Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2024

There are 1 speakers on the call.

Operator

Hello. Good morning, everyone, and welcome to our earnings call for Q1 2024. I'm Luiz Roberto Tiberio. I'm Investor Relations Superintendent. I'll address Alceros here with us.

Operator

He's the CEO, Kata Pereira, the company's CFO and IR Director and Marcelo Miyagi, who is the Accounting Superintendent. I'll turn it over to Andre. But before that, I'd like to share some announcements and guidelines. There is simultaneous translation into English and this call is being broadcast. This presentation and the video will be available for download on the Investor Relations website.

Operator

You can send in your questions in writing using the platform's chat. The call will last 1.5 hours, and we'll have time for questions and answers from investors, analysts and journalists. Also, we'd like to mention that there might be forward looking statements in this reference in this call referring to our business outlook, operating and financial results estimates, and they're based on the management's expectations and beliefs and on available information today and do not constitute any investment recommendation. Forward looking statements do not guarantee performance. They involve uncertainties, assumptions and risks presented in disclosed documents filed by SABESPA.

Operator

Therefore, they depend on future events and they might or not come true. So investors need to take into account industry and other operating conditions that might affect future results and might lead to results that are substantially different than the ones presented here. Now I'd like to turn it over to Andre Sauciedo. Over to you, Andre. Thank you, Tiberio, and good morning, everyone.

Operator

So let's have a look at our performance of Q1 2024. We tried to follow the adjustment journey of the company and to conclude some steps of the restructuring that we started last year. There are some levels of accommodation for the new shared service center and the new IT strategy. Important to point out the performance of our engineering operations teams and regulatory team. With the support of everyone on the company in defining the contribution for the regulatory model for the privatization process.

Operator

So we had many debates and discussions. Management invested a lot of time to design a balanced model for privatization. Also a subsequent event after Q1 is that there was another tariff adjustment with actual gains for the company. Which is a result of a good communication with the regulatory agency. And there is technical support to our claims.

Operator

And we've been having very good communication with ISASP. And they understand our needs. And that's why that was reflected in the tariff adjustment that goes into effect today actually, enters into effect this adjustment. And even more important that, that the definition of a new regulatory model of a single contract In this quarter, we end a journey started in December 2022 of designing what the new model should be, the new regulatory model, a model that would be the foundation for other future processes. It's a challenging process because there is a regional perspective and natural resources sharing considerations.

Operator

But we work with the state government, with the environmental department of the state and other departments. The UFC team, our consultants consultants to the state government, our CESP also engaged in this process. Everybody trying to build together and work together so as to provide good services and also as to be able to attract private capital because investments are considerable and that would ensure predictability levels along this journey, which is a long journey. It would be a 36 year contract taking into account 2024 as year 1. We are very excited actually.

Operator

So it was really important what we've been doing last year, this year on putting together this contract. And now with the new regulatory framework, I think we're going to be able to capture more value in the company going forward. Also in the company, it should be pointing out our good market timing because of a very well thought out plan in the past. We concluded a very important funding process that will enable us to speed up this year nearly BRL 3,000,000,000 in the ventures, combining green financing and social agenda and the preservation of reservoirs, oceans and rivers with our blue certification. We are very happy.

Operator

We think we can replicate the certification structure for the coming debenture issuance With the certified bonds and very well defined commitments in resource allocation and investments that do have an impact and change lives of peoples and communities and reduce human impact on the environment. So we're really happy with this event in Q1. Also, as a subsequent event, which is very important as well, something that Katya worked on with her team, Bruno, which was to reduce the company's risk. One of the important delivers was that we approved our debt our hedging policy that was introduced in April with contracts that are a pilot project. So we understand how it works and its behavior over time.

Operator

So we are testing this model and this is going to be an ongoing policy of hedging against FX exposure because we are exposed in our pricing and revenue dynamics. In the 2022 earnings call, I mentioned that we are still speeding up the process of investments, bringing forward the new investment plan for after the privatization up until April, we launched 43 packages of linear networks to clean up the Teete River. And we renovated the most important sewage plants in Baruaries, Sao Miguel and also smaller sewage plants in Guarulhos and other sites. So that can we speed up the process of treating sewage. So these packages add up to more than R16 $1,000,000,000 because the constructions are going to be carried out in 'twenty four, 'twenty five, 'twenty six.

