Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP (SBS) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to SABESP's conference call to discuss its results for the second quarter of 2012. The audio for this conference is being broadcast simultaneously through the internet at the website www.sabesp.com.br.

At that same address, you can also find the slideshow presentation available for download.

We would to inform you that our participants would only be able to listen to the conference during the Company presentation after the Company remarks are over there will be a question and answer session at that time further instruction will be given. (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 Investor Relations and Ms Nara Maria Marcondes Franca, Head of Accounting.

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

Okay, good morning. Actually, good afternoon, everybody. Thank you for attending one more earnings conference call. We will run through a brief eight slide presentation to discuss the main events during the period, and after that, as usual, we will move on to the question and answer session when we will all be available for further clarification.

Let's start on slide three. We have the Company's built water and sewage volume, showing 1.4% above the same period in 2011. Let me start by commenting that in 2012 we concluded the implementation of what we call TACE -- T-A-C-E, TACE, it's an external commercial service technician. In fact, this is an in location electronic reading system. This was implemented throughout the Company already. These services allows greater billing speed and reduce water bill reception time.

The TACE began to be utilized in Sao Paulo city and the metro region of Sao Paulo a longer time ago. It was then extended to the municipalities in the interior region of Sao Paulo as of 2010. The intense implementation phase in the interior region occurred mostly in 2011 and as we implement, there's a change for the [mirroring] schedule, covering a higher number of consumption days, which led to a greater billing volume in that period, in that past period.

This event somewhat justifies the lower consumption reported in the second quarter of 2012 compared to the same period last year as the number of billed days was higher in the prior quarter, that is in the second quarter of 2011.

That's -- now looking quickly to the last ratio, you can see that we have maintained a somewhat in the 26% level. We understand that with the beginning of the contracting of works -- of finance by JICA, the Japan International Cooperation Agency scheduled for early 2013 we will have a more substantial decline for this indicator. In fact, this is when additional intense work will commence. but we should see that coming down -- stable and coming down throughout the year and the beginning -- throughout next year.

Let's move to slide four. Here we will comment on the financial results. Net revenue was positively affected by the 6.83% tariff increase as of September 2011 and the 1.4% growth in billed volume as we commented in the previous slide.

However, the 8% rise over the same quarter in 2011 was below our expectations, mostly due to the TACE implementation which we just again just commented. In fact, the conclusion of the implementation of the TACE in the interior region there was also a decline as we went through it, the implementation effect right now, there was a decline in the number of days that unbilled supply is estimated, what we call here the revenue estimate.

As a result, there was low -- less days to be counted, billing reflected sales growth and the tariff increased, but also impacted -- was impacted by the unbilled revenue estimates which also is part of the operating revenue which was lower than the estimates for previous periods. But please, note that this was a non recurring event for the upcoming quarters and it in fact had no cash impact or effect.

If we exclude the effects of this different on the revenue- of the revenue estimate of BRL90 million and that was the impact, gross operating revenue would have growth by 7.8%, net income would total BRL346.7 million and EBITDA margin would be 34.4%.

Looking at costs and expenses, as you can see, declined by 6.5% in the period. Costs and expenses as a percentage of net operating revenue slightly increased 74.3% in second quarter 2011 to 74.8% in second quarter 2012. If we exclude the revenue estimate adjustment we just mentioned above. Costs and expenses would have come down actually to 72.45% of net revenue.

The last line, let's talk is -- no, second to last is EBITDA increased from BRL775.5 million to BRL798.8.4] million in second quarter 2012. The EBITDA margin came to 32.3% versus 33.1 % in second quarter 2011 and again, this was due to the non recurring adjustments of the revenue estimate we have been mentioning recurrently.

As for the EBIT, it moved up by 3.7% from BRL599.3 million to BRL621.4 million in second quarter 2012.

Last on this slide, net income declined from BRL479.6 million to BRL292.8 million in second quarter 2012, due to the strong impact of the exchange rate variation. In fact, this non cash effect was due to the respective 10.9% and 14.6% depreciation of the dollar and the Yen against the real. Note that in the same period in 2011 the dollar and the Yen had depreciated by 4.2% and 1.12% respectively against the real.

On the other hand, if we exclude all the exchange rate variation on both quarter, net income would come to BRL430.6 million, that would be then an increase of above where we are today of 11.2%.

Let's go to slide five, here we will discussion the variations in costs in relation to the same period of the previous years in comparison to the second quarter of 2011, the increase as mentioned before was 6.5%. The main factors behind this expansion were the increase of 42.8% in treatment supplies, 24.9% in supplies, 8.6% in services and 7.6% in payroll and benefits. Let's look at them closely.

So, let's start with expenses with treatment supplies, which increase BRL15.4 million, as mentioned, 42.8% over the last quarter from BRL36 million total to BRL51.4 million. This was due to the BRL7.4 million upturn from higher activated carbon consumption due to weather and water source conditions and the proliferation of algae in the reservoirs that serve the Guarapiranga and Cantareira water production systems.

Another impact came from BRL3.3 million, due to the greater use of quick lime utilized in the sludge treatment, and this also element had a price increase of approximately 23.8%.

We'd also like to highlight the BRL2.9 million increase due to a couple reasons. First, the greater hydrogen peroxide consumption in the sewage pumping station in the -- by Baixada Santista Region, the southern coastline region as a result of the proliferation of algae and this together with the beginning of new operations in the Guaruja Region of pumping stations, all this added also by price adjustment of about 2.5% for this material.

So, in summary, we had water quality issues, increasing capacity issues, all this together with price above inflation increases.

