of 1.3 47. But if we remove the voluntary resignation program looking at the recurring expenses with staff, we had an increase of 5.4%.

Operator

So from 776 to 818, and this is explained by the salary raise and 1% of raise in salaries and jobs would happen every year in February. So when we compare Q2 2022 to 2023, we have that. So the annual salary raise and also raise in salary plans that happened in February, leading to higher expenses with personnel. We had a reduction of 1.5% in the number of employees, 220 employees less comparing June 22 to June 23. No impact of this voluntary resignation program.

Operator

So the employees that joined this resignation program, they will start so it will happen from July 23th to July 24. General material expenses, we had a reduction of 17.4 percent, basically less expenses with maintenance maintenance materials, maintenance and conservation of buildings and fuel and lubricants. Here we had a reduction because we had a reduction in our fleet, so we start capturing the benefit in terms of consumption. Treatment materials, I think this is the first time after some quarters that it went down. So basically, we had this drop 2.8%.

Operator

This is related to reduction in consumption. We had a reduction in consumption and this reduction in consumption of treatment materials has to do with the level of the quality of the water. With that, we have less conception of materials used for water treatment and also some impact related to price. We start to see a reduction in prices when compared to the same quarter in 2022. Services, we had an increase of 7.3%.

Operator

Basically, these are professional services, part of services are related to technology. We are talking here about improvements in the communication channel, of digital channels to communicate with our customers, also improvement in our billing system that enables us to have information and help in the collection actions trying to stop or improved unpaid bills and also data security and also including maintenance and installation costs related to connections. This is all part of the 7.3% increase in services power, 2.8% increase explained basically by an event, a single event, which is payment of BRL11 million of natural gas, which is a contract we signed in 2021 that expired in the Q2 of 2023, which is related to a gas for pumping from reservoirs. With the level of water we have in our reservoirs, we didn't use this contract fully. This was signed in a pick or pay condition.

Operator

So at the end of the contract, we measured and assessed what it would be and when we closed the contact, then we have to pay this 11,000,000, which is the variation of the energy bill, we see movements of migrating from the regulator to the free power market. When we talk about values, 54% in the free energy market and 46% in the regulated energy market. When you talk about power kilowatts hour, 65% visavis35%. We are also advancing this agenda to increase our share of free market for energy, but the event that happened in this quarter was the closing of this contract with the water level we have today around 73%. This is very recent information from August.

Operator

So 73% of water level with Cantareta system 77%. When we compare with the same period last year in August 22, the level of Cantareta was 33%. So, this is when we had a major drought. So, if we compare both years, we see that this helps also with treatment materials and it helps us not having the need of using different energy or power sources. Overhead expenses, we have here something that well, many of our investors or shareholders asked us to open that general expenses or overhead.

Operator

So we broke it down. So, if you look here, the first bit of this column is the so called city or municipal fund of the R357 1,000,000 in the Q2 2022, 172 refers to transfer of municipal funds and 184 are overhead general expenses. In the Q2 2023, we have R207 1,000,000 transfer for the municipal funds and general expenses, €189,000,000 So basically, virtually no change looking at general expenses or overhead, the big variation is related to the municipal funds. And this variation follows the increase in revenue it's paid depending on the revenue. So this increase is around 20%, where basically 17% is municipal funds for the city, for the municipality of Sao Paulo.

Operator

Looking at depreciation and amortization, we had an increase of 12.2%, which basically reflects our volume of investments in the past year from July 23 to now from July sorry, from July 22 to July 23, we had addition of immobilization, dollars 5,900,000,000 representing an increase of 12.2% in depreciation expenses. Looking at allowance for bad debt, we had a drop comparing 22%, 14% drop in allowance for bad debt. And if you look on the graph on top, in the Q1 of this year, we had 3.3%, a significant drop in the Q1 in allowance for bad debts, where it didn't do anything in a structured fashion to have a reduction in this allowance for bad debts and now 4.2%. And it got worse. And what does that mean?

