Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP (SBS) 2013 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 2013.

The audio for this conference is being broadcast simultaneously through the Internet in the website www.sabesp.com.br. In that same address, you can also find the slideshow presentation available for download.

We inform that all participants will only be able to listen to the conference during the Company's presentation. After the Company's remarks are over, there will be a Q&A period. At that time, further instructions will be given. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements are being made under the safe harbors 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 Mr. Marcelo [Bianchi], Head of Accounting.

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

Good morning, everybody, and thank you for participating of this conference call, once more to discuss our results. We have today a five-slide presentation to discuss the main events of the period and after that, as mentioned, we will go to our question-and-answer session.

Let's move then to slide 3. I'll talk about the Company's billed water and sewage volume. That came up 2% on the first quarter over first quarter 2012. This increase in billed volume was due to the increase of 2.7% in water connections and 3.5% in sewage connections. This is in line with expected growth of approximately 2.5% in billed water volume and between 3% and 3.5% in billed sewage volume, the latter influenced by the Company's large investments in this segment.

The water loss ratio remained flat, closing the quarter at 25.5%, but we again -- we would like to remember that last year the Company signed a very [unprecedented] loan agreement with JICA, the Japanese official bank, totaling BRL710 million, to finance our corporate water loss reduction program. I believe we've mentioned this before. Just like to highlight that we are expecting that the initiatives of this first stage of the program should start to take effect in the beginning of the second half of 2013, this year, as we are in the final process of bidding and hiring the work services. After that, we definitely should keep track and expect reductions in our water loss ratio.

Let's move now to financial highlights, or slide 4. Here, we see that the net operating revenue was positively affected by the 2% upturn in total billed volume and the 5.15% tariff increase as of September 2012.

Cost and expenses fell by 2.4% in the period and if we exclude construction costs, the item costs and expenses climbed then a little bit more, 7.3%, which is a percentage of net revenue again -- sorry -- which as a percentage of net operating revenue excluding construction costs, this figure increased from 51.8% in first quarter of 2012 to 54.2% this last quarter.

Adjusted EBITDA increased by 3.7%, from BRL888 million in first quarter last year to BRL921 million this first quarter. The margin came to 34.8%, versus 34.5% in the same period of last year. Excluding construction costs and revenues, the adjusted EBITDA margin came to 42.4% in first quarter 2013, against 43.3% last year.

Net income then totaled BRL496.2 million, a 0.9% increase.

Let's go to slide 5. Here, we discuss the main variations in costs in relation to the same period of last year. Excluding construction costs, overall costs climbed 7.3% year over year, due to the increase of 45.5% in treatment supplies, 28.4% in general expenses, 14.6% in taxes, and 13.7% in payroll and benefits. We'd like to highlight the decline of 13.7% in services and 3.7% in electric power.

Now, let's comment on these. First, treatment supplies, as mentioned, increased 45.5%. That is a BRL20.3 million variation, due to higher consumption of aluminum polychloride, a product that ensures water quality when we are at maximum flow, which is where we are in this period of the year. Also, higher consumption of activated carbon. This is due to the weather and watershed conditions, which impacts the quality of the water we produce. Associated with the price also increase for these elements of 11.73%. Also, higher consumption of lime, again due to the higher treated volume, and also associated with a price increase of approximately 7%. And, for last, a higher consumption of iron chloride, in order to meet quality parameters in the treatment of the water, resulting again from the strong rain in the city of Cubatao. It provides a lot of water for the metro region of Santos.

Other reasons for the increased consumption in certain supplies included the start-up on new sewage pumping stations and higher chlorine consumption due to the increased [tibidity] and color of the Guarau treatment station. And, just so you know, the Guarau treatment station is responsible for water that we provide to a significant portion of the metro region of Sao Paulo. So, it has a very big impact.

As for general expenses, it increased BRL47.6 million, or 28.4%, due to the provision for lawsuits in the amount of BRL24.6 million, agreements for environmental compensation of BRL17.3 million, and the provision for payment to the municipal fund pursuant to the service agreement with the municipality of Sao Paulo.

Tax expenses increased BRL5.1 million, or 14.6%, especially in the municipality of Sao Paulo due to the 5.4% increase in -- it's called -- the EPTU, which is a urban land municipal tax, and also due to expenses related to layout and expansion of our Sao Paulo downtown business [unit], which is a very big unit.

Payroll and benefits, [our] big, big expense, increased by BRL55.5 million, or 13.7%, due to the 6.17% increase in wages as of May 2012, with an impact of approximately BRL33 million; the provision for vacation also, with a BRL4.3 million impact, again, due to the increases in wages and headcount in the period; overtime work pay, an increase of [BRL5] million; and a BRL9.3 million upturn in the provisions for the defined benefit plan due to changes in actuarial assumptions.

