Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP (SBS) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to SABESP's conference call to discuss its results for the first quarter of 2012. The audio for this conference is being broadcast simultaneously through the Internet on the website www.sabesp.com.br. On that same address, you can also find the slideshow presentation available for download.

(Operator Instructions).

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of SABESP's management and on information currently available to the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of SABESP and could cause results to differ materially from those expressed in such forward-looking statements.

Today with us, we have Mr. Rui Affonso, Chief Financial Officer and Investor Relations Officer; Mr. Mario Arruda Sampaio, Head of Capital Market and Investor Relations; and Ms. Nara Maria Marcondes Franca, Head of Accounting.

I'll now turn the conference over to Mr. Arruda Sampaio. Sir, you may begin your conference.

Okay, thank you. Good morning, everybody. We're going to right now go through our first quarter 2012 earnings. We have a couple slides here to discuss the main events.

Let's jump to slide three. We will have the -- here we will discuss bill volume and water losses.

We have a positive performance in bill volume. Water and sewage volumes were 3% up from the same period in 2011, all this as an aggregate.

The increase in bill volume was due to the increase of 2.6% in water connections and 3.6% in sewage connections. This is in line with expected growth of approximately 2.5% in billed water volume and between 3% to 3.5% in billed sewage volume. The last, as you all know and have kept track of, influenced by the Company's very largest investment in sewage treatment, mostly in the metro region of Sao Paulo and the metro region of Santos.

The water loss ratio, as you can see, remained virtually stable in relation to fourth quarter 2011 with a small increase, actually an increase in water loss of 0.1 points percent, yet when we compare to first quarter on a quarter-to-quarter basis from last year, we see a reduction of 0.5% from 26.2 to 25.7, so it doesn't change the trend of reduction.

Let's move now to financial highlights. Let's -- that's slide four.

Net revenues was positively affected by the 6.83% tariff increase as of September 2013, and the 3% growth in billed volume, as mentioned in the previous slide. Staff and expenses increased by 0.4 in the period, yet, as a percentage of net revenue, costs and expenses moved from 81.4% in first quarter '11 to 72.7% in first quarter 2012.

EBITDA increased from BRL654.3 million in first quarter '11 to BRL880.2 million in first quarter 2012. The EBITDA margin came down -- came to, sorry, to 34.4%, above 28.5% in first quarter 2011 and this includes the construction costs and revenues.

EBIT moved by -- up by 64.6% from BRL426.2 million in first quarter 2011 to BRL701.7 million in first quarter 2012.

Net income increased 169% from BRL182 million to BRL491 million in first quarter 2012. This variation is, in great part, explained by some relevant, non-recurring events. In the first quarter of 2011, the two major ones were, first, the recognition of BRL157 million as an actuarial liability event, and the second, the adjustment of the terms of the amortization of assets, especially the intangible assets related to the service contract agreement with the municipality of Sao Paulo in the amount of BRL73 million.

So, in fact, the 2011 first quarter was highly impacted by non-recurring events. So, then if we exclude these two effects, the first quarter 2012 net income increase was yet still very good, 27.1% over first quarter 2011.

Let's now move on to slide five. On this we will discuss the main -- and highlight the main variations in costs and expenses in relation to the previous quarter.

In comparison with the first quarter 2011, there was a 0.4% upturn in costs and expenses, mostly due to the increase of 31.6% in general expenses, 27.7% in tax expenses, 12.2% in credit write-offs, 14.5% in services, and 22.8% in construction costs, and we also highlight the 27% decline in payroll and benefits.

In fact, payroll and benefits fell by BRL150.2 million, from BRL556 million to BRL406 million, and this, again, was mostly due to the BRL157 million first quarter non-recurring provision we mentioned previously related to the G0 actuarial liability pension plan.

Also contributing to the favorable variation, a 400 employee reduction in the work force in the period and this is related to the retirement plan that is associated to what we call the TAC, which is a conduct adjustment agreement between the Company and state prosecutors. This is actually almost concluding. We still have further dismissals under that contract, but this is pretty much concluding, moving up very close to conclusion of that reduction and retirement plan.

Moving to general expenses, that climbed BRL40.3 million or, as mentioned, 31.6% from BRL127 million to BRL167 million, due, in great part, to a BRL36 million increase in the provision for legal contingencies over first quarter 2011 and a BRL6 million increase related and explained by the higher revenue obtained providing services to the city.