Operator

This was in the Q2 of 2023. We have really looked at bad debts of our company and delinquency rates and what we could possibly do so that we went back to the delinquency levels we had before the pandemic. And we did that system having the billing system and the billing system entered during the pandemic we had the full goal live in October 21. We stopped to look at everything the system could provide us in terms of information and continuity in the collection process. We made some improvements.

Operator

We identified the opportunity to reconnect previous contracts that were broke, but do something so that our collection options followed what was designed. So between May June, we had this process of have we looked at the results of this action looking at broken contracts. But on the other hand, we had compensation of that with new agreements that were broke. So agreements made in the Q1 were broke in the Q2. And those who were broke from previous years, we recovered some of them, but the net effect was really an increase and the delinquency rates in this quarter, Q2 20 3.

Operator

What we also did and something we started doing in June, everything that was in our roadmap of bills that were due and that were so we tried to have them paid. So now in July, we had a significant number of paid bills paid. And in addition to that, we bought that together, try getting this paid bills, we also had a special action for payment of unpaid bills and this will take place until September to try to capture this, the paid bills we had now in July, but also actions of disconnection, which we're having for the agreements that were broken. So we are extending this so that we have time for this bills to be paid. So that disconnection actions we are coordinating with the operation team is also a lever to bring our customers to this negotiation program, this negotiation program, we have a very attractive condition for cash payment so that we no longer have this endless cycle of agreement because when we have an agreement, they will not be disconnected, but sometimes they don't in the end, they have no money and they break the agreement.

Operator

So we gave a 100% discount in interest rates for a cash payment so that we can collect as much as possible trying to remove the risk of having agreements that in the end, they will not fulfill. And they can also pay in installments. With a smaller number of installments and with a higher cash payment. So what we learned in the Q2 was how do customers behave. We look at the customers' behavior so that we could build this payment negotiation program.

Operator

So, restructuring actions will provide results or bring results in the second half of this year because we are building this road. And now with this new customers director, the focus will be on that. And we will effectively see these results being delivered in the second half of the year. Looking at tax expenses, it's virtually neutral, the increase. Looking at all the costs and expenses of our company except these non recurring event, which is a voluntary resignation, we had an increase of 2.7%.

Operator

Next one. Talking now a little bit about investments. We are still at a fast pace to deliver while we have in our investment plan in the Q2, we had 1,300,000,000 invested in a cash effect, €945,000,000 Out of those investments we made, 57% were in sewage, 56 or 57. Again, the commitment of balancing really or reaching a balance regarding sewage treatment, we are we have 92% of sewage system looking at all municipalities on average and regarding sewage, we have 90 percent sewage collection, but sewage treatment 84%. And we look at the timeline, our investment plan from 2022 to 2027, we see that amount which we have been talking about that has been approved and again a focus on sewage treatment, increase in sewage treatment and also sewage collection so that we can reach our sewage services universalization, which is our target.

Operator

Talking a little bit about our debts. When you look at net debt versus adjusted EBITDA, our covenant 350, when we look from the Q2 2022 to now, we basically have a very comfortable indicator 2.2. Our net debt in the Q2 of 2022 was 115 to 16.49. Basically, this is the entry of the 2 Infinevast loan in July 2022 and now May 23 increases the net debt and additionally, a positive effect of the exchange rate variation. When you look at adjusted EBITDA versus financial expenses, we have the covenant 280 and 4.1, that's the level.

Operator

Also very comfortable considering all the covenants we have. That's it. Regarding the debt composition, basically 87% debt in national currency, foreign currency debt around 13%, so no new entry regarding what we had been reporting in terms of foreign debt, foreign currency debt. This is due to exchange rate variation and also amortization of the debt over the past year. When we talk about costs, just to highlight that, look at average of our debt in national currency 12.85 when look at foreign currency 3.56%.