Service expenses declined BRL36.3 million, or 13.7%, due to the reversal of the provision for expenses following the end of the partnership with the Sao Paulo municipal government.

Electric power decreased BRL5.5 million, or 3.7%, from BRL150 million first quarter last year, to BRL144.8 million this quarter, mainly due to the average reduction of approximately 25.5% in the distribution system usage tariff of consumption units that are included in the free market, and that is a consequence of provisional Presidential Decree 579 and Law 12,783, which recently was enacted by the government.

But, again, as you can see, the impact is not as big as they announced. We have less an exposure to this benefit, unfortunately. But, on the flip side, some benefit -- we made a 3.7% reduction. But, the bad side is that this is mostly a non-recurring for the coming quarters.

Let's move to slide 6, and comment on the items that affected net income. In the first quarter of 2013, net operating revenues increased BRL67.3 million, or 2.6%, over the same period in 2012, mostly due to the 2% upturn in billed water and sewage volume associated with the 5.15% tariff increase as of September 2012.

Costs and expenses including construction costs increased by BRL44.4 million, or 2.4%, over the same period in 2012.

Net financial expenses and revenue including monetary and exchange rate variation had a BRL17.7 million negative impact on the variation between the periods. This variation was mostly due to, first, the lower appreciation of the real against the dollar of 1.4% in first quarter, versus 2.9% in first quarter last year, and the appreciation of the real against the yen of 10% this quarter, against 9% in first quarter last year. All this, leading to a BRL29.6 million increase in expenses.

And, again, the second point is the higher monetary variation on domestic loans and financing due to the increase in total debt, our total debt following the [17th] debenture issuance that occurred in February 2013, and also the 1.9% IPCA rate variation in this first quarter compared with a 1.2% variation in the same period last year. All this, increasing expenses also by BRL15.6 million.

These increases were mainly offset by the decline related to the interest on lawsuits, especially against suppliers and contractors, what reduced expenses by BRL25.3 million.

Finally, income tax and social contribution recorded a negative variation of BRL2.9 million, due to the higher operating results in the period.

Now, let's move to our last slide, on regulation. Here, we would like to discuss the recent developments of the process of implementation of SABESP's first tariff revision by ARSESP. Going back, on April 24, we held a conference call in which discussed these facts in greater detail. We will now quickly review the main items that were discussed in that occasion, for those who did not attend the event as well for those who did attend. Again, we'd like to revisit the issue.

We would like to take the opportunity to explain, again, that the proximity of this disclosure of the Resolutions 406 and 407 from ARSESP, both on March 22, conflicted with the disclosure of our fourth quarter numbers on March 21, being that the main reason for us to cancel our conference call on March 26 as, at the time, we felt not fully understanding of the resolutions, their impacts and application, and we thought that that would be the key element for the discussion and not the very good results that we came in first quarter. So, not to talk only about the fourth quarter results and not the relevant information that just came out, which we could not comment. Then, we cancelled that conference call.

But again, in fact, a couple of days before, in March 19, that is three days before the disclosure of the preliminary maximum average tariff, we requested a 10-day postponement to allow us, SABESP, to better qualify our positions regarding cutbacks in [OpEx]. But, again, our request was not granted.

As a result, on April 4, with Resolution 406 already disclosed, we filed an appeal along with ARSESP, with a request for reconsideration of said decision. That means that with the request for reconsideration, discussions still could progress between SABESP and ARSESP, all the way up to April 22, the reference date for the application of the new tariff. And, in our case, the discussion and our objective was to apply immediately as many of the issues in the request as possible. Otherwise, we would have to leave that open for over 120 days, which is what ARSESP has legally established time to respond for the appeal.

But, again, as you already know, ARSESP made no statement regarding our request, and the increase is maintained at the announced 2.3509%.

Having said that, I would like to remind you of the contents of Resolution 406 and 407 and, subsequently, Resolution 413 published on April 19. Resolution 406 approved the preliminary maximum average tariffs for the first four-year tariff cycle. The approved increase, as mentioned, was 2.3509% applied linearly to all SABESP's tariffs. The resolution also approved the pass-through of the regulatory fee, equivalent to [0.5%] of revenue from regulated municipalities -- and all these represent over 95% of our total revenue -- and also the new formula for the annual tariff adjustment.

The 2.35% increase came effective on April 22, while the regulation fee pass-through will be applied by SABESP as soon as we conclude the operating adjustments that are necessary to include it in the bills of the municipalities where it will be charged.