Operator

And we are very excited with engagement of suppliers. We are adjusting the packages and contracting conditions so as to be more competitive and to be working with the investment funds as well so that we can speed up mobilization of resources for construction companies. And finally, and maybe an important point today, we had concluded the public consultation process. We disclosed all the final materials in April. And the Ouray assembly is scheduled for the 20th of the month.

Operator

So this assembly will review the new concession contract and in the annexes and other items. Your URAI governance and how it's going to work. Also, the board is going to be elected and the executive board, just like an entity, approve the municipal sanitation plan. So on the 20th, we will hold the general assembly to change the bylaws that will enter into effect later. And today, the expectation that we have is that the offering will be made in June.

Operator

It might even be concluded in June itself. We should conclude the waivers in the coming days. Katya will give you more details about that if you want. And after the contract is approved at Urais company, the company would be able to sign the contract. So that's what I had for you.

Operator

So we've been working hard to improve the different elements of the company. It's important to point out, as I mentioned before, that there's going to be some volatility, especially in material and services cost and the resignation plan. This quarter was slightly below our expectations, but we are working hard to improve figures just like we did in the past. January February, There were some agreements that had been signed before and that had an impact on our performance. We are coming up with new ways of negotiating with consumers that we reduce the risk of contract breach through collection services and other means of payment that we reduce our risk.

Operator

So that's what I had for you. And later on, I'll be available for your questions. Thank you. Thank you, Andre. Now I'll turn it over to Katya.

Operator

Katya, over to you for the financial highlights. You were on mute, Katya. Can you hear me now? Yes. Good morning, everyone.

Operator

So welcome to this earnings call. We see that there's an increase in revenue, a 15.6 percent increase in revenue. This is growth because of the increase in tariff of 9.56% and the increase in 5.5 percent of volume, and there's also the effect of the tariff mix. Looking at the margin, I'll highlight there is that the adjusted margin without the effect the nonrecurring effect, which was the APS agreement, which was what Andre was mentioning, and this also was part of the explanatory note of the 2023 results and the agreement we had with the insurance. That's a nonrecurring event that, as you said, that we would have 2.59-1s.

Operator

EBITDA margin was 45,000,000 and then it grows to 49.6 percent. And net income, also that was a 31.9% growth. So not taking into account the non So not taking into account the nonrecurring events so that we can really assess the company's performance. And we see the KPIs as well in the slide looking at this quarter, but also at the journey the company is on. So we see the past 12 month average.

Operator

It's a rolling average that shows us the performance not only of the last quarter, but what's been happening in terms of revenue. Comparing 2023, the previous year, and Q1 2024, there was an increase and there is the volume effect and the tariff effect and the mix effect. Again, when we looking at the 12 month average allows us to account for seasonability. When we compare quarter over quarter, there's different behaviors because of seasonality. But without seasonality, we can see the clear trends in a graph like this.

Operator

The same applies to the EBITDA per cubic meter. Again, we see the trends over the past 12 months, and we see 2023 Q32 and Q1, 24, 240. So this is the upward trend we see today. And we in the company also, we also look at figures quarter over quarter to try to find improvement opportunities for the company. Having a look at our volumes, there was a 5% increase in water, 5.7% in sewage.

Operator

Our greatest volume is in residential consumers. This is where we see most growth, but there's also marginal growth in volume in the other consumer categories. But average is a 5.5% increase. In December 2023, there was similar growth rates and there's a mixed growth that has an impact on revenues which is slightly larger than we see today. So basically, that's because of the mix and because of the vacation period where there's consumer migration, the people travel from Sao Paulo City to other places.

Operator

And because of that, there's a lower average tariff. That's why it's important to look at the quarters taking into account this volume growth. But when we look at mix and average tariff, we see these differences because of seasonality. So this is an important point. This is the financial performance of the company.

Operator

Net income 1Q 2022 was 7.47 dollars That's a significant increase of $705,000,000 in revenue, which is a 15% growth in revenue. Construction results, again, this is a proxy. There's nearly no impact on results. Costs and expenses, we see the breakdown there because it's important to understand what is recurring or not recurring. So we see the APS effect, which is 162.

