Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 22, 2024

There are 1 speakers on the call.

Operator

Good morning, everyone, and welcome to SABESP Conference Call to discuss the earnings of the Q4 of 2023. My name is Luis Roberto Chiberio. I am Investor Relations' Superintendent. Today with us, we have Andres Alcedo, CEO of SABESP, CACHA Pereira, CFO and Investor Relations Officer and Marcelo Miyagi, Accounting Superintendent. Before turning the floor over to Andres Alced, I would like to make some announcements.

Operator

This video conference has simultaneous interpretation into English and is being recorded. The slide presentation and recording will be available for download at the IR portal of the company, where you can find the earnings release. We remind you that questions can be made in writing only using the chat box of this platform. Our conference will last approximately 1 hour and 30 minutes. We will reserve the final part to answer questions.

Operator

And to conclude my announcements, we would like to clarify the statements that may be made during this call regarding the business prospects of the company as well as operational and financial forecasts and goals are based on projections made according to beliefs and assumptions of SABESP's management and on information currently available to the company and are not investments' recommendations. Forward looking statements are not guarantees of performance as they involve uncertainties, assumptions and risks, including those disclosed in the documents filed by the company as they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the company's future earnings and lead to results that differ materially from those expressed in such forward looking statements. Now I would like to turn the floor over to Andres Alcedo. Good morning, everyone.

Operator

It's an honor to be here again to present one more cycle of earnings, one more step towards the path we've been following since last year. This path is based on our strategic goals that were set in the beginning of the year, matured during this journey and that today we can share with you more clearly and also in a visual manner. Our main goal as a public company, as a service utility company is to service society and our customers. We have a concern with sustainability, because we must ensure that the presence of human beings in large cities and our experience with the environment is more harmonious to reduce the impact of our presence ensuring a better world and long lasting resources. We also have a social aspect.

Operator

We include people in our management and we know how much sanitation matters to communities, the lives of people and to preserve water sources and the environment as a whole. So society is the center of our strategy, and we divide these goals into 4 dimensions. Starting at the top, internal processes dimension, we need efficiency to ensure maximized results, competitiveness that is related to a clear dimension in terms of market and clients. The market we operate in that is composed not only of users of the service, but we also have the granting authorities, the city governments, state governments and this planning has to be well coordinated to boost results. And with that, we want to be a reference in services in the company.

Operator

That combined with the innovation and people and staff, we want to be leaders in efficiency, modernity, creating new paradigms and solutions for complex problems and working in cooperation with other companies, both in Brazil and worldwide to provide sanitation that can be accessible for everyone to reach the universalization of sanitation. So on the left of the chart, you can see that is connected to sustainability in a broader way, but as applied to SABESP, sustainability also has an economic and financial dimension that's quite strong. Few services in the company or in Brazil or infrastructure has have such a social and sustainable connection agenda, sustainability and social agenda so deeply connected. So we work to have an economic and non economic impact for the benefit of society and the company. And from the point of view of image to make sure that we provide good services.

Operator

In the past, we brought to you what we had delivered in terms of results and what we plan for the future. From the corporate point of view and the Executive Board and actions, we made changes to the company reorganizing it, not only in the leaders, all the leaders are represented here in this slide, but also combining experiences, market experiences with the history of knowledge building and training inside the company. That has proven to be the right decision. And with good results, you'll be able to see in this presentation and in the earnings release. We created a vision that the ESG agenda combined with digital transformation and data governance allows us to use all the information we have in the company in the decision making process.

Operator

We created a new visual identity that is closer to people, more inclusive, lighter, more modern, and that reflects our vision for the company. And we have launched a new PPI, which includes increase of investments for the next 5 years when compared to the last 5 years. From the customer point of view, we've completed the commercial programs. We've submitted to the regulatory agency and we are applying a collection rules diligently. We have reviewed the entire rule and we're testing in this process what's the best way to approach the customer, giving more time either by SMS or a call, what type of person responds better to each type of approach?

Operator

We did 2 to the large collection events with 720,000 agreements. In the corporate agenda, there is a process still in progress that has a cultural process of transformation combining competences, both of the existing SABESP team and the new team we brought from the market to make sure that all employees have the right environment to perform their activities. And with a major focus on contingency transformation linked to Sabrina that is risk control. Paola, I'm on the 4th column now from left to right. Paola is the leader of Engineering, Innovation and Environmental Risk.

Operator

She has increased the deployment capacity for bidding processes. We have launched Integra Chete. We've completed the delivery of 16 photovoltaic plants distributed generation this year. So now we have 43 plants that will have 60 megawatts average, average megawatts capacity, slightly more than half the low voltage demand. And it's a very strong concept of circular economy, generating new businesses, monetizing the load for this generation of sanitary fillings and generating revenue from selling products.

Operator

And under RubberVal, we've been able to transform 22 business units into 18 operating units. And there's an important concept here of bringing to the central units everything that's not operational and releasing those at the end to take care of everyday activities, collection and sewage treatment, water distribution. So all the support and non operational activities are distributed in the other officers, so that they can work better when the operations in coordination with other officers, especially customers. And this coordination between the teams is working better and better and producing good results from now on. So we are now quicker to respond.

