Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 1 speakers on the call.

Operator

I have some highlights here in this slide. Having society and customers as the center of everything, being supported by all of the different areas in an intelligent and efficient way and highly collaborative. The aestheticization process was very intense. Over 18 months, we were able to run the company efficiently, maintaining service levels and quality preserved by clients by our service. There were challenges along the way, drought periods, also rainy season that was very intense.

Operator

We also, over these 18 months, we completely changed the company's structure with a reduction in the number of business units that we now call operating units. All of the availability of water to our customers, collect and sewage and treatment of wastewater, everything that was not part of this context was transferred to other units that can. Decentralization and rationalization process, coordination was something that we identified early last year. We started designing the new structure in the Q1. We got to the Q2 with a very clear view on what we wanted to do, implementation and the communication with all of COP employees, everyone, managers, superintendents, explaining why we were doing what we were doing, why the company needed to get ready for this transition and anticipating what would happen.

Operator

And this was very valuable that we planned out carefully. We built trust and the perception that the change was a positive change for the company that would create value, would extend contracts and would merge everything into 1 single contract. So all of the different municipalities in 1 single instruments. And this is because we identified the regulatory gaps, we identified gaps within the company and that we tackled over the journey. We did our homework.

Operator

We adopt all of the changes that we wanted to adopt. So this is a process that I it was a fast process and with very little noise in the company and in society and we've been able to achieve many important things. A highlight before I turn it over or I turn to the next slide. One of the highlights here is that we were the only privatization process in which the company was able to maintain that with the guarantees of the government. Usually in a privatization process, the guarantee is locked.

Operator

But our discussions with creditors like the World Bank and the Japanese Investment Agency, which is Jaita, and the IBD helped us convince the government at different levels, and we were able to have legal support to keep the guarantees even after privatization with credit lines with very good costs and in good terms of payment for our activity. So this is just one example of how successful our silent work has been in the company articulating at different levels with investors, creditors, partners, suppliers and especially with the government and the privatization team. Over this journey, as well we have some examples here. The establishment of the shared service center, a new dividend policy aligned with the government view of having affordable fees aligned with investors. We did funding in a very good time, almost BRL3 1,000,000,000 certified with green brand for its sustainability.

Operator

Our brew certification for the use of water, we also have the B3 certification. We provoked B3 to start the program of having the certification. And we were the 1st company out of Europe to have this we were the 1st IPO of a company with that certification. And so we are the only company in water and sanitation and wastewater that is in the Brazilian it's listed in the Brazilian stock market. Our regulatory agenda was also very intense.

Operator

We've eliminated some problems of the past, some pending readjustments of in the 2024 tariff readjustment cycle, so much so that the 2 adjustments we have were above inflation. Because of those pending issues. Every quarter, we've been dealing with any regulatory issues, and we are confident that our plans will be fulfilled, especially after the start of the new contract. And all of this progress wouldn't have been possible without a complete reorganization of the company. We increased our capacity to run projects.

Operator

There are BRL 27,000,000,000 in contracting phase for investments to be made especially in 'twenty five, 'twenty six and 'twenty seven, so as to be able to achieve the metrics that are established in the contract. There's a robust program to clean up the Teete River, which is part of the investment plan, as part of our contract obligations, which have with important milestones in 2026, and we also plan energy management, which was one of the important points in our cost structure with self production, biogas production at the wastewater treatment plants, integral migration of our units into the market, the free market, free energy market. And in customers, we also have plans, I will not go in details, but we've made great progress since we established the Customer Care Office. So next, this is just a snapshot with a summary of this journey. We had EBITDA margin of 40% in late 2022.

Operator

In the first half of this year, we consolidated margins above 50% of EBITDA. We had the highest EBITDA in any quarter in our history, BRL 2,700,000,000 showing this continuous improvement, this obsession for efficiency, execution discipline, plan what needs to be done. And there are 2 metrics in the table that we like to highlight, which is a good way to compare the company with itself and peers, which is cost and cash generation per cubic meter. So the cost and cash generation by each cubic meter, It was EUR 252,000,000,000 the OpEx per cubic meter EUR 252,000,000 and it's now EUR235,000,000,000 the first half twenty twenty four. So a nominal decrease of 6.7 percent considering the cost performance, we will be able to reduce the nominal cost in the company, which reflects in EBITDA per cubic meter, which was 1.86, it's now 2.57.

Operator

We have historic and it's the highest ever when adjusted to inflation. So we are very happy with the performance and the company is still being run with great quality even after we've had the termination plan that was concluded in June this year, reducing the number of employees from more than 12,000 to close to 10,000 employees. So the company is being well managed, well run and a new ownership context, which now in addition to the state of Sao Paulo, there is also the Equatorial Group with 15% stake and signatory of investment agreement with the government and we are confident that the experience of this new shareholder and its successful history of company integration and turnarounds of state owned company is going to be very valuable for us to continue this process and become even more efficient and being able to optimize our results. And we worked hard in this preparation. We prepared the company for this transition and we are ready to interact with this new shareholder.