Operator

That was an important agreement for the company because last year, we had expenses of 45,000,000 dollars because of a deficit of health care insurance. And with this agreement, we will no longer have any future responsibilities. We will no longer have costs or expenses in the future related to retired employees and their dependents. So that's the driver for this agreement. So there is going to be a clear benefit for the company.

Operator

And there was another process that would also generate post employment benefit for employees. So this was a very important agreement for the company that will ensure us better future results visibility and no future impact. So that's why we entered into this agreement. Of the BRL 272,000,000 of costs and expenses, that's the important impact of depreciation, I'll give you more details later on, and events such as the bed payer allowance and service variation. So this is the expenses there other than APS.

Operator

Other expenses are not that is impactful. Financial expenses is 79,000,000. Quarter over quarter, there was a benefit last year of FX variation with the appreciation of the real. And this year, we are moving sideways. There was an impact of the U.

Operator

S. Dollar on Q1, which was offset by the yen. When we used Q1, the FX variation was closely no. But when comparing it to 2023, there was a loss, so to speak, because back there, we recognized the financial revenue from FX variation. In addition to that, there's also an increase in some debts last year.

Operator

We had almost 1.5 of new debts and that's the breakdown of national results of expensive income tax and consequence of that's the consequence of our results and net income, 8.23 without adjustments. APS is just highlighted there, but there was no adjustments in this net income figure. Some details here. As was expected, we've been delivering the PDI that was designed back there and approved and introduced starting in July 2023. 1360 people resigned by Q1.

Operator

And in June, the plan will be concluded with looking at the net of 4.8. Actually, that figure, when we look at that financially and using at the resignation plan alone, the defect would be much larger. In May, there was also an increase of 4.9 percent of union agreement and salary adjustment. So year over year or quarter over quarter, without the resignation plan, that figure would be 5% greater. So 4 0.8% shows the impact of the resignation plan PDI.

Operator

I know you're going to see in the second half of the year after the PDI has been concluded, we will have a greater capture. And in the 1 year horizon, that what we see is the 15% reduction. Of course, always comparing to the baseline, which was when the program was introduced because over time, there are salary adjustments every year. So that's also something that needs to be taken into account. General supply is also moving sideways.

Operator

We are working hard on general supplies and treatment supplies during the consumption and demand planning. And looking at that and the D plus 1 after privatization, so that's going to be more predictability, long term contract, so that there's going to be no seasonality impact. There was a positive impact of consumption and prices of some supplies. The reservoirs were full in Q1, so we could manage water treatment. So that's a benefit that was captured by the company.

Operator

And in services, there was a $60,000,000 increase. Part of that impact is from maintenance of systems and pipelines. So we see that effect on Q1. Electricity is aligned with what we presented last year for the same Q. Again, with the same strategies that were designed, looking at the free market and distributed generation, making progress with the solar panels.

Operator

So we've been working to have a supply of renewable energy and with managed costs. General expenses was a big impact. We have the breakdown there so that you have visibility of general expenses. You see what the municipal fund is. So there's that's a pass through to the tariff, and this is not managed by the company.

Operator

Significant increase because of the increase in revenue, but also because of new municipalities that are now receiving after Q1 last year. So the impact is larger than the revenue because of that. And in general expenses, what we see is the AAPS, which was the agreement we mentioned before and RMB68 million which is general expenses, which is updates of ongoing processes. And so even excluding APS, there's been this increase of ongoing processes. There's nothing new, nothing significant, just an update.

Operator

In depreciation and In depreciation and amortization, there is nearly EUR 120,000,000 increase because of the increase of immobilization last year. We ended the year with $6,300,000,000 of fixed assets, and that generates depreciation and amortization expenses. We see a small graph below showing the performance of fixed assets because this is what has an impact on depreciation. The PCLD, which is the bad payer allowance, there's a nearly $30,000,000 impact. In Q4 last year, we mentioned that there were 2 very good quarters, And that was an important nonrecurring event then that had an impact on our Q3 and Q4 results.

Operator

And also, structuring actions are underway with the customer team, working with new types of collection and also speeding up service termination or suspension. So this year, to give you an idea, basically we doubled that the number of service disconnections given our contracts negotiated with our global maintenance suppliers. So that's what we've been working on. In Q1, there was no fee run. We started late in March actually, but there was the effect of not having had that and events such as new agreements.