Operator

And in electromechanics, for example, we can mobilize people to meet specific demands from operations due to system deficiencies. And this is a continuous journey that started last year in operational units of sharing best practices. So what is best done in Franca Vale do Paraiba, Vale do Ribeira, Presidentu Prudenti will be presented to the coast team and also teams at the metropolitan areas. And that generates a continuous efficiency gain. So innovation that naturally happens in the end and that is shared to the entire company.

Operator

In the financial area led by Katya, our CFO and IRO, we've made several advances, fixed collection, we renegotiated contracts with banks, we accelerated collection process, more cash available with hedging policy. We are now finishing the agreements with financial institutions to be able to implement it. And we have a technology roadmap for transformation to rationalize apps we have in the company creating a single data platform and infrastructure platform, so that the entire company can use the same database and have access to information with no need of rework or adaptations. In the regulatory area under Bruno, we've seen this approach with regulators sharing experiences, which results in a better understanding from the regulator of our day to day activities. And we there was a great recognition of our tariff in May, March this year that allowed us to recover.

Operator

And Bruno really leads and had a great work. We won the Olympia auction, which was really very important for us. And also, there is the institutional relationship with mayors of the granting authorities and regulatory agencies that's always also under his leadership, ensuring a single treatment to the demand needs. Now planning from the corporate point of view, which is D plus 1. So after privatization, what do we have to do on the 1st day and the following days for 100 days plan to ensure that we'll profit from the transition of company type from a state owned company to a private company.

Operator

We have a dedicated team for that working with the superintendency. The ESG agenda will evolve this year. We have the 1st debenture, Sustainable and Blue that was launched. This was made along with a sustainable finance agenda that changes the way we relate to the Capital Markets. Digital Transformation, Data Analytics applied to the business starting to generate results both in operations and with customers.

Operator

There is a big business that will materialize this year and the coming years. And the customers, there is a set of services to be offered in addition to basic sanitation services. That tend to generate more revenue and improve the value perception that the customer has. From the tariff, we pay more attention to strategic customers, to offering a package of services, not only water and sewage, but to meet the needs of large custom clients that have that need other activities. The use of artificial intelligence to fight fraud, under measurement and losses.

Operator

Sabrina will advance in the new organizational culture, also in D plus 1, creating an intelligent team with people that will boost our delivery capacity. We have also changed the way in which the company sees itself. Now we have an alignment of goals or targets between the executives and the operational people. It didn't used to be like that in the past. So that reinforces the view of 1 single company, one single SABESP.

Operator

So targets will be pursued by everyone at the corporate level, superintendencies and operational units. In terms of engineering, we're making an effort to finish the expansion of sewage systems in the Sao Paulo area. We're working to expedite the photovoltaic plants to increase jet distribution energy distributed capacity. And the completion of self production operation that will happen in 2026, 2027 also helps in that. And there is a project of Integra Cheeti that will enable significant reduction of the organic load that is dumped into the river and will then make Tiete River into a much cleaner river that it goes through Sao Paulo and many other cities in the state.

Operator

Brabivao continues with an operational improvement. That's a continuous agenda and the team is highly focused on that. That includes reviewing our contract for operational support and for operational improvement. We're finishing this in the middle of the year and we'll implement it. The IT and Finance agenda, we issued the ESG debenture.

Operator

We have a new financing portfolio with consolidation of our shared services center that will boost efficiency and gain in competitiveness for the company. And that includes the implementation of SAP SAP S4HANA. We are focused on the new regulatory model and we'll work with a single contract. The 375 municipalities will have a single contract. This regulatory model encourages high efficiency And this is a great victory.

Operator

This is something we've been talking about since last year. And along with the government that fully understands the need of having divisions in sanitation and has welcomed most of our suggestions in this new regulatory model. Now looking and highlighting our CapEx, our capacity to execute this business plan. The business plan was disclosed last year. Then we had the plan disclosed by the government in February after the privatization.

Operator

First, last year, even though we didn't run the full year with the current capacity we have, we were able to advance in the CapEx investments. We've invested BRL2.7 billion in water and BRL3.6 billion in sewage, totaling BRL6.3 billion. When we compare 2023 BRL5 1,000,000,000 per year, there was a major leap in terms of capacity to generate new contracts and new investments in the That is separated between light blue, which are system expansion, system improvement efficiency and asset renewal, which is green and other in yellow. So it's IT, new businesses, investments that are not associated to granting of sanitation. The blue represents the advance in reaching universalization targets.

Operator

Green is efficiency, reduction of losses. So in the beginning, we'll focus more in the blue and then the green part tends to grow. As for investments associated to universalization, that's nice to look at the chart on the right. We have either underbidding or already bid for 96% of these assets. So we bring here an expression of our plan for last year and this year.

Operator

For next year, 89% of the funds needed for universalization are have are bid or under bidding. For 2026, that is 74%, then 63% 62%. I think there's a slight mistake on this chart on the right, Chipperio, we should update it. But in addition to that, given the best better coordination in prioritization and preparation of market relations, we've been able to obtain 80% more projects launched that were delivered. So many more bids were made in December.