Operator

Since the end of last year, we established a group in the company that also was in touch with the government and mobilized us to think about what would be required for the D plus one plan the day after. So challenges that would be in terms of people, people retention and talent attraction and also what kind of incentives we could adopt so that individual performance would be recognized as people create value in the company. So we are working on that, and we will be presenting this to the new management, a new board as soon as this plan is ready, as soon as we are allowed to do that. In terms of processes, we are updating our ERP. The new SAP version is expected to be deployed early next year.

Operator

It's a very robust process, very comprehensive. Our SAP today is very customized. We are migrating to SAP, which is less customized, which makes us more effective in the use of SAP. And some other process another process that's important is the transition of our procurement system, which is very state led today, more bureaucratic. And we will be able to establish contracts now as a privately a private sector company, which is going to be much easier for us to do procurement without doing away with the discipline of being unbiased and looking only at the benefits of the company, trying to be more competitive in our RFPs.

Operator

We have a protocol that has been designed and validated by the Board that is monitoring the transition. And for the new projects, there is a transition from what was not concluded into now this new private procurement requirements. That's going to be processed in the coming months. And there's a process and way of establishing the relationship with the stakeholders. There's a number of relationships you have as a state owned company that is going to change with the new management.

Operator

That's ORAI is a new organization that we established a relationship with this organization that represents the government, there's municipalities, there's the regulatory agencies and a new contract to be implemented. We are doing that very carefully and we've been preparing for that since the beginning of the year and this process of execution of these adjustments will be continued with this overview of the Board and shareholders. And we begin the 100 day plan. As soon as we there's alignment with the new management, we're going to be implementing the 100 day plan. That includes a number of activities.

Operator

And of course, one of the highlights, the change in the procurement process and the implementation of all of the obligations that come with the new contract. These are some of highlights of what our journey has been like in the past months to achieve what we've achieved. And I'll turn it over to Caio, but I know that there's going to be some noise yet. There's adjustments and tasks that will be done. But I'll turn it over to Caio to tell us more about this journey.

Operator

Thank you, Andre, and good morning, everyone. Happy to be here with Sabes' team, Andre and Katya, these earnings calls. The customer office was established in August. It was planned and executed in the first half of last year, but the customer office itself was established in August last year. Part of the work there had been executed before, but mostly by Katya.

Operator

But now with this customer office, we've been able to be more focused to the customer office, strategically represents the strategic statement that we focus on customer. And in terms of processes, it means that we have centralized all of the commercial processes. We identify we realized that there was a lot of value to be captured from this process centralization. So in a way, yes, we are celebrating our first anniversary and we are happy that we've had very positive results. And so a very quick overview here of what we've done and what you can expect.

Operator

Collection is a game in which you need all of the stages to be well oiled up. That's what we call the collection rules. So we started with what's basic, improving our messaging and also adopting negative reporting and also a protest is when you have to work with corporations and corporate customers, so always trying to be more efficient. Also the focus on credit recovery is an obvious one that we started to attack. So, we did 3 fairs, so to speak, with more than €1,500,000 agreements executed that have been supporting credit recovery and with the impact on PCLD.

Operator

Also in addition to that, there's an initiative that is as or more effective than agreements when you do the math, which is an innovation that we have of the unified second copy. So person is there reading the meter for the customer. If there's a debit, they issue a second copy, merging all of the debits and generating a code line so that customers can pay that in one single payment. So we have very complex systems, but at the same time, there is some low hanging fruit that helps us and it's just changing in management approach. So you can make processes more efficient and have good payback.

Operator

Another agenda that was implemented and that's being effective is the negotiation with large debtors of the company municipalities, for instance, with larger debts. And over time, we did this effort trying to do something very well structured also from the point of view of establishment of guarantees to mitigate credit risk that is incumbent on you after this renegotiation because it almost always includes installment payments. Because of the centralized management, you can gain scale and have, for instance, a commercial intelligence unit, which is something that we introduced in this customer office. We are not very flexible. We were not very flexible in terms of procurement, but we've been able to or even hiring, but still we've been able to hire someone that's helping us find out where we can improve in terms of data usage and commercial management.

Operator

Another important step in this collection rule, which is required, the one, is cut management. It's inevitable. You need to have some level of service discontinuation to be able to control bad debt. And there was again a growth there. And the figure is not important for the cut itself, but it's an important step in the collection process.

Operator

And to conclude, I'd like to say that these achievements were there in a state owned environment in which we had so many restrictions. Now in this new world that opens up for us, we will be reviewing the collection model. The collection model was decentralized more than 20 contracts. And we are in a transition. It's more than 20 contracts in the different in the past business units that we are centralizing.