Operator

So we are working on that so as to introduce new payment methods that can help consumers and will also ensure our revenues. We are adjusting that and the customer team is working hard on that. And last year, we ended with 3% and now it's 3.4% of the bad payer allowance. And this year, in the short and mid run, we wanted to remain on a 3% level. Before we start using digital payments and different types of payments so that then we will be able to reduce the default level.

Operator

So there's this accommodation period. But again, 2023 is the starting point for this journey in 2024. And so this is the baseline we are adopting. Looking at our indebtedness, again, the indebtedness level or the net debt adjusted EBITDA 15.8 percent net debt with the effect of the funding this first Q. We are low leveraging rate.

Operator

This is going to be good for us so that we can comply with our investment levels. So this leveraging rate will enable us to, in the coming few years, to increase the indebtedness ratio, of course, respecting our covenants. So that means improve our capital structure and so that we can be able to make the investments that are required and that will be greater in 2029. So we ended with 167 The good margin and an EBITDA net debt adjusted EBITDA or adjusted EBITDA financial expenses also very good. We still see the 12% of debt in foreign currency.

Operator

And in next quarter, we're going to be 100% real linked debt back to our indicators and Brazilian real. So that's it for me. And I'll be available for your questions later on. Thank you, Katya. Also well, that's it in terms of our presentation.

Operator

Now we begin the Q and A session. You can send in your questions in writing only using the Q and A button and this platform. First, we will take questions from analysts and investors, and then we will take questions from journalists. With that said, we already have some questions. So let's begin.

Operator

Karolina Carneiro says, well, good morning, everyone. We have 2 questions. 1, in addition to the APS agreement, what other initiatives are underway in terms of personnel that will have an impact on the company's turnaround and should be highlighted. 2, on the new contracts with RUI, are there any variables such as asset base to be used in initial calculations and the OpEx? Because they have not been disclosed.

Operator

Do you know when these pieces of information will be disclosed? Good morning, Carol. We have different initiatives. There are initiatives of when we're still state owned. And then there's the resignation program and the utilization of management and CapEx and overall management of service agreements that many of them have been migrated to the CFC.

Operator

So these policies are in a way. So that's why we see a journey of reduction in the long run. There might be some noise quarter over quarter. Structurally, the unit cost in the several lines tend to do this. The AAPS agreement has a different reasoning, which is risk mitigation.

Operator

It's something that was a good opportunity for the company when it was presented. As Katja mentioned, we had an agreement with the healthcare insurance company. And SABESP was the guarantor of payment flows. And we had to make some payments to them because of actuarial imbalances that happened in 2022, and we wanted to solve that problem. And we started to charge from beneficiaries, and that's what led to this agreement.

Operator

So together, we combined 2 issues. 1 lawsuit that we didn't know what the outcome would be, but it could have been a significant impact on our balance sheet. And even if we are entitled to charge the beneficiaries, that was not beneficial for us. So we did the agreement to mitigate risk 1st and foremost. And this was very beneficial for the company.

Operator

As a state owned company, we don't have such leeway. But as we become a privatized company, there's going to be other opportunities for agreements that will mitigate risks and that will help us reduce current liabilities. As to the URAI contract, the asset base is being validated. According to our SaaS orientation, we hired independent consultants. It's probably going to be ready by the end of May.

Operator

And that and the OPECs, SABESP and the government know how important it is for you to set this figure as early as possible, and we are working on that. OpEx itself has a calculation formula starting in 2022 with a number of factors. That's an annex 8, I think. So there's there you find the formula. And later on, we can put you in touch with our regulatory team that can give you more details on this formula.

Operator

Thank you. Thank you, Andrea. Next question asked by Gabriel Francisco. Hello and thank you for answering my question. Can you explain if part of the increase in the service line is due to more outsourcing because you have fewer headcount?

Operator

Is there an impact of consultants and legal and financial advisors because of privatization process? Is the service expense level the same you can expect for the future if nothing else changes? Thank you, Gabriel, for your Actually, what you see there is a demand effect. It's not associated to outsource the services in operations. Depending on our needs in the future, we don't need to hire contractors.

Operator

But in Operations and Maintenance, we already have contractors. So that increase is not directly related to that. It's not related to the fact that they're lower headcount. We are still consolidating the service levels. We are centralizing some activities that were being carried out by the business units.