Operator

Total our debt, 11.53 meaning that today we have over 50 percent of our debt in local currency is related to DI. So basically, this effect of a greater debt in local currency is pulled by an increase in DI. I think this is it for the numbers. And now I give the floor to Tibeiryu to open the floor to questions to be asked by our investors. Thank you all.

Operator

Thank you, Katya. Thank you, Andrea. We already have a few questions here. We start answering the questions by the investors and then we will answer the questions asked by journalists. The first question we have comes from Carolina Corneiro.

Operator

I have two questions. In addition to PDI, which is the voluntary resignation program, what else have you done in terms of personnel costs to reduce the regulatory gap, is our SASP being involved in the discussion so that you don't lose this efficiency in the next revision cycle. 2nd question, where the privatization process launched, we know that the company do not make decisions that should be listened regarding relevant points. But the topics that in our opinion should be the focus to improve contracts or what are the agendas or topics that should be addressed. Andrea, thank you, Tiberio Caraul.

Operator

Thank you for your questions. Regarding the regulatory gap, there are many initiatives underway, particularly regarding personnel expenses, we were already better than what regulations enable us to have. So there is a relationship between personnel expenses and contractor expenses. If you reduce 1, we will need more contractor services. Even if we improve the contracts of our service, there is a trend or room of migrating everything that was done by our own employees, part of it will be done by contractors.

Operator

We have been talking to the agency and our and the new Regulatory Actions Executive Office led by BRONO has been discussing with the agency and they have this agenda and they are talking to the agency, telling them about our concerns regarding the sustainability of our company and the focus we all have, not only the company, but the state and the agency to have a better quality services to as many people as possible. So this is the agenda we have been discussing with the agency and they have been very receptive. And we understand that this tariff cycle will be very positive. On the company side, we doing our homework, trying to be more efficient, reducing this regulatory gap. And on the side of the agency, really understanding our points, telling them how we operate and how regulations can help us provide better services.

Operator

Regarding the privatization process, as I have been talking to you, this is led by the government. It's a decision by the state government. And the governor is the main leader here and this is being negotiated with a team led by Rafael and Natalia, and the Department of Environment with the state. And they contact AFC that has legal consulting, strategic consulting to support the whole project. We have been participating at all levels, providing this group with information from our company, information regarding our vision in terms of what is more efficient and what can create more values, not only for investors, but also more value for societies so that we can provide better services and turning services universal.

Operator

So these are very technical discussions And we have been working with this group and specifically Carolina regarding your question and regulations. And you have been making that very clear, both investors and analysts. And we too think this is the way to go. So, if we can really reduce uncertainties in this tariff process, well, In other words, the more predictable this process is so much the better. So the governor has being mentioning this in events related to privatization.

Operator

He too understands that improving predictability is something that they are aiming at. So, this is a positive agenda. We have been working on this agenda so that this really happens, so that we can really reduce the subjectivity in tariff cycles, again, Natalia Afael and the governor and the agency, they have been working on this agenda. So, it's a matter of time. We cannot anticipate decisions that haven't been made yet, but this agenda is being taken care of by all participants and stakeholders in this process.

Operator

Thank you, Andre. I'd like to remind investors, if you want to ask questions, please ask the questions in the Q and A box. Dovsy Bizoc asked the following question. What revenue mix with water and sewage in the ex construction revenue. I can answer that.

Operator

The mix, 53% is water in our revenue and 47% sewage. This is the revenue mix we had in the Q2 of 2023. Thank you for the question. Question by Guilherme Lima Santander. Even though the quarter PDD increased to 4.2% in this quarter, looking to a longer period past 12 months, we see an improvement that is indicated.

Operator

We went from 4% the first 2023 to 3.7 percent in the Q2 of 2023. Do you think that we can expect a further improvement for the second half or will may have problem? What level of PDD you think is feasible to reach? And the other question is, Could you please talk about the interest of the company to go on growing in assets in the state of Sao Paulo, like in the city of Olimpia, do you have any project in the pipeline today? I can start answering and then I'll give the floor to Andre.