Operator

From December 23 to February 24, we've placed BRL12 1,000,000,000 in bids for the investments of BRL24, BRL25 and BRL26. Now going back to the improvements we had last year in the combined agenda of all the areas working together from revenue, we had the extraordinary tariff review of 2023 that added almost 6% to our tariff recovery of volume that's something external to the company, but affects our economic figures, a better mix that can be seen in the performance of 2023. And now the expected recognition for 2023, we have submitted commercial programs to ARSESP. They have a limit set by regulation to be recognized, which is BRL420 1,000,000, which is smaller. Today, we give a discount of BRL720 1,000,000.

Operator

So we are talking to our CSP to understand What will be these commercial agreements and what discount we can give? And then we can adjust the portfolio so that the discount is exactly what is authorized by the agency. So we expect the agency to recognize part of it in the tariff adjustment of this year and will adjust as the agreements mature and for them to respect this limit that's given to us. Also we are billing cancellations excluded for the calculation of effective revenue, and we are working with the regulator to see the best way to deal with this. And that addresses the main revenue gap we had.

Operator

On the costs and expenses side, there were 2 events that had effects already, which they are continuous events. We started the personnel restructuring, which reduced the staff. We had a voluntary dismissal program that people apply to up until June and it goes up until June this year. The reduction is 15% in terms of headcount and we'll see the impact in the payroll. In delinquency, we've started our actions.

Operator

We have impacts already. Cachha will explain this. There might be some noise along the way. There will be quarters that will be better, others not so good. We're still adapting and trying to understand our structural delinquency.

Operator

We went through a long period of worsening of this indicator and we're making a lot of efforts to improve that. We have more our basis of customers our customer base change. So we have more vulnerable people, more social tariffs. So we want to stabilize this in the future at a good level. We don't know exactly what that is.

Operator

We're working for it to be the lowest of SAP project and contract review. This set of activities that under Cartier's umbrella that help each other. So once SAP is implemented, the capacity of SSC increases and then we review the contracts to adapt to that need. So a part of it is in progress and the results started already, but a good portion of it will come this year and next year. Also, we have actions to improve the electricity generation portfolio that I'll show in the next slide.

Operator

And maybe it will be clear how we see each other, how we see ourselves in terms of energy management. First, there is the efficiency pillar. How can I exercise this water production and distribution and sewage treatment activities spending the least possible energy, the lowest number of megawatts hour to make our operations work? This is under operational efficiency. In addition to that, there are 2 important plans.

Operator

What can I generate energy that's distributed energy for sewage treatment and biogas that is produced in some sewage treatment plants? On the left, we have 3 0 5 megawatts average of energy when we look to 2023. 93% is high and middle voltage and that and low voltage 7%. Low voltage, we saw with distributed generation or the regulated market. Middle and high voltage can go to the regulated market.

Operator

We can generate energy. How are we today? A snapshot of 2023. 65% of the 93% have migrated to the free market, and we have a contract portfolio. We still have 28% of our energy, 305, so that's 70 mega in the regulated market.

Operator

That's in the migration process. This 86 average megawatts has to migrate to the free market. Some of them are not feasible because it requires change of equipment, but a good portion is already migrating. In the low voltage market, we have in the captive on the regulated market 5%, but 2% has migrated to distributed generation plants. Looking forward, in low voltage, the idea is to move as much as possible to distributed generation.

Operator

Up until 2025, we have 4.5% of distributed generation with solar panels. Now, we have to find new areas to expand and cover everything we every area we can in distributor generation for this 2.5% that's not been addressed. When you look at middle and high voltage, we have launched a tender offer for self production, 190 average megawatts, and we're waiting for the proposals until the end of the month, it will start producing energy as of 2027. Then we'll have a self production structure that will provide some savings as compared to today and will start producing effects in 2027. We are analyzing biogas production capacity with the sewage treatment plants of the metropolitan area.

Operator

It could generate 11% of our energy from biogas. There is an advantage, which is using the heat produced in the thermal production of energy to dry the sludge. And that sludge could be commercialized and that becomes a product and source of revenue for the company. So 20% of our portfolio would still be linked to free market contracts, so that we can manage seasonality that self production cannot cover. This is an overview.

Operator

This provides a considerable savings in from energy. And then you can look at the free market today and the average cost of energy and how can that be in the future when you look at self production, biogas production, that's an input that we generate and don't use currently. New free market, we have 4.5 in distributed generation migrating all the low voltage power to regulated market. I think there are a lot of input there, so you can make your calculations and estimate the savings in energy, which accounts for 15% of our expenses today. Okay.

Operator

This is what I had to say. And it's important to go through every step of the process. 2023 was a very good year. We made lots of efforts as well as our employees, 3rd party companies for this transformation process. Today, we have a company structure that's adequate to go ahead whatever the scenario is.

Operator

We're ready for privatization, for competition and to become a reference in sanitation both in Brazil and abroad. And I would like to thank you all again all the members of all the officers, Katya, Caio, Bruno, Oberval, Paula, Sabrina, all employees and the staff, because this is an outstanding team with delivering on all our promises and we are committed to continuing at the same pace in 2024. Now I turn the floor over to Hello, Andrea. Thank you for your part. There is one more slide that talks about the privatization schedule.