Operator

And in April, we concluded the centralization strategic procurement is something that is also being incorporated by procurement. So this is a number of initiatives underway. And we are migrating contracts, but they have different expiration dates. And as contracts expire, strategy that we adopted last year is that any new contract or contract renewal is for 12 months with the termination clause so that we could go through the privatization process, have the ability to talk and bilaterally negotiate our agreements. So we still see this level of expenses in the company.

Operator

We are working to reduce it. And in 2025, the expectations is that we're going to have the full benefit. So the company will have been privatized for a while, the contracts will have expired, and we will scale up what we are negotiating. So in the coming quarters, we expect to see similar levels. But as of the second half of the year, there will be some reductions.

Operator

But the benefit, the full benefit and the big incentive and opportunity of doing things differently is something that we will see after the company has been fully privatized. There are some important levers. The way we are structured today as a company gives us a much better view of what can be achieved. It's a long question. Did I answer it?

Operator

I think you covered everything. He also asked if there's an effect of hiring consultants or legal advisers. There's value that is supported by the government. Consultants that we hired have a contract that is mostly based on success fee. And nearly all of them follow the privatization law.

Operator

So there is the expense, but the government can reimburse us later on. So it's a state law Gabriel that defines how that should be carried out. Thank you. And there are 2 questions asked by Marcelo Sa. For a selection of board members per ticket.

Operator

This ensures that Strategic will appoint 3 board members, 3 board members from the states and 3 independent board members. In the bylaws, there is the possibility of adoption of multiple voices. If a relevant shareholder tries to enforce that, can it make this board composition unfeasible? And the second question is about the poison pill. And the bylaws says that would be the largest value between 200% of the capital increased price that happened in the past 36 months and 200% of the average price of the past 90 days after the tender offer announcement date.

Operator

It's not clear to me what happens if this poison pill limit is achieved in 4 years of the due. So only the 200% of the average price of the past 90 days would be taken into account? And Marcel, the bylaws, there would be 9 board members and the government would appoint no more than 3 board members. That's in the bylaws. That's the makeup today.

Operator

And also, there's a minimum number of independent board members. So that's the structure today. And if there's a strategic shareholder, it is likely that they will also appoint a Board member, even an independent Board member that would be possible as well. The multiple vote is a right of shareholders and that does not make the bylaws invalid. Of course, the changes in the dynamics because you wouldn't have a ticket, but you would have individual vote per board member.

Operator

So indeed, these are 2 different mechanisms, the multiple vote or the ticket vote. These are 2 possible mechanisms according to our bylaws. Poison pill, I don't understand your question. I'm reading it again. Basically, it's the largest of the 2 figures.

Operator

It's the largest of the 90 previous 90 days. Or the stock issuing price. So if there's no increase in capital, this metric is not taken into account. So only one of the items is valid. Thank you.

Operator

Next question, Vladimir. Actually, 2 questions by Vladimir. First one, good morning. The new municipalities who have had approved funds, why is there the new collection? Is this the privatization?

Operator

And the second, the PCOD value, which is the bad payer allowance, is substantially higher than that indicated in the non recoverable revenues of the new regulatory going? I'll answer the first one. Thank you, Vladimir, for your question. So the new contracts, the new municipal funds have been waiting for approval of our SAPS for many years. They had filed for that many years ago.

Operator

The largest municipalities already have their established funds and the smaller municipalities had not realized that there was this opportunity. They need a municipal law to be passed, and then after that, they have to file with our assessment. And our assessment approves that, and then we make payments after the approval by our assessment. And if there's any retroactive payments to be made, we make them according to what ARSESP decides. So for us, from the economic point of view, this is neutral because there's a full pass through to the tariff.

Operator

And the impact of the new municipalities is not relevant. And that's not to do with privatization. In the post privatization model, it is much more clear the type of discipline that we will guide the payments made into the municipal funds. The totality will be included in the tariff. And in Sao Paulo, we pay 7.5 percent of Sao Paulo Municipal Fund and only 4% is recognized in the tariff.

Operator

But after privatization, the totality of that is going to be included in the tariff. The same will happen to the other municipalities. You still need the municipal law to be passed And then they need to file that with our assessment, which needs to approve that. And in the next tariff cycle, there is a payment of or reimbursement of the payments made and the inclusion of future payments. And now the question about bad payer allowance.