In other words, the BRL6 million is an increase related to the 7.5% transfer of funds we do on a quarterly basis to the municipal infrastructure and environmental fund, in accordance to our contract to provide service for the metro region. And, in other words, we sold more to the city citizens and thus, that increases the base of the transfer.

Tax expenses moved up by BRL7.6 million or 27.7 [million] due to the municipal tax, mostly called the land tax. It's called in Portuguese in words IPTU and especially the land tax for the City of Sao Paulo.

Contraction costs went up due to higher levels of investments in the period.

Credit write-offs increased BRL5.7 million or 17.2% from BRL33.1 million to BRL38.8 million, mostly due to the higher provisioning for public entities.

Services increased BRL33.6 million or 14.5% from BRL231 million to BRL265 million. This is due to a couple points here. Service related to the intensification of water loss prevention initiatives, radio and TV advertising campaigns focused on social and environmental initiatives such as the sustainable planet and we call it Projeto Verao, which is summer projects.

The other point is the increase in the service payment related to the public and private partnership agreement of the Alto Tiete water production system. Since there was a startup, an increase in production capacity from 10 cubic meters per second, to 15 cubic meters per second.

And last, there is a fleet renewal program ongoing, where the Company is moving from owning the vehicles to leasing them. This should bring benefits to us as we do the math as lower cash requirements for fleet acquisition and lower costs of maintenance, fleet management, and vehicle-related taxes and expenses such as ownership taxes, licensing, et cetera.

Let's move now to the next slide. Let's talk about the items that affected net income.

Net operating revenue moved up by BRL283 million or 12.3% over the same period in 2011. That's mostly due to 3% upturn in billed volume, also a 6.83% tariff adjustment as of September 2011, and increased construction revenues following high investment in the period.

Cost and expenses varied BRL6.7 million or 0.4% and that is well below revenue growth.

Other operating revenue, that is, net of expenses, increased BRL4.5 million due to the recognition on an accrual basis of part of the funds that we received from the State of Sao Paulo government as we adhered to the alienation of exclusivity rights for deposits of SABESP employees payments for March to March 2007 with Nossa Caixa and Banco do Brasil. And this -- and also revenues obtained from contractual fines with suppliers.

Net financial revenue and expenses had a BRL95.7 million positive impact in net income variation between the periods. This was mainly due to the 9.05% appreciation of the real against the yen, as mentioned by one of the analysts, with a little help from Japan, then, in first quarter versus 4.3% appreciation in first quarter 2011, and a BRL37.9 million reduction with interest payments on domestic loans and financing due to the amortization of the 8th and 9th debenture issuance as of -- in June and October 2011.

And on the other side, all this was, in part, offset by higher financial expenses related to losses in the amount of BRL23.7 million.

Finally, income tax and social contribution impacted negatively by BRL67.4 million, and that is due mostly to the increase in the taxable base.

Let's now move to our last slide and let's talk about our long-term low-cost funding and how are we in the process further securing liquidity for the investment plan. As you know, the ministry of the city has been approving public long-term cost financing for several of SABESP investment project since the beginning of the year and the end of last year.

In February this year, the Company contracted 30 credit operations with the Caixa Economica Federal, that is, the social bank, totaling BRL134 million, which will be allocated to water supply and works and services, as well as studies and projects. The benefited regions is mostly the Baixada Santista, the Santos area, Campinas area, and metro regions of Sao Paulo.

In these cases we're talking about loans paying interest rates of 6% plus risk rate of 0.3% and administration fee of 1.4%, which is about 7.7% total, plus TR rate, which runs anywhere close to 1% a year. The grace period is up to about 4 years or 5, depending if it's water or sewage, and the total period for amortization is 20 years.

Moving to the next, we, in March, signed two contracts, financing contracts, totaling BRL181 million with BNDES, the development bank. This is mostly directed to the execution of sewage systems expansion in the metro regions of Sao Paulo and also to prepare the executive project for the next big water expansion in the metro region of Sao Paulo, we call here the Sao Lourenco water production system.

This loan -- these two loans, have a total term of 180 months, with grace periods of about 24 to 36 months and the interest rate is the BNDES TJLP long-term interest rate of 6%, plus a spread of 1.72%, which includes in there the administration and the risk. And, again, what is important, then, to highlight that these approvals and contracts further guarantee the funding availability and thus the liquidity for the Company's continued progressive and very important investment plan and the quest to improve service coverage and achieve full coverage by the end of this decade.