Operator

Regarding PDD, we really expect to have an improvement in the second half. So PDD is allowance for bad debts. So right now, we have a structured action paving the way so that we can start collecting the fruits. I cannot still tell you what will be the reduction we will have in the 3rd Q4 in terms of bad debt, but this trend of decrease will happen and we hope that it will continue so that we don't really generate any volatility in the results as we had good results in the Q1 and worst result in the Q2. But on average, we have 3.8 1st quarter compared to the end of last year where we had 4.2 allowance for bad debts.

Operator

We have had an improvement. We identified points that will lead to volatility. We are looking at it. So agreements and this debt negotiation program we have and the actions we are taking in terms of disconnections, considering that some customers are not really fulfilling the agreements, but the trend is a downwards trend so that we won't have many impacts in terms of allowance for bad debts. Thank you for your question.

Operator

I don't know if I could add anything to that. Other projects similar to the one you in Olympia, is there anything else in the pipeline? Okay. Guilherme, we are looking at all projects underway in the state of Sao Paulo. We have around 5 projects, Igarapava and Oreos, not all of them have the same level of traction and robustness and the construction of the building as was the case in Olenka, but well struck a project with vision aligned leading to economic attractiveness in the state of Sao Paulo.

Operator

We will closely look at them. We understand that we have financial technical capacity to do that in our state. This is a commitment of Samba Espi with the people of the state of Paolo. These are 5 projects, Garapava, Orenos are still open and Baru, Marilia and Brodowski, they are suspended today. And we are checking and looking at all of them.

Operator

And obviously, our participating will depend on our analysis to see if it's really feasible and if they will generate value. So we are checking that. Thank you, Andrea. Next question is by Luisa Cangiotta, Itau BBA. The first part has to do with allowance for bad debts.

Operator

I'll read her question. Good morning. My question is related to delinquency. Considering the initiatives you have right now focus on reducing delinquency rates, I'd like to know what is the expected level for the next quarters and when will you have a normalization in terms of allowance for bad debts. My second question is related to a deduction in gross revenue and a drop compared to other quarters.

Operator

Could you give us any further details, any one off effect? Thank you for your question, Luisa. I think the question related to allowance for bad debts, I think I answered already in the previous question. We will go on working so that we have further and consistent reductions in bad debts. We cannot really say how we will be in the 3rd or Q4, but the actions are underway.

Operator

And this area was structured and was structured basically. Now in August, this new area, an executive office for billing. So we will have teams that will be devoted to that and doing this topic in a centralized fashion and taking all actions necessary regarding the reduction, looking at the net, we had a reduction of we had an increase of 19% in net revenue. We really had a one off effect. We had a credit rate covering from PISCOFINS, dollars 81,000,000 This $81,000,000 contributed when we look at the growth in that revenue, it grew 19% when gross sanitation grew around 16%.

Operator

So it was a one off event, dollars 81,000,000 recovering credits from Pesco Fin's tax. Thank you, Katya. Next question by Ugo Gomes from Safra. Could you please tell us something about the investment schedule payment per year considering the expectation of accelerating CapEx if we have privatization. Thank you for your question.

Operator

These details and these analysis, they have been produced by our company. What we have today is our investment plan up till 2023. This plan and current values totaled BRL56 1,000,000,000 and it's program to happen until 2,030 3 simulations by the consultants showed that if we have privatization, maybe this schedule is anticipated to 2029. And there is an addition of investments that was standardized by the government of BRL10 1,000,000,000. So this level of details of the schedule for this investment, how it will take place, this will be better clarified to the company doing phase number 1 of the project when we will start designing well that is this privatization all about this phase that started in August and will go into January next year.

Operator

We have audits and details about investments what has to be done. So we don't have the answer right now. Next question by Matteo Zamorin, Navi Capital. Good morning. Congratulations for the results.