Operator

And this is the reason why Andre mentioned and Katya will stress that bad debt reduction is a journey where we expect some volatility because there's a change in process, there's changes in contract models. We are happy with the performance this quarter, but it's important to mention that this journey might see some volatility along the way. And based on business intelligence, we can clusterize collection rules and this helps us manage collection costs, which is an important driver we are looking at more carefully. So going beyond just collection and look at what you spend to try to collect, this is important important. Go on acceleration of credit recovery, negotiating with major debtors and using more tools for that.

Operator

The company, as a state led company, had some challenges in pricing. When you look at pricing, we need good pricing to be profitable and now we are going to be more flexible. And so because of that and because of specific financial instruments that can be used and also with the use of digital platforms and work with partners, we will be able to really have a better credit recovery strategy. Also, there is a mission around the expansion of payment methods. For instance, the use of credit cards, especially for installment plans that we offer to mitigate credit risk that we can negotiate.

Operator

So that's the strategy now to mitigate credit risk. And we think that credit cards can be an important lever for that. And to conclude, there's a number of other points on our and that there's for instance, Sabes with you program, which is our evolution of communication channel onto a nominee channel platform where we can have a point, an end to end view of customer journey and we can be more efficient in our customer care and more cost effective as well. There are important opportunities there relating customer care costs and the use of more digital channels. And a number of initiatives that we see there in IoT, iDometrics and fraud management, these are all value levers that little by little, this office will be adopting to better management and create value.

Operator

So thank you, and I'll be happy to take your questions later on. And I'll turn it back on to Andre. Thank you, Caio, and congratulations for your achievements. I'd like to share one of the highlights here, something we worked hard on, which is organizing CapEx and prioritize CapEx correctly and increase our ability to invest in new projects for contracting and execution. In 2023, R6.4 billion investment this year.

Operator

The plan is R8.1 billion dollars and next year R11.5 percent. This was announced last year. And our plan includes now the investment plan of the new contract of course. So the curve up to 2029 reflects the new URAI contract with all of the municipalities today in water and sewage for 20 5 to 26 are contracted, there's investments being made in improvements of BRL 1,000,000,000. That's the great part that you see in the 2024 bar.

Operator

We are contracting for 2025, 6, 7 and 8, the volume of investment of BRL 27,000,000,000. And this is a buildup of projects that were announced in the past 7, 8 months. So beginning in December until the end of this process is due as a state owned company. So we're making the most out of this transitions and migrating the bidding processes onto competitive procurement processes in the private process using RFPs, and this will accelerate contract establishments. So we expect that we'll end the contracting of these BRL26 1,000,000,000 that will support us in the goals for 2025, 2026, '27, 'twenty eight and 'twenty nine.

Operator

As you can see there, the gray bar over the years because our projects are multiyear projects. So in 2024, it's been was planned 2 years ago, 2025 was planned last year on year and so on and so forth. So once we conclude the contracting of these R27 billion, we will migrate to the orange bar, which is being modeled. We're going to be seeing how we can anticipate these investments in the coming months. So this is how we've been able to organize more clearly our investment plan, and it's very important.

Operator

So it includes linear sewage and water pipelines to support vegetative growth and also new growth large wastewater treatment plants, the 3 big ones, but at Sao Miguel and Barofundo, there are 3 midsized ones, one in Guarulhos. And all of the projects in the countryside and the coast with expansion of our network and increase in our resilience and increase of water availability and the coast and connecting systems in Paria Grande, Sao Vicente, Praia Grande, etcetera, so that there's we can exchange water flow along the coast, so that our service can be more resilient irrespective of the season of the year. So last year, in the restructuring, we organized the engineering teams in 1 large unit and this is Yuting Fruit as of the second half of the year last year and this year. So it's a 27 year. Everything is being modeled based on marketing knowledge.

Operator

And from the bidding process, we are migrating to the RFP process, which is much more simple when compared to the state bidding process. So we are confident that in the near future, we will finalize contracting these investments and then we will be looking at the next cycles, 'twenty six, 'twenty seven, 'twenty eight. So that's it for me. Thank you. And later on, I'll be happy to answer your questions.

Operator

Thank you, Andrea. I'll turn it over to Katya now. She's going to be giving us the financial highlights. Good morning, everyone. I'm happy to be here with you once again with good news.

Operator

Consistent performance quarter over quarter. Revenue grew by 11.9%. This increase in revenue was driven by increased rates or tariffs. 9.6% was the tariff in May 23 and then the effect of the 6.4 4% rate of 2024. So the average there, there's 8.4% increase when comparing Q222 to 2024, so 8.4% regarding increased rates.

Operator

There's also positive volume impact. There is increased volume both in water and sewage that also drives growth in Q2 and the Q2 was dry, very hot considering it was winter. So when we look at our volumes for the second quarter of 'twenty four, it's aligned with the first half of the year. So volumes were maintained, which is atypical for this period. And when looking at demand, we see that it grew in the higher than 10 cubic meters ranges, which has important impact on revenues, which also drives EBITDA.