Operator

When you look at the regulatory model says that you should take into account the past 60 months in terms of non recoverable revenues. And we are taking into account the average of bad payments before the pandemic. So the percentage is much lower than that we see in 2024. So eventually, there's going to be a convergence. Gustafsson don't think it's going to be 2024.

Operator

When you look at 60 months, basically, we're talking about 5 years. And irrecoverable is that what you cannot collect in the 5 year horizon. So this is a PCLD of 261,000,000 of irrecoverable according to the regulatory agency. They look at the tail. So having a 3.4 percent that payer allowance does not mean that we won't try to still collect.

Operator

So we still pursue collection of above $360,000,000 In accounting terms, we do the allowance. But commercially, we're still working to collect those amounts. So there are different concepts in the time line. It's 5 year horizon, 60 month, and the pet payer allowance is 260 day or 1 year horizon. Eventually, they will converge when we look at the 5 year average.

Operator

So in answer to your question, in the according to the new regulations, if I'm not mistaken, it's 1.9 as a target. So we will try to achieve that, but we are still working on that with our customer team. 165, not 1.9. So there's still some ways ahead before we know when we're gonna be able to get there. Thank you, Katya.

Operator

Next question asked by Liliana Yang. She says, thank you for this opportunity and congratulations on your delivery so far. Two questions. 1, what did Arcep not recognize in terms of SABES tariffs, referring the IRT of May 2024 or 6.4 percent? For example, the repass of the municipal fund of the sum policy, is it 4% or 7.5%?

Operator

2, what should be the offering format and when we will have more details about that? For instance, the price to be paid at the offering by minority investors is going to be the same paid by a strategic investor? Thank you. Thank you, Liana, for your questions. The 2 important points that were not addressed by the tariff adjustments and that are recognized in the new contract that have an impact on the revenue.

Operator

1st 6 demand contracts, so key accounts. 2023, there were had R720 1,000,000 discounts that were not recognized in the tariff. In the new contract, there is a BRL300,000,000 forecast to be recognized in the tariff. So we will be adjusting this volume of the BRL720,000,000 in our budget. This is a very important point.

Operator

This was not recognized in the tariff adjustment even if there was an item, therefore, which was not included in the new regulation. The second point that had an important impact is reforms and cancellations. We talked to the regulatory agency about that issue that we have the obligation of letting them know the build amounts. But in that period, in that time frame, we are not able to review all of the requests for review. And in the new contract, it's going to be 90 days.

Operator

And this addresses 90% of the problems we have with wrong measurements of revenue because the figure may be polluted by reforms and cancellation, which should account for 2% of the revenue in the 2022 values. And answer to your first question. The value of the tariff includes 4%. The 7.5% is the new regulatory framework. The second question is the privatization offering.

Operator

This is being led by the government. They've been having meetings with the privatization agency. So the government is analyzing that. We give them support whenever they request us to. Our advisers and consultants are also at their government service, but the figures have not been set yet.

Operator

And I think that this is going to be published as soon as possible, as soon as the model is established. Thank you, Andre. Next question asked by Luisa Candiotta. And she says, Good morning and thank you for taking your questions. Could you share more details about your vision regarding the final documents of a public consultation regarding the new regulatory framework.

Operator

What were the most important contributions made by the company and addressed points? We see that commercial programs will be included in the tariff with annual limit. That said, what should be the strategy to apply tariff discounts going forward? There are changes in revenue, so there's commercial agreements? There's going to be a budget for existing contracts.

Operator

The contract inventory is at BRL720,000,000 of discount. It's going to be adjusted to BRL300,000,000. This is going to take some time. There's a forecast. And then we're going to be working with the regulatory agents that the figure grows in the future, but then and it's to be something we build together with the agency.

Operator

So to look at the new commercial agreements and not be limited to BRL 200,000,000, but the context that with the new consumers, the unit cost will decrease for everyone. So this is an important point to be addressed. And in terms of cost, we had the recognition of PPR of the employees. This is an important point that is going to be recognized in expenses. And sharing efficiencies in the 1st cycle up until 2,030.