Operator

Could you give more details regarding the regulatory initiatives to bridge the gap between net revenue reported by the company and the regulatory band? What are the initiatives to reduce contractors' costs mainly and also costs with materials? So the CSC, is it being implemented? Could you please talk more about this initiative to reduce cost and gain efficiency? I can start.

Operator

And we can complement later. Look at the regulatory gap, what we have is that the regulation area which we created, we have a new structure. Now we have an area for regulation. So they're very close to the agency when we have the tariff. So when the tariff raise of 9.56 was approved, there were some points that were addressed with SARSP related basically to PISCOFIN taxes.

Operator

This was an action that the regulation area did after approval of the tariff raised approved for this year regarding commercial programs. The area today, well some work is being done between the regulation area and the commercial area, sales area where we are revisiting all our commercial so customers level of price and level of discount we have, what is part of a file, which we think makes sense for the company. We are organizing this information. And the idea is that we submit this to a CERSP. So this work is being done already by the customer team and by the regulation team, the financial area is also participating where we are building this rationale to submit to a CERSP.

Operator

I think with that, we can address one important point, which is one of the discussions that always shows of this regulatory revenue gap recognition of the discounts given by the company in the commercial programs. When we talk about reducing costs. Let's start with the implementation of CSC, the shared services center. The design is ready. We are working on the migration phases.

Operator

It was totally well, migration will officially start next week with some activities, some processes will start being migrated and we already had a structure in place to serve some business units of the Metropolitan. So we are capitalizing and speeding up what is more at hand, we are already doing that movement. And this is a process that will take well, think about a full transition until the end of the year, we will have the transition of our activities. But the maturity will happen within 9 months. And we also have technology actions that will help speed up this process of migration and integration and centralization of processes.

Operator

As Andrea mentioned, our contracts, we have different maturity contracts. And since we have contracts that go from 6 months to 1 year, 3 years and even beyond, we will have to respect the maturity of the expiration date of these contracts and when they expire, we have to bring this to 1 single model or a centralized contract. So the capture of this gain will come over time. It will not come right after this is implemented. It will come as these contracts expire.

Operator

I don't know if I really answered your question. Andrea would like to add something. Well, generally speaking, this is a big company with a well established contract structure. As we became aware of demands and renewal of contracts, we have tried to rationalize the context or maybe alternative modes of contracting to become more efficient, but this happens over time so that we avoid risk of discontinuity. We see that these gains will be consistent over time.

Operator

We have some restructuring initiatives we have been taken in order to review the way we contract these different services, we have services today that are being that maybe makes that are being done together, that be done separately. And the other way around, services that are separated that maybe should be centralized. I have examples for all of them. And another opportunity I can give you further details but like collection, a disconnection is with the collection company, but the collection company has a greater affinity to perform remote activities. Field activities are very expensive, so effectiveness of disconnection.

Operator

We send a message, SMS and email. These are all administrative processes. They're not physical processes adding this concentrate physical process going to the household of the customer. This leads to more costs. So, bringing this to a field activity would be more efficient.

Operator

This will improve our ability to really implement a better collection. We hope that in the next quarters, this gain inefficiency will materialize in materials and the gap on the side of revenue is okay. On the side of expenses, a number of things are being done. Some of the things are about to show how we operate and for SASP, understanding to what extent what they want can be adjusted to our reality because we had some price shocks over time that were not captured. I think this is something we have been doing our homework so that our company is more efficient and also talking with the regulatory agencies showing that we are doing whatever we can to be as efficient as possible so that these visions are as close as possible for the next tariff cycle.

Operator

Thank you, Andrea. Thank you, Katya. Next question by Jana Yang from HSBC. Thank you for the opportunity. Could you give us an update of your discussions with R SESP?

Operator

What requests by SASB are still being assessed by the regulatory agency. Is there a discussion underway to adjust or change the tariff model and regulatory model? And if yes, could you give us more details? Thank you, Lily, for joining us and thank you for your question. Most of your question, I think I answered in the previous question asked by Matheus.