So, that concludes these initial remarks. We'd like to open for questions and answers as of now. Thank you very much.

We will now begin the question-and-answer session. (Operator Instructions). Our first question is from Michael Gaugler from Brean Murray, Carret.

Good morning, everyone.

Good morning, Michael.

Mario, you did a nice job outlining the debt profile and what your thinking is. One question that sort of raised in my mind was, you anticipate keeping the rate of domestic versus international the same, going forward, or does it change? I mean, right now, I think it's a little-- it's right around 70/30 domestic/international. Do you pull more of it back domestic now or does it go more international?

Well, Michael, the FX exposure, if we, let's say it all rest -- all the rest of the variables, dollar example, kept constant, we expect it to increase as we go through time and time being from now to the next 4 to 5 years. And the basic reason for that is that we will be taking more international long-term funding than we will be amortizing in the period. So the FX is anywhere close to 30% now, you can expect, all rest constant, an additional FX exposure in the future.

Now, I would like to comment on that is that we have, in the total debt and the debt profile, as you can see, two Eurobonds, which we pledged very much having them, but we can, in the long one, in the 2020 one, call it as of 2015. We have a call option on them.

So, at the same time, the 2016 bond is a $140 million bond that we have done before and we may do again any time soon or whenever a tender offer on them. In other words, we have a pretty much good liability, debt liability, position if we want to reduce and change that debt into local debt without hurting too much the debt profile.

In fact, if we continue to see very -- the improvement in the local interest rates, we see the liquidity continuing in Brazil as is, especially for our Company, I'm not saying we're going to do anything, but it becomes attractive to think about doing some liability management there and, potentially, seeing where the exposure can be reduced to accommodate this new and then we will have some options in terms of not further exposing the bottom line.

Okay?

Understood. And then I know we've got two more questions. I'm just wondering about water supply and how the levels are in the reservoirs right now?

Okay. I'm not -- let me ask Angela here. Angela, where is the water supply? I kind of -- we keep track here, Michael, and we're obviously moving into, right now, the dry period.

I don't have the specifics on where the reservoir levels are. I do know that we don't see major concerns. I mean, Angela is giving me here the levels we have at the Contareira and the Guarapiranga systems, which are the big shots around here. We're talking more than 70% of the water supply for the metro region and there's not even a yellow light there.

So, I think we did well replenishing and to help us, the weather is very cold, help us in terms of less water consumption, but not on the good side, lower revenue. Nothing is perfect. But the reservoir levels are find.

Good to hear. And then my last question, on the regulatory environment, just any new developments in terms of establishing the asset base for tariff-setting purposes or anything else new that you feel might be relevant with regard to ARESP and their process?

Okay. I'm going to put you on hold just to get one or two more specifics here to maybe qualify better the answer. So, please hold a second.

Sure.

Just one more second. Two more points here to share with you guys. Just one more second.

Sure.

Okay. Sorry, Michael and the rest of the audience here. Let me, then, jump in. I think, first, the good -- I think we have fairly good news from our perspective.

First is that everything is on track, there is absolutely, from the Company standpoint, from our perception, there is nothing that guides us not to for us an ARESP to deliver the schedule they have put out, the last schedule. So, I think that's good news. We are moving on the regulatory asset base estimation and, according to the timeline, we have to deliver that in August 30 and we will. I get the information we are doing well there.

Now, something did happen in terms of developments, as you all know, and, Michael, there was a public audience on the full methodology, methodology that the regulatory agency put out for public audience, I believe in early February. There was a public discussion. SABESP made several comments and I think that -- I was pretty much taking notes of, let's say, like the five which we think are the most relevance to share with everybody, one of them not so positive.

Originally, we have asked that the cycles, revision cycles, would be 5 years, which, again, would help take the revisions from a different year in terms of election year and it also, given that the revisions are very complex, especially because we have always to estimate the value of the asset base, that would give more time for that to happen.

That, unfortunately, was not accepted. It was kept at 4 years.

But something that is positive was accepted. We may request at any time an extraordinary revision. Originally, just as an example, they mentioned that extraordinary revisions would be possible at any time, as long as such items would reach such value.

Example -- exchange rate variation about 30%, then we would ask a revision, which is something not interesting. So, the fact -- the good news is we can ask revision at any time for any reason.