Operator

We capture 100 percent the company captures 100% of efficiencies generated and then 50% in the 2nd cycle, 75% and then 90%. And an interesting point of the municipal funds that can help us reduce the municipal fund allows to keep some pass throughs if there's any municipality that doesn't pay. So because it's an important mechanism for us. We'll be able to retain resources from municipal funds in case the municipalities don't pay their bills with us. That's a very important mechanism.

Operator

Next question asked by Gabriel Francisco. Can you give us more details on the cost basis for 2022 that is the basis for the OpEx calculation and the tariff review according to the new regulation. It seems to me that some costs such as the management bonus and losses are removed from the calculation base. Do you have any idea of the magnitude of the costs no longer taken into account? Actually, the basis was 2022 because that was a closed year that was audited already and then it was used for the analysis for the new contract.

Operator

2022 had not been closed yet, so the baseline is 2022 because the figures had been audited already. And as to while Andre answered that, that one of the achievements was the recognition of the bonus as something not to be discounted, but as we say here, and I can give you figures later on, it's €100,000,000 roughly €100,000,000 It's not that significant. An important point here, what is part of the new contract, is that it's going to be an obligation, which is the insurance, mandatory insurance. And this is an account that was the company, the insurance premium that because of the requirement that will be in terms of coverage, we will have that as a pass through into the tariffs. We are going to present the company's insurance program for RSASP.

Operator

And when that is approved, that's going to be passed on through to the tariff. So this is going to be an expense that is going to increase for the company because there's more coverage requirement insurance. But that is going to be introduced in the tariff as a non manageable expense. So that's helpful when we look at what is discounted today in the regulations is going to be in the contingencies lines And insurance is going to be helpful and we'll be able to treat that in a structured way, in a more comprehensive way. And there are some other initiatives that we adopted to reduce risk that are also going to be helpful for our contingency management.

Operator

Thank you. Thank you, Katya. Thank you, Andre. So that was the last question from investors and analysts. Again, if you want to ask questions, you can use the Q and A button.

Operator

And so this was the last question from analysts and investors. And now we can answer questions from journalists. Actually, there's an additional question here. Adela Souza asks, the initial tariff, B0, is going to be in the contract signed by Yura before privatization? Good morning.

Operator

The formula is there. The p0 tariff will depend on the conclusion of the 2023 asset base. So we wanted to announce that as soon as possible. But by 20th, I'm not sure that's going to be have been approved by our SESP. So probably this contract is going to be signed as is today.

Operator

Okay. Thank you. Okay. We can now answer the questions from journalists. Asks, what's not ready yet in terms of offering the offering model?

Operator

During the offering early in June, is it viable? Is it not just is it not too short a time? Thank you, Thijs, for your question. The regulatory model, I don't think it's going to be adjusted by the URAI meeting because we think it's been concluded already. So at URAI, we already have the new concept for the regulatory framework.

Operator

So that is set. As to the offering model, there are some points that are still open. The price, for instance, it's going to be different prices or not and some other details. So the government needs to set that. And then the process is that there's a meeting with the state privatization team and then they announced to the market what they decided.

Operator

So that doesn't need to be ready by the URAI meeting. It's a different logic. It's a construction of a new contract model that has an impact on the offering, but it's not part of what URAI needs to approve. And the June timeline, it is feasible today, yes. We can that window is from end of May until beginning of August.

Operator

So with the current figures, we can have an offering up until the beginning of August. In case we needed to change that schedule, we have this flexibility to adjust the schedule up until August. Thank you, Andre. Thijs has another question on your it's a follow-up on the P0 tariff. So if I understood you correctly, privatization would begin without the initial tariff.

Operator

Is that correct? No, that's not correct. The methodology of these 0 is not being established. So the variables are there except the 2023 base. And if the offering is done without that defined, that's just in the next tariff cycle.

Operator

It's not a problem. So whatever is not available today can be recognized later in the next tariff cycle. Thank you, Andrea. Next question, Alberto Alarigi Jr. Says, this apparent hurry for privatization with many non defined points, Don't you think that create legal risks that could compromise the process and its legitimacy?

Operator

Why is there such a hurry for such a complex process? That's an excellent question. I think it's the opposite. We've been making very well founded decisions since the beginning of last year when hired at UFC and defined at the Phase 0 and the foundations of why going forward with the process, the benefits that would be accrued, all of the details in Phase 1, a notification to municipalities, definition of the new regulatory framework. Everything is being done with great technical rigor.