Expenses with -- now the next point will be expenses with supply, which moved BRL8.6 million or 24.9% over the same period last year, totaling BRL34.6 million to BRL43.2 million. This was mostly due to water and sewage system preventive and corrective maintenance, which amounted to BRL2.2 million and the reincorporation to the stock room of surplus material that was not used in the maintenance of water and sewage connection and that works, totaling BRL3.6 million in the second quarter of 2011. In such, it is a reversal back to our inventory.

Excluding this reversal that's called reincorporation of this material to the stockroom inventory, the increases have been 13.1%, not 24.9%. In effect, its only 13.1%.

Other point is service. As we mentioned, it grew by 8.6%, a total increase of BRL20 million form BRL232.6 million from BRL252.6 million for the most part, due to BRL11.9 million upturn related to social and environmental initiatives performed under the partnership with the city of Sao Paulo government. The BRL6.4 million increase in the fleet renewal program undertaken through fleet rentals, we're renting now and this increases our service expenses, a BRL5.7 million rise with service payment to the public and private partnership agreement of the Alto Tiete Production System and this is due to the start up of the additional five cubic meters per second water capacity, which was the object of the expansion of the service.

The -- also BRL5 million were spent in addition to the regular in paving and pavement replacing services related to the water loss reduction program.

Last on this slide, but not least, payroll and benefits increased BRL31.5 million, or 7.6% from BRL412 million to BRL443 million due to salary increases of 8% as of May 2011 and 6.17% as of May of this year 2012, with an impact of approximately BRL21 million on the total payroll and also in addition to that, an BRL11.4 million rise -- increase in actuarial liabilities related to the [G zero] pension plan.

Let's now move to slide six. Let's go quickly through the items that affected our net income and talk about the main variations. Net operating revenue moved up by BRL135.2 million or 5.8% over the same period in 2011. This is due to the upturn in billed volume, tariff adjustments and increase in construction revenue. This last, following higher investments undertaken during the period. Costs and expenses grew BRL113 million or 6.5% as already discussed in the previous slides for the reasons, we have reviewed them in detail already.

Other operating revenue and expenses grew -- fell -- sorry, BRL29.8 million, mostly due to the BRL36.3 million agreement for the exclusivity rights for the salary deposit of SABESP employees from March 2007 to June 2011 along with Banco Nossa Caixa and later with Banco de Brazil.

Financial revenues and expenses, that is net financials as shown in the chart, have a BRL337 million negative effect on the net income in the period, this was in great part due to the exchange rate effect of BRL282 million in consequence of the appreciation of the dollar and the Yen against the real as already detailed in a previous slide.

Specifically, regarding financial expenses, there was a decline of BRL12.8 million in lawsuit financial expenses due to the lower need for provision and approximately BRL5.8 million in domestic loans and financing interest payments over 2011 due to the amortization of the eighth and the ninth debenture issuance in June and October last year.

So the base for charge was interest was smaller. As for financial revenues, the second quarter 2012 number came in at BRL37.7 million, below second quarter 2011. This is mostly due to the gradual reduction in the interest rates of financial investments and also lower cash and cash equivalents observed between the periods and during the periods.

Finally, income tax and social contribution recorded a positive variation of BRL197.7 million, justified mostly by the impact of the exchange rate variation during the period. And also the tax gain obtained by the interest on all capital or part of the interest on along capital that we booked after the dividend approval by the annual shareholder meeting. So we had -- we deferred it two times. So we captured the benefit this quarter.

Let's move now to the last -- sorry, the second to last slide, talk about debt. In July the Company contracted and signed 22 credit operations with Caixa Economic and Federal Geisha is our social bank. You know well, BNDES, the Development Bank, this is the Social Bank. The amount totaled BRL160 million, which will be allocated to water supply and sewage works and services in municipalities with populations of less than 50,000 people. The funds came from the FGTS, which is the sanitation and also the sanitation for all program and were obtained through a selection process undertaking by the ministry of cities.

The financial charges are basically interest rate of 6% per annum, a risk rate of 0.3% and management fee, administration fee of 1.4%, which means an all in 7.7%.

The -- it is -- there is an index, it's the TR rate. The TR rate has been running very low at around 0.5. this -- the financing has a 24 year term, being four years for amortization and 20 years for -- sorry four years of grace period and 20 years for amortization.

Let's go to the last slide, talk about tariff adjustments. We would again like to inform that on August 11th the Sao Paulo state sanitation and energy regulatory agency assessed -- authorized us a tariff adjustment of 5.15%, that is 0.05% below inflation in the period. This to be applied on a linear basis to all categories of water and sewage consumers as of September 11, 2012.

As you can see on the slide, this tariff adjustment is one of the lowest to be applied in Brazil sanitation company this year, which just holds the idea that greater than inflation increases are possible as you can see in other companies. We would like to remind you that tariff adjustment has been below inflation since 2008. This is due to the Company's successful initiative launch in 2007 to cut costs through corporate water loss and energy cost reduction program without the possibility of -- but on the flipside giving the formula without the possibility of incorporating these gains by the Company.

And again, because the formula does not provide for a productivity component. We expect that this, as you can see, this situation remained throughout the 2012 which this is, this increase. But we do expect that the new tariff's methodology to be implemented by the end of this year will allow the incorporation of productivity gains. In fact, according to the regulator, he has already set that the productivity gain for the period as a suggestion will be 2% for the entire four year period. We already know pretty much what's ahead of us.

Well, that concludes our initial remarks and we are open for questions right now.

Thank you. (Operator Instructions).

It appears that we have no questions at this time and I'll turn the conference back to SABESP for their final remarks.

Well, everybody, thank you for your time and if you don't have the question now, but if you have it later, feel free to call myself, Angela, the entire IR team. Thank you for your time and see you next quarter. Bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.