Operator

So what we see there in EBITDA is a combination of volume growth and rate increase and at the same time all of the hard work we've been doing to become more efficient in cost management. As Andrea mentioned, this is the highest EBITDA of a quarter in the history of the company. So comparing to 2023, it's a 35.5 percent increase in EBITDA. There's an adjustment there so as to make sure that the figures are comparable. So we eliminated non recurring effects in the Q2 2023.

Operator

There was the provisioning total provisioning of PDI at that time, nearly BRL 5 30,000,000. So we adjusted for that so that we can compare figures. And still with that even with that adjustment, there's 35.5 percent increase. And net income, we did the same adjustment there. And there's a 5% decrease.

Operator

Basically, the income effect there is because of financial effects. There was support in 2023 in the Q2 because of the appreciation of real before the U. S. Dollar. So there was a positive impact of FX of nearly BRL300 1,000,000.

Operator

And so that was the positive effect in 2023 and 20 20 4. It's the opposite. The Brazilian currency is now weaker, starting in April. It lost value and the hedging strategy that we had was such that offset part of the FX impact and we did the operations mid April, which is when we had all of the derivative contracts approved and signed and the approval of moving forward with the execution. So we offset part of the FX impact with hedging operations and today the BRL 530,000,000 that we have in that USD denominated are covered.

Operator

And you see some KPIs that we can compare the company with itself. And it's important that we use these KPIs to challenge our different groups. We see revenue per cubic meter, EBITDA per cubic meter and OpEx per cubic meter. So over time, we challenge ourselves to be more efficient and trying to grow EBITDA per cubic meter. It's an easy metric to understand.

Operator

Everyone understands what it is and we'll be seeing results. As Andrea mentioned, if you look at growth and there we see the average of the past 12 months and Q5 45 at the end of Q2 2024. And if you look at Q22 to 2023, we see nearly 10% increase and then we can see this gradual increase every quarter and the same also when we look at EBITDA. EBITDA is being increasing consistently with implementation of all of the strategy that we designed in 2023 has led to that. As I mentioned, that was a 3% increase in water volume and 3.3% increase in sewage volumes and 1% increase in new connections.

Operator

So growth driven by residential customers and demand migrating. So you see growth is driven in the above 10 cubic meter range, which is a higher average rate for us. So this is Q2 2023 bridging us on to where we are today. So BRL 600,000,000 growth in revenue for the reasons I just mentioned. Construction results are now zero costs and expenses.

Operator

The benefit of BRL607, we removed BRL5 30,000,000 because it was a nonrecurring event and we adjusted the EBITDA and we see the BRL 77,000,000 positive effect. And basically, the gains we had on the cost line were driven by the PDI result or the IDP and capturing the gains of people who left us. So there was a drop in personnel costs and there's also the positive impact of PCLD as Caio mentioned, that led us to a cost reduction in Q2. Other operating incomes, last year we had a penalty for contract non compliance and then when compared 2020, 2024, there is decrease, but this is something that was not recurring over this year, which is good. It means that our suppliers and operators are providing the services as contracted.

Operator

Financial results is what I mentioned before when you look at net is R4 48,000,000. Of those BRL 4 48,000,000, most of that is from FX impact. In 2023, we had the benefit, we had the positive impact of BRL 283,000,000 that helped us. So FX impacts were positive in 2023. Now in 2024, in the same period, there's 216 in FX variation.

Operator

So that's because of our debt. We hedged the operations and for FX variation, the hedge covered 50%. And why 50%? Because when we closed the operations, the U. S.

Operator

Dollar was becoming stronger. So we've been able to offset 50% of FX variation by the end of March of 2024 until the end of June. So 50% coverage given our contract term. It was very effective when we started the operation, so we've been able to offset FX variation just with the increase in interest rates because we switched foreign interest rates into Brazilians. Another impact is the increase of the EUR 2,900,000 that entered in March and last year also the second half of the year EUR 1,000,000,000 of the IFC.

Operator

So that increases our basis of our debt basis. And of course, that increases our financial expenses. And income tax and social contribution, there's a negative effect because of higher results and then that brings us to net income of BRL1.2 billion in the second quarter. More details, there's a 15.5% decrease in expenses comparing Q2 23 to Q2 2024. So we already see the results with the gains of the IDP when we look at the composition line.

Operator

There's a decrease of 8.4% in the second quarter. And with this, many people left in June. And so as of July this year, we will see full capture of this value that we had estimated. And the 15% basis that we mentioned of reduction is based on figures of May 2023. After that, in February this year, for instance, there was a 2% in the career plan and 2.7% of compensation adjustment in May.

Operator

So because of that, there's an increase in payroll expenses, but this strategy will lead us to 15% gains considering base date of May 2023. And this is going to be fully captured at the top June. General supplies, expenses are down. So we are managing inventory and materials very carefully. So overall supplies and treatment supplies.