Operator

And the final model, as I mentioned earlier today, is very innovative and has been adopted elsewhere. And I think this is what should be done not only here with this regional view and interdependencies and coexistence of assets and natural resources that serve to more than one municipality. There's the and then the 30 day time. And the offering follows the rules of the equity markets. And as new information is made available, we can change the offering schedule because we want people investors wanted to take part in the process to be comfortable.

Operator

As I mentioned before to and answer to Thais's question, we can have the offering up until early August. And this is a decision that we make together with other parties. So we decide when the best time for the offering would be. It's a robust regulatory model, which is very suitable to the sanitation challenges today. And all of the important variables are defined in the contract model.

Operator

So it's the opposite of what you say. Everything is being done very carefully with all of the technical consideration. And the state government is also doing its part and there's also the legislative processes in parallel. So we're doing things according to schedule. And this is something that is going to be a break through in Sao Paulo and in Brazil as a whole.

Operator

And we are confident that the process is being led the best way possible. Thank you, Andre. Thais has another question. If you don't have the offering by August, do you think it would be done still in 2024? Well, we today are working with the 1st Q window.

Operator

We don't have a plan B. In case there's anything that will make us rethink, well, then we will see what would be the best way to go about it. So yes, so these were the questions from the journalists. And I'll turn it over and to Katya for your final remarks. So I'd like to thank everyone in the company, the superintendents, the operating teams and everyone in the company.

Operator

This has been a very fruitful journey. We've been learning a lot. And it's a transformation journey for the company, for the consumers. And the company is being able to respond to changes in a very positive way. So what we've been doing in 2023, 2024 is the result of hard work, dedication.

Operator

I'm not going to name names because I don't want it to be unfair, but I'd like to thank everyone, the support teams, financial team, HR, engineering, operations, customer, regulatory, new business. So everyone will everyone's been working really hard in this process. Also, the company has had this unparalleled ability to mobilize whenever there's any event that put lives at risk. Last week, there was this atypical weather event in Rio Grande do Sul. And very quickly, 40 people in the company were engaged.

Operator

Engineers, technicians, people in maintenance and operations. And they traveled to Rio Grande do Sul. There are 14 crews working in Porto Alegre and municipalities, working with the state government in Rio Grande do Sul to help with the disasters there, sending also water. We sent many trucks of water to Rio Grande do Sul to help them reestablish the services there. Helping them reestablish the services but also helping supply hospitals and shelters with water with our trucks.

Operator

So, thank you to our heroes that traveled to Rio Grande do Sul from people from Sabespa and everyone who donated to help. I'd like to thank you all. I'd like to thank everyone in the company once again. Also, I want to thank everyone in my team. Everyone's been working very hard because of this privatization process, the turnaround process.

Operator

So thank you, everyone, in finances. I'd like to thank my colleagues, the managers and directors and their teams. We have been rethinking this company, rethinking processes, and this is a journey. And every day, there's more information, and we are always aiming for continuous improvement. There's a long way ahead, but I'm happy to see that we've been making progress working together so that we can deliver the best to society, which is to deliver sanitation, more affordability and better results for the company.

Operator

Thank you, everyone. Thank you. So with that, we end this earnings call. Thank you, everyone, and have a great day.

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Key Takeaways

  • The company has finalized a new 36-year regulatory model and single-contract framework with state agencies, laying the groundwork for privatization and predictable private capital inflows starting in 2024.
  • Following Q1, SABESP secured tariff adjustments through strong engagement with the regulator, delivering immediate gains and positioning it to capture greater value under the revamped framework.
  • It completed a BRL 3 billion green and social financing package—tied to blue certification—to accelerate environmental and social investments in reservoirs, rivers, and sewage treatment.
  • Risk-mitigation measures include an APS agreement to eliminate future post-employment benefit liabilities and the launch of a pilot FX hedging policy to manage foreign-currency exposure.
  • Financially, Q1 revenue rose 15.6% to BRL 1.705 billion driven by a 9.56% tariff hike and 5.5% volume growth, with an adjusted EBITDA margin of 49.6% and net income up 31.9% year-over-year.
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Earnings Conference Call
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q1 2024
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