Operator

Yes, you're right. Well, as part of the privatization process, there were several events made during this journey, coordination, mobilization made by Natalia, secretary and all the technical support brought to the process. The company took part in most of these milestones, super relevant events such as the passing of the law in December last year, and we made a public consultation materializing the effort of the team to have a single contract more predictable with more power to the granting authorities and regulatory authority granting power. And we now look at sanitations as a regional according to regional aspect. So we can share infrastructure among the municipalities across benefit of denser, richer municipalities with those who have a lower population.

Operator

And so the route to the privatization of SABESP followed these assumptions that were brought by the sanitation law. Now we made a public consultation. In the next weeks, the state government will publish the report of what has been accepted. Following that, there would be a resolution by the general the state council CDPAD regarding concepts general concepts linked to the supply or the tender offer, then URAI meeting will be called 30 days before then there will be a voting according to its bylaws, the contracts, its attachments, the election of the executive levels and the Board of IORAI. And once the contract has been approved, it will be ready for execution.

Operator

And the parties would be SABESP, URAI's representative and the regulatory agency and granting authority. So we are expecting to finish in April the completion of the authorization for change of control from with the creditors waiver. So capital markets that demand their meetings, there are some voting meetings took place last week. We have started the process with bilateral credit, bilateral financing. After the resolution of CDPAD due to governance issues, there will be a new special general meeting to approve the bylaws and the new governance.

Operator

So there is a schedule that's been structured and we aim at the window that uses the that starts in mid May and goes to the end of August to use the data from 2023. Okay. Thank you, Chiberio. No problem. Now I turn the floor over to Katja.

Operator

Good morning, everyone. Most of the part of financial highlights has addressed. It's been a very busy journey of hard work and we see the results in 2023. In financial highlights, we see the increase in revenue in the year of 16% by quarter 21% increase. Most of these revenue effect comes from the increase in tariff that we're able to apply as of May 2023, 2926 with a portion regarding to the extraordinary review that was requested by the company to reduce the regulatory gap for required revenue.

Operator

There is an increase in covenants for the future and the mix customer mix between residential and non residential as well as increase in volume when you look at the categories on the consumption histogram or bar chart. In terms of margin, we have the same benefit. We have a benefit of 35.9% for the year and in the last quarter 72%. Net income grew in the Q4 by 84% when compared to 2022 and year on year 29.9%. The difference with people asked us or challenged us during 2023 is how do we measure our performance?

Operator

Where are we now? Looking at SABESP, we brought to you a bit of what we're doing. How do we compare the performance of SABESP with SABESP itself? As KPIs, we started to control continuously in the company our revenue position. How is our revenue looking at build cubic meter?

Operator

So build cubic meter is a proxy in terms of performance metric. So we can see the growth of the average tariff. And so it goes from 4.8 in 2018. Pre pandemic 2019 it was 5, then the pandemic starts and in 2021 there is a reduction of the tariff naturally due to the increased number of residential customers, the quality mix quality tariff mix is reduced, 2022 slightly increased and then we closed 2023 at the 4th quarter at 5.2. So there is a development and this development is reflected in the mix, in the tariff adjustment that was applied as of May 2023 and increased volume.

Operator

And here we started to close the regulatory gap that is related to performance. When we look to EBITDA, we see the same effect. We reach in 2023 in EBITDA level, the best in the historical series of 5 years. So if we look at revenue that's closer to the regulatory agent and we see all the work being done by the regulation team and customer team. So now looking at the future, how we can reduce this gap even further.

Operator

But in the EBITDA, we see the effort of the company in search for operational excellence and this turnaround effect to maximize the EBITDA of the company. About the operational performance in Water. In the Q4, there is an increase of 4.3% in volume in residential customers as well as in commercial customers and public. In the year, we saw the same movement, the same trend, 2.7% total increase, also concentrating residential customers, but commercial customers are also growing as well as public. This growth in volume is also proportionally to water because of all the investment we made focused in the coverage of sewage treatment as well as collection.

Operator

So we do expect the build volume in sewage to grow. So we reached 4.9% in the 4th quarter and for the whole year and a growth of 4.3 or 3.3. And so the same increase in revenue that we have in water, we have in sewage. When we look at the financial performance for the quarter, we have a net income in the Q4, dollars 22 would have an increase in revenue of dollars 976 due to the mix in volume and increase in the average tariff. In cost and expenses, there is an increase of BRL160 1,000,000 basically due to the allowance for doubtful accounts improvement.

Operator

Due to all the initiatives that the company is undertaking to recover that. There are improvements when we look at treatment materials and services. Other operating income there is a worse worsening of R49 1,000,000. That's tax incentives that is it's a beneficial effect for income tax collection. So we look at the results throughout the year and at the year end of the year we use these funds.

Operator

So most of these BRL 49,000,000 is due to tax incentives. Financial results, there was a significant impact of BRL380 1,000,000. The main attention point was a revaluation regarding San Lorenzo and we saw a need to adjust the provision for financial expenses of the concession. This is a concession that goes up to 2,038. So we looked at discount rates and saw the need for adjustment.