Operator

Looking at what we have centralized designing strategies to decentralized warehouses and procurement and treatment supplies. We see the effect of a reduction of use and also price reductions. Prices are down for the most important inputs we use. And in addition to that, as of last year, our new plants are more flexible and can use different treatment supplies and that we can choose according to price and we can capture value in our procurement strategy and also in the consumption and use strategy. That was a RMB20 1,000,000 growth in services.

Operator

It's not much, but we are looking at that closely to see how we can integrate that with a full CSC integration and which is the shared services center. And there's many contracts that are still being integrated, taking into account the original end dates, and we see many opportunities to accelerate this process going forward. So there's a small growth, but that's managed and we are working hard on that line. Electricity moved sideways virtually. And according to our strategy, and Andrea mentioned as well, we are increasing our volume in the free market.

Operator

So 66% of what we buy is in free market and 34% we buy from the regulated market. So there's an increase of our use of free market energy and there's the benefit of lower prices. There's still some 30% of energy that we buy from the regulated market and then there was the price impact that we see in this quarter. And we see a breakdown of overall expenses there. And we see that the major impact in this group is contingencies or allowance for doubtful accounts.

Operator

We see that consistent that considerable decrease. And when you look at the municipal fund, we see the increase driven by the higher revenues. Depreciation and amortization is we see comparison BRL 7,000,000,000 that we added to the basis. And so consequently, there is a higher level of depreciation amortization. Looking at allowance of doubtful accounts, there is significant decrease when compared to Q4 last year, Q2 last year.

Operator

And then there were many agreements that Caio mentioned with a major account adding to BRL76 1,000,000. So looking at that, we're talking about looking at year to date, 2.9, which is less than 2023. But here we see in the graph below, the first or the second quarter of 2024, 481.2 percent of the revenue and the year to date 2.3 percent. If we look at if we don't consider that non recurring event, it's less than the 3% that we ended in 2023. As was mentioned, that might be some volatility because this initiative is structural and also we are working with some specific cases to recover our old liabilities.

Operator

Looking at tax expenses, basically they are moving sideways, no changes. Investments in the Q1 2024, we ended with 1.4 percent, and also the Q2, 1.3 percent, aligned with what happened in the first half of twenty twenty three with a strong recovery in the second half of twenty twenty four. So the team is working hard to deliver on the CapEx commitment this year. Looking at our debt now, our indebtedness level net debt adjusted EBITDA level is around 150, so 153, so there's room for leverage and the strategies that we have there as a decision that not working with primary is because there's room for leveraging, supporting our CapEx with that and of course with our own funding over the years of contracts. Adjusted EBITDA over financial expenses, we are doing very well, EUR 570,000,000 against EUR280,000,000.

Operator

So we're very comfortable according if you look at our covenant. Our indebtedness level is slightly higher. It was 15.8, now it's 16.6. This is net debt because of the 31st issuing in March. Net debt, you see there local currency and foreign currency, but foreign currency debt is fully hedged.

Operator

This is an important point. So the strategy of decreasing volatility and ensuring predictability of results and this was delivered this Q2. And that's it for Metiberio. Thank you, Katya. We can now begin the Q and A session.

Operator

We will start with the questions from by analysts and investors. And then questions from journalists. We've received some questions already. And there are some questions that are similar, I'll try to consolidate that. Guilherme Lima has 2 questions.

Operator

He says, we see a growth of average rate of 5.3% when compared to Q1 2024, which looks strong, even considered a 6.4 percent adjustment of May. Can you tell us what are the factors that explain this growth? Is it the mix makeup? Yes. Okay.

Operator

You can answer this question first. I think I answered that in my presentation when I spoke about the increase in average rate. There is the rate adjustment or the tariff adjustment when you compare 1st and second quarters this but that was a growth. The 2nd quarter was strong in demand and there was also the positioning that when we look at demand rates of those that use more than 10 cubic meters. So that's also increased the average rate automatically.

Operator

So basically, that's the answer to that's why we had this growth. And when comparing Q2 to Q1, we don't fully capture the 6.4% increase. The full rate was as of June, partial in May and that's combined with also the consumption range effect. This is one point. And also the increase in connections in the Q1.

Operator

So increased rates, application rates and consumption range. These are the reasons. 2nd question is, could you comment on how our SESP and you are looking at the merit of the topic of reforms and cancellations of 2024 adjustment? We saw that the regulatory agents established this inspection of values that could be rebalanced in the future? The potential correction would be for 2024 or the whole cycle.

Operator

In case it's for the whole cycle, what will be the total amount to be rebalanced? Thank you for your question, Guilherme. This is a historical demand before our SSP. We've been discussing with our SSP since the beginning of last cycle. And they recognize that this issue requires greater understanding, but there's no estimates in terms of value or when this study is going to be concluded.

Operator

This is good news that they are looking into our demands and we spoke about our contract and repurchase. The 2% of our revenues goes to reforms and cancellations. So we would use that figure as a basis, but we can't confirm that that's what they're going to do and we can't give you any estimates of what our CSP is going to be deciding. Thank you. Daniel Trovitsky has two questions as well.