So, going back to your FX question, it basically -- if there is some immediate, quick variation in dollar that can potentially hurt and put the Company in a not-balanced form, we can go immediately and request for a discussion around a revision to compensate for that. So, that is mitigating, also, our FX exposure, from my perspective.

Also, the X factor to be applied during this first four-years will be not greater than 2% for the total period. So, it's pretty much operational efficiencies have to happen to 2%. Anything above that will be going to the bottom line.

Another point is that the strictness in terms of following the quality factor will only be applied after second year, so after -- years 3, 4. That gives us time to adequate our overall system to comply. And something that was left out of the formula was included, which is the allowance for doubtful accounts.

In summary, those are the key points that we highlight as to the current stage of the regulatory framework. Okay?

All right. Thank you. I'll let somebody ask a question.

Thanks, Michael.

(Operator Instructions). At this time, we do not appear to have any further questions. Oh, I'm sorry. Our next question comes from Marcio Prado with Santander.

Good morning, Mario. Good morning, everyone. This is Marcio Prado, Santander.

Mario, I just would like to ask you, with regards to the operating costs of SABESP a general view. We have seen the Company with costs pretty much under control over the last 12 to 18 months. I know there was some recurring that favored the operating cost comparison between the first Q 2012, to the first Q 2011, but, anyway, over the last 12 to 18 months we have seen the operating costs pretty much in control.

So, I would just like to hear from you if this controlled operating cost, if that has any major reason behind that, first to talk a little about layoff programs in the past, and how do you see operating costs for SABESP evolving from now onwards? Thank you.

Okay. Marcio, I'll start commenting, but if Rui or anybody else in the group here has anything to add or to -- they just look at me and I'll interrupt.

But I understand that the operating cost pattern that you just mentioned is actually the result of a work that was fairly big and that began in 2007 when we launched our investment plan. At the time, we -- if you recall, we said we will reduce and control energy cost, we will control, further control and reduce efficiencies in terms of water loss, which has significant impact in several aspects of our business, and we will reduce and fulfill -- not fulfill -- reduce total -- actually, not headcount, only, but total payroll amount.

And I think what we are is delivering. So, that's the point. We are delivering. So, if we go -- if we move forward and you ask me if we're going to have layoffs, we are adding a lot of capacity. We are adding a lot of assets to be managed. I think the Company is, obviously, looking at a well-balanced headcount and I would not say there will be layoffs as we move forward.

Maybe what we need to do is to make sure that we keep where we are and do the improvements that we can. That's one point.

The last point you said was about the future. Can you repeat it, because I pretty much didn't manage to take the note, Marcio? What was the last?

Well, basically, Mario, it's that given these costs under control, as you mentioned a product of the efforts you started implementing '10, how do you see this evolving into the future? I mean, additional cost-cutting measures, or should we expect costs now to increase more in line with inflation or a little bit higher than that? And, basically, how do you see this cost-control effort in the future, in the near future for SABESP, the next few years?

Okay. Let's put it this way and I'm looking at the head of regulation, so if I'm wrong, he's going to look at me mad, but the point is, if, as of the 30th of November, the rule for the methodology establishing the tariff and efficiency is that we need to improve efficiency on the OpEx by 2%, for sure we're going to work to reach less than -- more than -- a reduction of further than 2%.

If the question is if we have how to do that, I think there's always ways and the Company is always looking at ways to improve. One way is to further and continued improvements in the water loss program.

If you recall, we had the challenge put to ourselves and now we will be, in some form, committing with the regulator to take water loss reduction to, let's less, central economy levels, which is about 13%, 14% loss. All those movements, all that, will create more efficiency and will help us sustain the margins and the generations we're showing now.

I think we have not reached the valley, if your question is that. There is a lot of -- we can see a lot of duplicate functions in this Company. We are -- we have studies around that, which means that we potentially have gains in terms of reduction of functions.

There's a lot to do as we move forward and to -- but, again, the challenge, Marcio, is to keep the margins up where they are such that we keep the leverage going and the investments going. Okay?

Okay. Thank you, Mario.

(Operator Instructions).

Okay. Okay, everybody. Thank you very much for your time and availability. As you all know, there will be a Portuguese call further on today, so you are invited to join. We'll be back in August with the second quarter numbers and that's it. Thanks a lot. Any questions, call the IR area. 'Bye-bye.

The conference has concluded. You may now disconnect.