Operator

Out of the BRL380 1,000,000 in net revenue worsened, BRL206 1,000,000 is a one off event. So we are looking at this in a very detailed way and preparing the company for the follow on. So we saw a need to add to this allowance. Remember this PPP, this is an accounting effect. There is no financial effect because in the settlement during the contract, everything that's paid for PPP is transferred to the tariff.

Operator

So there is no financial impact. This must be made clear. What we pay today in PPP for years, especially in Sao Lourenco is BRL 530,000,000 and that's adjusted for inflation. So we saw an opportunity to adjust and add this amount to the allowance, but remembering that there is no financial impact in the short term that's diluted in term and the settlements that are made are allocated to the tariff directly. In income tax and social contribution, a reduction of $172,000,000 and we reached with a net income in the quarter for BRL1186,000,000.

Operator

For the year, there has been a revenue growth of RMB2.8 billion for the same reasons I just mentioned. In construction results, we just exclude the construction margin BRL2.3 is just for accounting needs. In costs and expenses, we broke down here. So there is BRL 530,000,000 that results from the voluntary dismissal program that was accounted for in the Q2 and BRL589 1,000,000 resulting from larger more expenses in 2023. We see some reflects in the 4th quarter, but there is still this impact much lower than.

Operator

There is an increase of 16% in revenue and for the year. And removing this voluntary dismissal program, IDP, we have a growth in revenue not accompanied by an increase in expenses. Other revenues and expenses, we are positive in BRL24 1,000,000 and financial results, a large BRL250 1,000,000 comes from this added allowance for Sao Lourenco. And we it then we have BRL 3.5 1,000,000,000 net income for 2023. Now breaking down, in personnel, we start seeing the reflects of the dismissal program.

Operator

As we mentioned, 9.30 people left the company until December 2023, we've seen a reduction of 3.6% in expenses. This figure would be even bigger if it wasn't for the dismissal program because in there was an adjustment of 4.9% in labor and 1% for salaries. So if it wasn't for the PDI effect, we would have an increase in personnel account. So we see that personnel has been reduced due to the voluntary dismissal program. General supplies, no major changes.

Operator

Treatment supplies, we see an improvement. This is for consumption due to consumption, also a price effect, but much more due to consumption because we spent the full year, especially the 4th quarter with the full reservoir levels. Since the reservoirs are full, we can choose the water we're going to use for supply. So we bring water from Cantareira, which is quality water. It demands less treatment, chemical treatment and the cost is lower.

Operator

Also we want to highlight all the work from engineering and operations, bringing flexibility to the treatment supplies in our plants. So bringing components and that are more effective and that allows us to remove the pressure from using a certain chemical material for treatment, providing options. So we can have more flexibility in the adverse scenario of price increases. So there is also work in operations and engineering. In services, there was a drop of 10.6%, which reflects what we've been doing in terms of searching for opportunities.

Operator

That is also seen in the plan disclosed in our PPI? How can we improve the efficiency in our networks instead of maintenance. How can we ensure that they are more modern and more efficient so that we can remove some recurring costs? Looking at services. We are looking at the contracts in a consolidated way and negotiate model and implement.

Operator

Of course, there's a long way to go still in this area, but we are looking at maintenance versus improvement of our distribution systems. Electricity, basically there has been a reduction in consumption of electricity and a price increase when we look at the free market at the transmission fee, TUSD. On general expenses, the improved quality of water, there is a consumption in the energy consumption. We don't need to bring water all from Achibayin, all the way from Achibayin. So with reservoirs above 60% or 70% provides us flexibility both in treatment supplies as well as electricity.

Operator

Now general expenses, we explain and break down listening to analysts what are municipal fees and general expenses. The municipal funds tend to have higher expenses whenever there is an increase in revenue because that's directly proportional and also the new municipalities that enter the system. So there is a decrease, an increase in municipal fees and a decrease in general expenses. That's related to reduction of contingencies and lawsuits. For depreciation and amortization, there has been an increase of 15.3% That reflects the fact that we put in operation last year, BRL7.2 billion, a historical high of intangible assets that became operational last year.

Operator

And when that happens, of course, there is an increase in depreciation and amortization. And allowance for doubtful accounts, there was a decrease of 46.2%. This is due to all the structuring actions that customer areas doing, enforcing the collection rules, understanding our customers better and also due to events that end up being recurring because we have been doing this collection fade ons since last year, but our recovery events. As Andrea mentioned, these large collection events, Fero, allows us to recover funds. So there is a positive effect in the Q3.

Operator

In the Q4, we did it again with lessons learned from the last one and we continue. And when the structuring operations that take longer to be implemented and see the results and then they start seeing the results. So we had the benefit here of structuring collection actions and fair points. Tax expenses have increased due to the increase in revenue. So when you look at the allowance for doubtful accounts, we go from 4.4 in the 4th quarter.

Operator

In the Q3, we see 2.8% with a fade out effect and now 2 percent in the Q4. This could have some volatility because we're working with recovery. We have an inventory of old debts that we're trying to recover to the company. So we've seen this result, but we still are not sure of what level will be the normal level for allowance for doubtful accounts. Let's start with allowance for doubtful accounts.