Operator

The first question is similar to Marcelo Saas' question. So I'll read Daniel and Marcelo's question and Andrew can give them one single lesson. What do you expect in terms of the organization of the company as soon as Equatorial becomes a shareholder and reference operator? Do you know what's going to change in the short term in terms of team and what are the first initiatives for efficiency? And Marcelo asks, what are your interactions with Equatorial like for the time being?

Operator

Is there anyone from Equatorial already working at SABESP to learn more about the company and this transition? With the CADE approval, Can you already have that or do you need a board to be appointed before that happens? Well, Marcelo and Daniel, because of this pending CADE approval, we couldn't have interactions with anyone from Equatorial. We can't do jump the gun, as lawyers call it. Now that's been the approval and we are waiting for the guidance of our lawyers to see what kind of interactions we can have with Equatorial because it is a 15 day period in which people can challenge the authorization.

Operator

So we need to wait for that before the before CADE's decision becomes effective. So August 23 is when this period ends. I think it's a Friday. So on August 26, we formally conclude the process of approval by the antitrust agency. So it's a gray zone on what can be done right now and our lawyers are guiding us on what can be done in this period.

Operator

And as of August 26, we expect that there's going to be a general assembly to appoint to the new board members according to what's provided for in our bylaws. That's going to be a 9 seat board with representatives of different stakeholders, also independent board members And then the new board members will maybe appoint new executives. We have no visibility regarding that. What we've been hearing informally from Equatorial is that they're also looking into it and But no decisions have been made yet. And on our end, we are working on D plus 1, which is the day after, working, looking at people, structure, etcetera, and looking at market practices and what we could adopt here that could change.

Operator

Our structures today are typical of a state owned company And some of them can be adjusted, which is just natural. And in terms of people, we need to align. Well, how the company wants to be perceived as an employer, what kind of talents we wanted to attract, retain, and this is something that they're going to be able to review as soon as they can be on board of the transition process. Our Board has put together a transition committee that has been led by the Board, and we supply them with information. And they will be interacting with the Equatorial team as soon as that is authorized.

Operator

Thank you. Daniel's second question is about CapEx. Gustavo Ferde also has a question about CapEx in addition to a number of other analysts. I will read 2 of the questions about CapEx. So Daniel and Gustavo's questions that they ask about the different CapEx terms.

Operator

And Daniel's question is how do you plan closing the CapEx gap between the level you have today and the universalization goal that is defined in the new concession contracts? What are the challenges in solutions? And Gustavo of Latvia asks, how is it that SABESP expects to accelerate CapEx in the second half of twenty twenty four? The company reported SEK 2,700,000,000 CapEx in the first half of the year, but its goal is 8,100,000,000 by the end of 2024. What are the next steps for you to increase CapEx in the coming quarters?

Operator

And Vladimir speaks about universalization targets, especially in informal households. So it's a big question about CapEx that can answer all of them. Vladimir and Daniel, thank you for your question. There was an acceleration of projects taken to the market and some were contracted in the first half of the year. And there's a transition now of the RMB 27,000,000,000 that I mentioned so that they will be going through less lengthy contracting process.

Operator

So we are looking into that carefully. What's going on is just very typical. And we see that every year, there's a slowdown of CapEx in the beginning of the year. That happened last year, this year, and then CapEx speeds up in the second half of the year. That's what typically has been going on.

Operator

So there's no changes in our 8 bps target for investments this year. We are not changing our investment target and have all the levers in terms of relationship with service providers and new contracts that are to become effective in the second half of the year. And we will support our investment demand this year and in the coming years as well. In the future, it's important that this BRL 27,000,000,000 is going to focus greatly. So BRL 12,000,000,000 will be for the Tiete project, which is similar to the Pineros River project.

Operator

So the first phase of Tiete River will include a section of the Tiete River starting in the city Sao Paulo, but we'll include Guarulhos and other municipalities in this Telete project. So it's a major project for the Tiete River. We will be working in some low income neighborhoods or in some areas with many informal households, and we are using the lessons learned in the Pineros River project. I hope I've answered everyone's questions Yes, I think you did. But Arlindo has a question that I didn't mention before, but Arlindo asks us if we could draw a parallel with the capital structure of the company and the funding of future investments.

Operator

I don't know if I understand his question. So in other words, how are you going to fund the CapEx? I can answer that. So, yes, how are we going to support the investments in the next years? Well, there's going to be a mix of increased leverage.

Operator

As I showed you in my presentation, we have a very low leveraging level today. And the dividend design, the new dividend policy, there's a net debt EBITDA cap, which and we think we're going to be below this cap over the period, but there's going to be a mix of that the market with the portfolio can have access to local capital markets, foreign multilateral agencies, specific funding such as sanitation for everyone. So we're remodeling our funding portfolio so as to support the company's growth. And part of the results will be from the company's cash generation that we will be generating more cash with more connections and greater tariffs and the capital structure is going to be shaped based on that. Next question is Marcelo Gonsalves.