The new formula for the annual tariff adjustment replaces the previous one which had a Portion A of pass-through of non-manageable costs and Portion B of manageable costs, in which we applied the IPCA consumer price index. This formula, we have been utilizing ourselves since 2003 and regulators since 2008. That has been put aside. The new formula does not distinguish between manageable and non-manageable costs. That is, it passes through 100% of inflation measured by IPCA and deducts from this the productivity index and the quality factor. In the latter case, it can only be, important, applied as of the third year of the tariff cycle, to be very specific -- the quality factor element.

Before revisiting Resolution 407, let's go a little bit into the main issues of our request for reconsideration. First, on the CapEx side, the Company disagrees with the treatment given by the regulator to works in progress, as they are excluded from the regulatory asset base. We believe that ARSESP's decision contradicts the methodology already approved by it, as it now considers investments incorporated into the operation and not disbursement investments as previously determined.

On the OpEx side, our main disputes refer to the exclusion of expenses with the profit-sharing program and the payment of private pension in the [G Zero] Plan, where we found legal difficulties to sustain not paying and providing these benefits to employees and pension holders, and also expenses related to credit recovery and compensation of executive officers and members of the Board, which in our opinion are consistent with the common management practices of companies the size of SABESP.

Resolution 407, let's talk about that. And, remember, it authorizes SABESP to pass through the amounts related to municipal charges legally established in program or service agreements contracts to the bill for those services we provide to end users. This resolution refers to more specifically the pass-through to the tariffs of the funds that SABESP has been transferring to the municipal fund for environmental, sanitation, and infrastructure since June 2007. All this, pursuant to the service agreement signed with the Sao Paulo municipal government and the San Paulo State government.

Now, let's talk on Resolution 413. As we said, it was published on April 19 and suspended the effectiveness of Resolution 407 -- that is, the pass-through -- in such, postponing the authorization for the pass-through of the legal charges to the tariff to the moment of disclosure of the final results of the tariff revision which, according to ARSESP's schedule, is August 9. So, it's basically -- it suspends the application now and postpones application by August 9.

We believe this postponement was mainly, but not solely, caused by the request filed by the Sao Paulo State government which is requesting more time to carry out studies of public policies for minimizing the impact of the application of the pass-through in the Sao Paulo metro region, not only the city. So, [most that] the state government has filed request for postponement, but that is following normal procedures of regulatory agencies. Thereby, we understand that as he filed directly to ARSESP, he is validating the process as a whole. And, as you know, we [prize] first the process being implemented and validated and finally applied.

But still, regarding the Sao Paulo State motion, note that the federal supreme court has recently concluded the judgment of two lawsuits and granted authority in the metropolitan -- regarding the authority in the metropolitan region, and having decided on the shared control for sanitation between the state and the cities. That means now that the Sao Paulo State has clearly legal concession power over the metro region, thereby strengthening its position in the development and application of public policies in this area. So, that, we understand, supports a little, somewhat, the reasons why it requested that response, in our view.

Last, but not least, we would like to mention that on April 21, just recently, we filed along with [SABESP] a request for postponement of the tariff structure for 12 months. As you know, it was due for us to present to ARSESP to open discussions on the tariff structure. So, we filed a request for a 12-month postponement. The basic reasons for this request is the fact that we do not know today the exact final tariff increase over which the new structure would be applied and, in such, we are unable to clearly appraise the impacts over the demand of probable, relative price changes in the final structure. So, we believe it's better to have the discussions once we went through the tariff revision and away from all the discussions that are ongoing from now all the way to August 9.

So, that concludes the initial remarks. And, now, we will open for questions and answers.

Thank you. (Operator Instructions). Hasan Doza, Water Asset.

Good morning, Mario. How are you?

Fine, Hasan. How are you?

Good. Thank you. I just had a quick question on the last point you mentioned, which is this request for postponement, the 12-month postponement. Can you just explain that a little bit, as to what tariff you're referring to on this 12-month postponement, please?

Yes. To be very clear, Hasan, if you look at the tariff schedule, we had as part of the process also to review the tariff structure, that is, how we charge people in different categories and the costs for them according to their consumption. So, we had to present by April 30, submit our tariff structure proposal, and that would all go into the same discussions around the final average tariff.

So, what we asked for postponement is only, specifically and only, the tariff structure proposal -- sorry, the tariff structure discussion. So, all the rest is still undergoing. We have not filed any request for any other postponement, other than this additional matter that would have been put into the entire environment for discussions we're in right now.

Hopefully -- I hope this clarifies.

OK. Thank you.

(Operator Instructions). It appears to be no further questions. Now, I'll turn the conference back to SABESP for their final remarks.

Well, thank you, everybody. We will, still today, put it in our website -- but now, first in Portuguese, working hard on English -- our request that we have just announced, so you can be more specific and understanding of what we have made public right now.

Thank you, and talk to you in a quarter, or this afternoon as we have the Portuguese call and investor event here.

Goodbye.

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