Operator

We go back to 3% in 2023. So if you look at 2020 2023, we've removed the pandemic, the COVID pandemic effect that was stronger in 2021. Between 2021 2022, we had implementation of the billing system. There is a learning curve there. So we were able to adjust the system, providing all the tools to the collection team.

Operator

We haven't yet finished, but we've reached 3% already. So we've stopped at 3% so far. So when you look at the message, 3% provides us some comfort. Of course, we'll continue to seek something that allows us to reach levels pre pandemic levels. But looking at the year of considering everything that was done, 3% is a percentage that could have some volatility.

Operator

But in the 3rd Q4, there is a lot of recovery effect. Of course, when you do a Feirao, the first one is highly effective. The second is effective. And although we adapt the strategies, the effects end up being not the same once you do it continuously. In terms of personnel, there was a growth, but if we exclude 530 from IDP, it would be pretty much in line of expenses compared to 2022.

Operator

General supplies, there was a drop of 3.5 percent. Treatment supplies, 6.8%. Again, we're looking at inventory control. How can we be more efficient in terms of contracts? There is a benefit of treatment supplies looking at consumptions and we also considering flexibility and components.

Operator

In services, we've it was higher than 2023. It shows that all the transformation journey we're undergoing is not immediate. It's a journey. So we will start to capture that benefit on a quarterly basis. As the contracts and how can we group this contract, optimize the structure, then we have the SSC, the strategic materials and the corporate.

Operator

So how can we capture these benefits and use this centralizing intelligence to negotiate with suppliers? Electricity was pretty much in line when we look at 2022. Consumption has dropped looking at the year because we had the benefit from full reservoirs, rainfall, no drought and that brings us comfort in the management of our systems. And the variation we had is due to prices looking at the distribution tariff in the free market. For general expenses, there was an increase of 7.2%.

Operator

Basically, the growth we see here in this line is due to municipal funds. General expenses can be broken down. In general expenses, RMB 450,000,000 refer to contingencies that were recognized during the year. And that figure, we've been reassessing with the legal team and a very detailed work and with the reversal of allowance for contingencies that neutralize or offset the growth of municipal funds, they tend to grow because the revenue is growing. Depreciation, the same thing.

Operator

We're talking about depreciation, amortization that increased by 13.8%, allows for doubtful accounts decrease throughout the year by 16.5% and tax expenses increased by 10.6% due to increase in revenue. And finally, our indebtedness. Looking at the net debt over adjusted EBITDA, our covenants is around 3.5. We looking at the Q4 of 2022 and during the whole year of 2023, we were at 2. With the performance of the last quarter, we are now at 1.7.

Operator

So we had an improvement in the net debt over adjusted EBITDA. And the same thing applies to adjusted EBITDA over financial expenses. So we're looking our debt domestic and foreign. We have 14% in foreign currency and 86% in local currency. We are now transforming this debt into local currency.

Operator

This is it. Thank you, Tibeirio. You have the floor. Thank you, Katya. We can now start the Q and A session.

Operator

I'll start by reading the first question from Guillermo Lima. He's asking, as for the formal notice made in September 23. Could you update us regarding the progress of this process with 180 days and comment on how the conversations and requirements of the municipalities have been. Should we see more municipalities in addition to Sao Paulo approving municipal laws? Thank you for your question, Guilherme.

Operator

The notice remains valid. It was sent in September and everything is moving according to our original schedule. The consultation ended the following step. The municipalities made contributions to the public consultation, welcoming such contributions and advancing to the next stage will happen in this beginning of April with the meeting, general meeting of URAI that will happen in the beginning of May. As for the municipal law, again, as we said before, conceptually speaking, we would not need local laws.

Operator

But of course, that's a decision of the granting authority. Each mayor has the freedom to make decisions according to his own context. And in a municipality is interested in doing so, we the group that's working privatization can support the city. Thank you, Andre. Carolina Carneiro, good morning everyone.

Operator

I have two questions. About the performance of costs, especially provisions and 3rd party services, we saw major evolution both in the year as well as on quarterly basis. This level should be the level more recurring as of now. Has there been any special additional initiative in those lines that you could detail? And the second question, could you comment on the proposal of the new regulatory model proposed in the CEMIL contract?

Operator

Do you identify any upside improvements in what was proposed? Is there anything that generates concern? Or do you believe that the final documents will be available as of when? First for Katju and the second for Andre maybe. Thank you for the question, Carol.

Operator

Looking at services, In services and looking at operations, what we can see in operations and can be treated as projects that could bring more efficiency and improvement to the system. So we do see an opportunity for reduction. This is something we've been working on during the year. We will seek the 10% achieved in the Q4, but there is still a main challenge when we look at the year as a whole. So this is a journey.

Operator

We won't stop at 10% because we've had some benefits that have contributed negatively in the 1st and second quarter, which is a major expense in asphalt replacement. And then the Q4, we no longer had that. So there are some initiatives that are recurring, but there's still opportunity to continue to improve. As for the overview of the new regulatory model, it's quite positive. It brings important developments and modernizations.