Operator

Can you give us more details on how on when you implemented the rate adjustment of negative 4% and how are you going to treat it from the accounting point of view? A part of it has already been implemented on 23rd, so 10% reduction for socially vulnerable customers and 1% reduction for some other customers. So this has been effective since July 23. The dividend for the 4.22, the impact is going to be in Q3. Miyagi is looking into how to account for that, but this is going to reflect our revenue.

Operator

So after Q3, we see this 4.22% will lead to an adjustment in our average rate and this is of course going to affect our revenue. And this resource is going to be calculated and measured and transferred to FAUSPI. That's why we're going to be doing the adjustment in Q3. In Q3, will include the 4.22 percent effect part on the account also because we will need to adjust the company's revenue and transferring to FAUSPI. New contract entered into effect on 23rd.

Operator

All of its terms are effective. There were no 30 day delays for anything. So all of the contract conditions are effective right now. Next question by Victor Cantarella. Can you tell us more about the water loss reduction program?

Operator

Are you going to quantify the loss reduction in your income and expense statement. I don't know if I understand the second part of your question, Ophir, but over the years, we've been investing and we will go on investing heavily in loss reduction. Historically, this figure is BRL 1,000,000,000 and there are 2 types of losses. There is the non invoiced water and there is different levers. Are of the water meters because some of them are obsolete and then they are very inaccurate.

Operator

So we are renewing our water meters And when you do that, you reduce your commercial losses. And our engineering operations team is expanding services to new areas. So as we we are going also to regularize the connections of people who already use our water but not paying for that. And there's the IoT strategy, our division intelligence and data strategy to identify fraud. This is also helping us to reduce commercial losses, which is what we call non invoiced or nonrevenue water.

Operator

And then there's the technical losses. So that's an ongoing effort of looking for leaks in our pipelines and engineering and operations teams work continuously on fixing those leaks, doing preventive or corrective maintenance. This is part of our regular plans. The effect of loss reduction is seen in 2 ways, increased volume and increased revenue, which may be offset in the annual adjustments as you increase more people in your portfolio. But there's no effect on the balance sheet.

Operator

And as you reduce losses, the delta, you have your treated water and you might have nonrevenue water. But then if you deal with that, you're going to have more aligned revenues when you look at what you treat. So there's no loss. Gabriel Francisco says congratulations on your performance. In your 100 day plan, are you considering discounts for large accounts so as to reduce the regulatory revenue gap?

Operator

That's a very good question. I'll ask Caio to help me answer this, but the idea is the new contract, there's a budget for us to adjust to BRL 200,000,000 for the existing contracts. So this is how we're going to be adjusting our discount stock considering the contract. And there's an opportunity with the new contract of coming up with new lines, new concepts for new customers. And Caio can give you more details.

Operator

Just like default, this is another very important areas of focus for us. We wanted to completely close this gap and a new contract established the rules of the game as Andrea was mentioned. It establishes looking at the current contract stock, it defines which ones are the ones that can have discounts and there is a cap of BRL200 1,000,000. So we started working on that already looking at contracts that are not eligible in terms of minimum volume, etcetera. So we already started adjustments or and as to the BRL200 1,000,000, I think it's important that we work on that and we are looking into methodologies, showing that it's important to maintain those contracts because that's where the company sees a churn risk.

Operator

So customers who have the possibility of having access to alternative resources that goes to water and in some specific cases also sewage. So much so that our duty is to show that the maintenance of these contracts limited to this BRL300 1,000,000 cap discount count. It's important to keep customers with us and that supports affordable rates. This is the challenge, but the assumption is we are working on that so as to close the gap. And in the future, the contract enables us to develop a new methodology, and we are discussing this with ourselves.

Operator

We wanted to develop a smart mechanism to attract customers so that customers can come and help us increase sales and make our assets more profitable and thus you may have a more efficient rate management. But this is the future that we are working on. And of course, the assumption is that the company from the point of view of regulatory recognition, well, commercial is commercial efforts go hand in hand with regulatory efforts. What is no longer part of our strategy is that commercial is not aligned with regulatory. So this is what you can expect.

Operator

Considering the 100 days, we have basically up until March next year to conclude the package. We are going to be working on contract adjustments in the second half of the year, so that they fit into that budget and then we run 2025 and the reality is established by the contract. Thank you. Marcelo Sa has another question. In relation to growth, are you looking at participating in new auctions?

Operator

Are you looking at Piaui specifically? Or do you want are you waiting for Equatorial to come in and then you decide on new auctions? We are always looking at what's going on in the market. We always look at auctions, especially in Sao Paulo and so on. Engagement but for firm engagement, we need to wait for the new shareholders to come in.