Operator

Details of what we have been discussing with the agency, I think that would both our team and the agencies team. But generally speaking, we have been tackled the revenue gap through this alignment of accounting regarding commercial agreements, I'm telling the agency that the other value levers have to do with consumption, with mix. These are things that are out of our control, understanding how they can see that on the side of expenses. I think there are a number of activities that we are doing here and part should be done by the agency expenses we have that are not taken into account today. So, we won't finish this agenda in 1 month.

Operator

So, we are trying to get our deals closer and closer and we have a contact once a month by Bruno from the regulatory team and directors from other teams that will show the agency and we want to be as clear as possible with the agency showing what reality is and what is our capacity to invest vis a vis the reality, what they see in our company. I hope I have answered your question. This is a very broad agenda, but we are trying to tackle it since the first day we are here. So we are reaching the last 15 minutes. Journalists have started asking their questions.

Operator

So we still have some questions from some investor. Miguel Rodriguez from Morgan Stanley asks, Well, the decision of not exercising the preference right, Androginia Castillo, were it exclusively related to the level of return or is there any other factor involved. Could you please comment how has the company looked at the demands of return for different projects and maybe taxes that may lead to the requirement of bigger returns or smaller returns. Well, Miguel, good question. This is a very complex topic, but basically trying to simplify this complex analysis, any capital allocation by the company takes into account risks and returns coming from that opportunity.

Operator

So what is risk in a concession regulatory environment, we have a lot of CapEx looking forward and obviously, looking at the risk taking appetite of the company and this is shown at the decision making levels with the regulation office and we also have the other office taking this decision and depending on the investment this is submitted to the Board of Directors. What we have been doing is that over this whole journey to standardize the risk, the level of risk and return we are willing to take depending on the project. In the case of Andradeena Castillo, the risk is relatively low. These mature concessions and the regulation in that area is a regulation that we don't see has extraordinary risks. Having said that, it was much more a matter of return.

Operator

We thought that we would get the best return for our investments. So we don't have any other right. And thank you for your question. Next question by Aral Reim from Reberco. He was kind enough to send the question translated into Portuguese.

Operator

So I'll read. Apologize if the translation is not okay, but I think it's good enough. Total receivables have continued to grow. Total overdue receivables and those more than 60 days over do also remain elevated. Then he asked, is there a plan to reduce these receivables by recovery or should we expect them to be written down via the P and L?

Operator

What is the expected timeline to meaningfully reduce the overdue receivables? I can answer that. Thank you for your question And thank you for being so kind to provide a translation, increase in receivables follows the revenue. If you have a greater revenue, we have also accounts receivable. An important piece of information is that today in our accounts receivable or in our balance sheet, we don't have anything above 360 days.

Operator

We follow that because we are still trying to recover that, But everything that is above 360 days has been duly written down, being treated accordingly in our P and L. So, our receivables is clean of any that cannot be collected. We are trying to recover this overdue. We're going down to 5 years even longer terms but that would have a positive effect. It wouldn't have a negative effect.

Operator

So looking at my receivables, 360 is already okay. We do allowance for losses after 180 days, we increased the volume we allow for but accounting here does allowances by edge. Looking at the delinquency history, we are very conservative. We look at what we have in the overdue and to be due and we apply them according to the history of the company. Then we provide the allowance required to prevent any impact on results.

Operator

Answer your questions, receivables you see in our balance sheet is clean of any loss. Everything has already been generated and has already been taken to account in our P and L. And the growth we see is basically related to the growth in our revenue. Thank you, Katya. He goes on with another question around AIM.

Operator

Since the Q3 2022 a collection action against the city government of Sao Paulo has been reported and the receivables for the quarters, the receivable calculated now is 2.8 BRLs. I like to understand a little bit more about that. The probability of monetize this debt papers, what is necessary for this BRL2.8 billion to be recognized and the time during which they could be realize if there is a time or schedule for anticipated payment and what are the uncertainties? And thirdly, how would they be considered in the balance sheet if recognized, meaning asset would be a commercial receivable or an investment paper. Well, of this 2,800,000,000 we make them visible.