Operator

From the management point of view, having a single contract with uniform clauses for all stages is a major advance. As for efficiency, recognition of investments in a cycle that will have a lot of investment with a new periodicity would also be helpful and more predictability in general in the process. As a result of that in providing company more freedom for management and defining priorities, the other hand is having a stronger regulatory agency, which is a way for the state to provide direction. So they need to have a more stronger supervision mechanism. So it's a balance between the granting authority and the concessionaire, and we see that naturally.

Operator

Are there tension points? Of course, some things became more relevant. On our hand, the planning and advancing of investments, we have to be more aware of that and more focused on that. This is the priority in this new cycle is the universalization. Any deviation from this route will result in punishment and our penalties.

Operator

And once the final model has been developed and defined and implemented, we were to create a flexibility buffer or cushion to prevent any major impact for the company. The next question is from Gabriel Francisco. Good morning. Congratulations on the excellent results. The average tariff per cubic meter increased much more higher than the authorized by Arcespi in 2023.

Operator

Could you just tell what was the contribution of the mix effect in the category of customers for that? Has there been any change or update in the commercial discounts that contributed to this high? Well, actually, as Andre mentioned, the commercial program has been built and is under appreciation of CSP. The increases made by the company were authorized by ARSESP. So looking at May 2023, it was 9.56% allowed, partly special review and ordinary review.

Operator

What happened was a change in the mix. We went back to the mix we had before the pandemic at full economic capacity and operation, which increases our average tariff. What was applied by the company was what our CSP allowed us. It's a natural movement of the market to reestablish consumption. Maybe I can help explain.

Operator

Part of the year was impacted by the adjustment of 2023. From January to May, the effect year on year, so January 2023 compared to January 2022, the effect is 12.8% adjustment. So the average tariff adjustment at 5 months at 12.8% and 7 months at 9.6% is close to 11.1%. So there is a composition that helps to explain that along with the increase in volume and migration of the volume to levels that have a higher tariff. The next question comes from Hugo Gomez.

Operator

Good morning. Congratulations on the results. Regarding the provision for lawsuits that has a significant reduction, should we expect a recurrency in this behavior? Or does the company still expect volatility in this line or even increase in next quarters? Thank you for your question.

Operator

Actually, this is a continuous work that the legal team of SABESP is doing, looking at current lawsuits and reassessing the probability or of less probability of winning the lawsuits that's reviewed every quarter, remembering that we had a process with KPMG with the state government looking at all the contingencies of the company, and we continue to do this. So there was an important reversal. We won't disclose what lawsuit it relates to, but we try to be very specific in to determine the likelihood of success in the lawsuits. We cannot affirm whether there will be volatility or other cases like this. But right now, we are confident on the appraisal made by or the assessment made by the legal team of the company.

Operator

The next question comes from Jaul Pino. Could you provide us the bar chart of consumption? He's asking more information about volume. Maybe we could study how to provide more visibility in this for future events. As for Marcelo Sa question, he says regarding the execution of the contract by the municipality of Sao Paulo, There are 2 things that talk about voting in the chamber, the lower court with the 2nd or the lower the city hall happening in May, June.

Operator

Do you think this approval could happen in the beginning of May? Andre, thank you for your question. We are keeping track of this process. The government team is leading this coordination. We provide the technical support and our view on this.

Operator

But the expectation is that the draft of the contract that will become effective after its execution will be signed before the tender offer is launched. So we need the approval of the City Hall or the legislative authority. So we're working on our schedule using this Q1 2024 as a window that goes until the end of May to beginning of August, so the first half of twenty twenty four. The timing is given by the political regulatory framework. And we're keeping track of that and helping as much as possible.

Operator

Now there are some anonymous questions and I'll ask them. The first one says about the costs in the quarter, could you say some more about the recurrence for 2024 in the reduction of cost of services, less maintenance and expenses with legal with lawsuits. In addition, could you say how much would from the general expenses in 2023 refers to lawsuits and other contingencies provisions. I think I have answered part of this question during my talk. When you look at services, we are also considering how we can organize ourselves as a company by making our networks more modern.

Operator

In this PPI we disclosed at the end of the year, we place for maintenance and modernization important CapEx amount and that has started in 2023. Whenever there was an opportunity to decrease recurring maintenance expenses and actually act on construction or updating the network we did. There is a decrease, but that doesn't mean we fail to give maintenance to our network. But it's a matter of how the company is looking at that and prioritizing because we're also updating the networks. As for expenses and contingencies, out of the total expenses in the year of general expenses amount around BRL450 million refer to contingencies.

Operator

Any other anything else? No, I think you've covered it. Gotcha. We have another question about CapEx. As for CapEx disclosed estimated for universalization, does that take into account the expansion of the coverage for rural and informal areas?

Operator

Does it consider all the regions being universalized in 2029 according to the new potential agreement. Well, this is was anonymous, but our earnings release is based on the investment plan disclosed in December. This plan was launched before the public consultation, but did not consider what was included in February in the public consultation. Everything that we included in the release is focused on the current contract terms we are subject to. For this new contract, the years of 2024 and 'twenty five are identical to the PPI.

Operator

So for as of 2026, the CapEx needed starts to increase. So instead of decreasing as our plan says, we would have an additional investment in CapEx until the end of the universalization curve by 2029. So going back to your question, what we have disclosed is the reference for our current situation. So for 2024 and 2025 is identical to the privatization and that does not include rural areas and informal consumers. So there is a census to be made by the state government to identify and the company has to go to those areas and offer the service.