Operator

Our priority is to deliver CapEx that is established in the privatization in the URAI. Anything that could have affect our CapEx execution is not even considered. So just so you know, we're always looking around and asking questions, but really engaging in team is something that will depend a lot on the new management that's coming, and we will align priorities with the new management. Yes, we're looking at that and because it's important that we look at what's going on and see what kind of value could be created in different circumstances, but a real engagement and effective participation in auctions is something that will depend on the new management coming in. Adela Souza asks, what's the operation the foreign exchange debt swap terms?

Operator

The first operation is up to December, up until December because when we decided on the strategy of doing a debt swap, there were uncertainties if we were going to be able to do the full waiver with the change in ownership and the foreign currency that are have the guarantee of the federal government. So we didn't know if we would have the approval, but we were very successful regarding the waiver. And then we had the expiration date in December, so that in case we had to negotiate a prepayment and settlement, we would be able to have some time for that and we wouldn't need to bring forward a future swap or derivative because that would be impacting MDM. So this was the strategy. And now in December, we are expected to renew our foreign debt foreign currency debt.

Operator

So it was a short term because of that and the debts are kept until their due date and we might continue with the strategy to reduce volatility. Thank you, Katya. Ogerio Model said according to the universalization goals, when we will be able to swim in the Tiete River? I wish I could give you an answer. The pollution of urban rivers is not only sewage.

Operator

There's a term called diffuse pollution. It's solid residues and rainwater that brings waste into the rivers. We are doing our part to connect as many residences as possible to our wastewater pipes so that no sewage is thrown into the river. But there's more than just that. Local and state governments need to do their part to prevent other types of pollution to be thrown into the river.

Operator

Of course, it would be great if we're able to swim in the river. That's the vision of the government. It's difficult to predict when that's going to happen, but it's a great aspiration. But there are some parts of the river when you can swim. You can swim in the river as it crosses the city of Sao Paulo.

Operator

We've answered all of the questions we've received so far, but we still have time for questions and answers. So you can use the chat or the Q and A to send in your questions in writing. I'll give participants another 30 seconds to see if there's any additional questions. So if there's no additional questions, I think we can move on to final remarks. Very well.

Operator

There's no additional questions. So, Andrea or Kaja, Caio, any final remarks? Thank you, Andrew, for this 18 month journey. It's been awesome. It's awesome.

Operator

Hard work, teamwork. I'd like to thank my peers for their patience. Thank you, everyone. I'd like to thank everyone in my team as well who were faced with major challenges in the past months, I mean to do their work and also the privatization work. Thank you.

Operator

I'm really grateful for the journey we've come this far. Thank you, everyone, for your time. We've taken very important steps that have led to the privatization. And speaking on behalf of the customer office, I think that this office has been seeing very interesting value levers that we are working on. So I'm very optimistic.

Operator

And thank you. I'd like to thank everyone in my team. Thank you. Thank you, Andre. I think the future is bright.

Operator

We concluded a very important phase overall. We see a change in the industry, but we have designed a new regulatory model with the government, also with participation investors and banks. And this is the model to be followed, everyone believes. We do want to offer sanitation to everyone. In the hybrid model that we created with good incentives, you ensure that.

Operator

Because asset base is remunerated wherever you are. So there's incentives for you to really offer sanitation to everyone. So we end one cycle. We all worked hard to get to where we are. So this was the last quarter of the company as a state owned company.

Operator

We are very happy to see what we've been done. Running a company this size is not easy and doing that at the same time as you restructured the company so deeply and significantly is something that in and of itself is an additional challenge, but that additional work front, which is the preparation of the environment for privatization, regulatory review, discussion with municipalities, investment plans, interaction with government, support to the so these were 3 work fronts that were very intense. And in that regard, I really recognize and thank everyone and employees, great warriors dealing with challenges in the state and outside of the state. Like to thank the investor community, journalists for putting up with us for all of the constructive interaction trying to find solutions together, identifying new companies, inefficiency gaps. We welcome your input and we appreciate them.

Operator

I'd like to also thank the team who's joined us for this journey. That's been actually very pleasurable and constructive. With all of the risks of implementing processes of a turnaround and privatization, we didn't know how much how long it would take and it was 1.5 years at record time, including destatization and restructuring. So thank you, everyone. We will go on increasing efficiencies in the future without the limitations of a state owned company.

Operator

Everyone is ready, engaged and working hard, and we're looking forward to our interaction with our new board and management and create more value and offer greater quality of life and dignity to the population in our service area. Looking at growth opportunities, we see many in the state of Sao Paulo. And as we mitigate our CapEx risk for universalization, we are going to be looking at opportunities in other states as well, in Brazil or even elsewhere. Once again, thank you very much. I'd like to thank the IR team for their partnership, financial, my peers and senior management, everyone in the company, every level, thank you very much.

Operator

You made a difference. So thank you and congratulations. It's been an honor. Thank you for letting me lead this process with so much patience and understanding.

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Earnings Conference Call
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Q2 2024
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