Operator

We haven't recognized them in our results because this is a right we have, but the time depends on the availability of the city administration to pay in 2023. We see the city paying debts from 2,006. Looking at the realization of these payments, there are 2 ways to go, ways to enter into the flow of payment by the municipality or work with we have other possibilities. It has to do with agreement and maybe we can provide further details. We are looking at other stability as well.

Operator

But actually, these are the ways we have to recover this BRL2.1 billion looking at the value. This is we have the principal and interests. Part of it is commercial, but part of it will affect the financial line, we are talking here about updating this value, this figure over time. We'd like to complement, Andre. I think that's it.

Operator

We have a stock of unpaid receivables. This is the most representative one, euros 2.8 billion. And we have been looking at the best way to monetize that. The city administration launches, bidding processes and latest one was in April. We don't think the conditions were attractive and we are looking at other ways of monetizing that, obviously, taking into account conversations with the city administration.

Operator

So we have been working to try to get other alternatives to get this paid. Nothing has been decided, But Aaron, we are paying close attention to that credit and we are really addressing this issue with the city administration of Sao Paulo. Thank you, Andrea. This was the last question. We are answering questions coming through the Q and A box, if you have any further questions, you can ask, including journalists.

Operator

If not, I'll give the floor to Andre and Katya for their final remarks. Well, no further questions. So, Andre, Katya, if you want to make any final remarks, I would just like to thank the whole team and my peers, Andrea. It's really been challenged. We have a very important agenda ahead and we have a full focus so that we really deliver 1 single Saberespi with the efficiencies we have been capturing, all the levers that have been identified.

Operator

This is the commitment we have. Thank you, Tiberio. Thank you, Katya. So again, we have this commitment to be transparent with a focus on results have a company that uses its full potential to be more competitive, more modern, more flexible. The company adapted to this new reality and the opportunities that come together with the new regulations.

Operator

We have a set of opportunities we have been looking at to generate new businesses in our company with our customers, with our water and sewage treatment processes, we have been looking at all that and over time, we will be communicating all this to you, I would like to thank our employees who really embraced this agenda, who have been working very hard transforming the company into a company that is much closer to consumers with a clear goal of being the best sanitation and water supply provider, not only in the state of Sao Paulo, but in Brazil. And finally, this is not done just by me, by Cartagio Tiberio. We were already thinking about an event to introduce all the directors and the officers, people who really work to deliver results, we by until the end of this month, we will have a meeting, which we are calling Sabespi Day, where we will be bringing the other directors and they will all be talking and they will talk about everything we did in the past 6 months, our challenges and the foundation that is being built for this future. Also talking about the vision, what we want to deliver in the next 6 12 months to you, to society, to our investors.

Operator

For the details, the IR team will provides you, but investors and the press, society, you will get to know our agenda and the people while leading these agendas, so this is an invitation. Suggestions of topics and items for the agenda are welcome. You can submit them to us. And again, thank you very much for your feedback. Thank you for the constructive criticism we have been getting during our journey and whenever possible we implement them.

Operator

This construction of the new Sebaspi is a joint construction. Part of it is done by us because we are in charge of leading it, but it starts in the company with suggestions made by our employees so that we have a better operation and also comes from our investors, from society so that we also look at external visions in terms of what we can prove. So it is a thank you message to the state government for having given me and all the direction this possibility to run this company and prepare it for the 2nd phase. We are very happy to be here. It's an honor to be in this position at a challenging time when we can really make a difference for this industry, not only in the state of Sao Paulo, for Brazil.

Operator

Thank you all very much. Thank you to Barry, Miyagi, Katya, the whole team and those who have been working with us. Thank you very much.

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Earnings Conference Call
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q2 2023
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