Operator

If the population wants the service, then we'll make that service available to rural areas and other consumers. The next question was also anonymous. If you could identify yourselves, it's better easier to find and use it as a reference. Good morning. In the process of a follow on offer, will there be an opening of data room for a more in-depth analysis of the company?

Operator

Well, it's not typical from a public offering follow on to have a data room with additional information. The information that will be sent to those interested is what's included in the official documents of the company reference forms, financial statements. In our case, the 20 F form that's filed with the SEC and other information to come. Thank you, Andrea. The next question comes from Tomas Gonzalez.

Operator

Good morning. Thank you for answering my questions. In the Q4, estimated losses with doubtful credits were reduced by half. Could this be a reasonable portion for this line of cost in 2024? Thank you for your question, Thomas.

Operator

As I said, the effects both in the Q3 and Q4, there was a major effect regarding summertime or rather I'm sorry fatal this large recovery that recovery events. The first, there was a large recovery amount. The second, we made some adjustments to how we served our customers and try to increase. But I think we should look at the year view. We closed the year at 3%.

Operator

Of course, we will try to get better that, but we cannot state that we repeat the performance of the 4th quarter because there were debt recovery events that happened. We need time to implement all the structuring actions that are being built by this customer team. With Caio and the structuring of his team that's supporting all this work, these efforts have increased. So they need time to mature. Of course, it's good looking at the figure, you generate good expectations.

Operator

But to be conservative, I think we should look at the year not including the Q4 right now. We thank you. Oh, we have another question. I was going to say we have no further questions, but there is one more question from Taizirata. I would like to understand this discussion about D plus 1 of privatized SABESP.

Operator

What's the transition plan? Could you detail it? Thais, I was missing you. You didn't ask any question. This process of thinking of D plus 1 started to be structured since the end of last year.

Operator

The strategic planning unit of the company was assigned a mission to think about everything that could be structured from day 1 and things that could needed to be addressed with the new shareholders shareholding structure. So we used 100 day plan, 100 days and 1000 days. With 100 days, we can have a better plan. So there are 3 pillars. People, we need to design processes and review the benefit plan and packages to be able to attract new talents to work in the company as well as to maintain the good talents we have in the company.

Operator

So there is major work involving leadership, employees to understand how to design that to keep talents in the company. The second pillar is processes. That includes policies, training. For example, in procurement, we'll go from a state owned company in bidding process to a more free model and direct purchases. How can we train this team?

Operator

So they need manuals, training processes and policies that will allow separation of functions, of roles. And in this process, both of people and procurement, for example, we need to design this transition that's been mapped by people who have done this in other places and are working on this agenda along with our own team. Within processes, we need to update the IT, software, infrastructure and systems to support the company. We are implementing an updated version of SAP, rationalizing existing systems, concentrating everything in a single database. And there is a joint effort from privatization team with the IT team.

Operator

So this can happen well to the for the benefit of the company. And the 3rd pillar is the cultural aspect. How can we bring people that will have people new people with the beginning in their careers such as interns and trainees to use this best potential that the company has in an environment of more freedom. So this is a process that we're doing carefully to have everything designed for the day after to present this package for those who arrive in this privatization process and the new board and the new shareholders to implement and get this approved for implementation. One more question from Alberto Allegri, Jr.

Operator

Hello. I don't understand this window from the Q1 until August. The CEO wanted to say is the expectation of the invitation privatization invitation should be published until August. This is not an auction with an invitation to bid. It's a public offering.

Operator

The public offering has restriction periods. In order for us to be able to use the results of the Q1 that will be disclosed on May 9, we need authorization. We have an authorization to hold this public offering from the end of May until the beginning of August, because in August, we'll disclose the figures of the 2nd quarter. So the offer can be carried out, then there will be documents filed with the CVM and SEC in the United States. And there is no invitation to bid, okay?

Operator

It's a different process and they will happen in this window. Now we have finished the Q and A session. I turn the floor over to you for your final comments. I would like to thank the entire financial team represented by Miyagi, all the work that was made for us to deliver all these figures to you and all the effort. And I would like to thank my peers.

Operator

This is a group effort. What Andre is saying is how can we be better together, providing a diverse vision and a constructive mindset. So I would like to thank you all because the company's results are the results of everyone's work and you are all part of that. Thank you, Cachio. Thank you, Chiberio and the entire team of the company.

Operator

All everything we do is done by everyone. The effort of all the teams and implementation of this agenda made it possible to show those results for 2023. And all this is possible because our current governors strictly closely align with the idea of generating value, delivering good services. So our freedom to implement this change in the company comes from Governor Stasi's strategic view. And we thank him for this freedom, allowing us to manage the company, giving value to our employees and always being attentive to our true mission to bring sanitation to more people with quality.

Operator

I think the Board of the company, the Board of Directors, the Secretaries and the trust of the Governor and freedom allowed to us to be in the right route, providing good return for shareholders as well as for society. Thank you all. Thank you all and have a good evening.

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Earnings Conference Call
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q4 2023
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