Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP (SBS) 2013 Q3 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 third quarter of 2013. 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 slide show presentation available for download.

We inform you 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 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 Mr. Marcelo Miyagui, Head of Accounting.

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

Okay, thank you. Well, good morning, everybody. Thanks for joining us for this one more earnings conference call. We have a (inaudible) slide presentation to discuss the main events during the period. And as usual, we will later open for a question and answer session.

Lets's move, then, to slide -- for slides, slide 3, Billed Volume. This increase in Billed Volume in third quarter this year was due to the increase of 2.7% in water connections, and 3.4% in sewer connections, and to the increase of 1.9% in billed water volume, and 2.1% in billed sewage volume -- all this leading to a total increase of 2% in billed water and sewage volume in this quarter when compared to the same quarter last year.

The lower billed water and sewage volume increase is due in great part to higher rainfall and lower temperatures in the period. These variables, [they don't] have a direct and big impact on water consumption, and consequently, on sewage volumes. Just for you to have an idea, the average temperature was 18.5 Celsius in July last year, against [17%] (sic) July this year. So, for us, a cold period.

The water loss ratio continues to decrease, closing the quarter at 25%. It is also important here to mention that of the funds that we contracted with [SAICA] last year, totaling about BRL1.5 billion. Around BRL1 billion per [sponsored] execution of services and the management of water loss program, which are in the final phases of contracting. The other BRL500 million are related to the works itself, and should be undertaken and accomplished by 2015.

With this schedule, a relevant share of the water loss reduction initiatives will begin in the fourth quarter of this year, right now, as we go through the fourth quarter, and we expect the ratio to fall as of the beginning of 2014. But it's really important to bear in mind that the ratio will drop immediately, because it's a moving average of the last 12 months. Okay?

Well, moving to the slide 4, let's comment briefly on our financial results. Net operating revenue grew 2.3%, most positively affected by the 5.15% tariff increase as of September, 2013. Also, the tariff repositioning index of 2.435% applied in April this year, the 2% increase in total billed volume, which we just mentioned, and lower construction revenues in the period. Gross operating revenue, the one that disregards construction revenue and (inaudible) taxes, on the other hand, grew 5.8%.

The lower than expected gross and net operating revenue increase was mainly due to the conclusion of the implementation of the (inaudible) services in the municipalities that we provide services in the interior of the state of Sao Paulo in the second quarter of 2012.

This led to a reduction in the number of unbilled water supply days, and generated a lower revenue estimate in June 2012. This estimate reduction caused lower reversal in July 2012, what led to a substantial impact on the variations presented in the analyzed period. So it was an impact due to how we measure and how we project revenues, and then how we revert back in the next quarter.

Excluding these non-recurring events, net operating revenue would have grown around 4.6%, while gross operating revenue would have increased by 10%.

(inaudible), administrative and construction expenses fell by 2.4% in the period. However, if we exclude construction costs, which fell by almost 60%, costs and expenses edged up by a mere 0.8%. When we analyze costs and expenses as a percentage of net operating revenue, you notice that a reduction from 73.4% in third quarter last year to 70% in this quarter.

Adjusted EBITDA increased by 15.5% from BRL902 million to BRL1.042 billion this quarter. The EBITDA margin came to 37.6% versus 33.3% the same period in the previous year. If we exclude construction revenue costs, the adjusted EBITDA margin reached 46.4% this quarter, versus 42.4% third quarter 2012. Net income, as you can see, totaled BRL475 million, 31.3% above third quarter 2012.

On slide 5, let's discuss the main variations in cost in relation to the same period of the previous year. Costs and expenses, then, increased 0.8%, as mentioned, due to the upturn of 62.7% in treatment supply, 14.6% in payroll and benefits, and great part -- sorry. And 15.6% in depreciation and amortization, plus -- and also, 9% in services. So these are the ones we are going to highlight.

On the other hand, we'd also like to highlight the decline of 60.8% in credit write-offs, 36.1% in general expenses, and 8.1% in electric power.

Now, specifically, on treatment supply, an increase of 62.7%, or BRL24.5 million. This was mainly due to the higher consumption of chemicals associated with a lower quality of rough water and price adjustment, some of which of these prices were associated with the exchange rate variations against the real.

Payroll and benefits moved up, chiefly due to the 8% increase in wages since May, 2013. This also associated with the Company's new plan for jobs and salary, with an impact of approximately BRL27.8 million, and the BRL9.7 million increase in the provision for the defined benefit plan, in this case, due to changes in actuarial assumptions mainly related to the discount and interest rate.

Depreciation and amortization climbed BRL28.2 million, or 15.6%, due to the transfer of work in progress to operating intangible assets, leading to a net impact of BRL2.1 billion.

Services increased BRL23.5 million, or 9%, due the BRL12.5 million increase arising from the reversal of provisions for expenses in third quarter 2012 related to the conclusion of the first partnership agreement we had with the municipality of Sao Paulo. And also, BRL6.6 million increase in expenses for sewage network maintenance, due to the certification of (inaudible), maintenance in several regions operated by the Company.

Credit write-offs fell by BRL42 million, or 60.8% this quarter, essentially due to the need for additional provisions, totaling BRL41.2 million undertaking in third quarter last year.

General expenses fell BRL75.7 million, for the most part, due to additional provision for risk related to labor losses, totaling BRL27.9 million in third quarter last year, 2012, together with a reversal of provisions for risk related to environmental lawsuits, totaling about BRL20 million, and provisions for civil lawsuits totaling about BRL15 million this quarter.

Electric power decreased BRL11.7 million, or 8.1%, mainly associated to the average reduction of approximately 22.7% in the distribution system [given] utilization tariff as a consequence of provisional measure 579 of last year, late last year, and (inaudible) 12783 of this year.

Let's now review items that affected our net income on slide 6. In the third quarter of 2013, net operating revenue increased BRL61.4 million, or 2.3% over the same period in 2012, due to the 2% upturn in total build volume associated with the 5.15% tariff increase effective as of September 2012, and the tariff repositioning of 2.35% applied since April this year.

Cost and expenses, including construction costs, decreased by BRL48.1 million, or 2.4% over the same period in 2012. Net financial expenses and revenues, including monetary exchange rate variations, had a BRL10.6 million negative impact on the variation between the period. This was mostly due to four points here. The BRL63.6 million increase in expenses, with exchange rate variation on loans, and financing, primarily due to the lower capitalization of these expenses in the intangible assets in 2013, lower monetary exchange rate variations arising from higher provision from lawsuits in third quarter 2012, meaning today, BRL12 million decline.

Third item would be the BRL34.1 million reduction in financial expenses, predominantly due to the decline in interest rate paid, due to a debt swap -- more specifically, the 17th debenture issuance in February this year, in connection to the early settlement of the outstanding balance of the 11th debenture issuance, which had higher interest rates, and at the same time, reduced interest rates on the provision for lawsuits.

The BRL6.9 million increase in financial revenues and monetary variation on assets is another item. This was mainly due to the interest and update supply on installment agreements, and also, to income earned on financial investments.

Income tax and social contribution expenses increased close to BRL60 million, due to the increase in taxable income in this period.

Let's move on to slide 7. Here, we would like to comment on the financing for our investment plan.

In October this year, the Ministry of Cities disclosed the results of the selection process through which 18 of SABESP's projects benefit from FTTF's funds. This would be through the (inaudible) Economica Federale, the Social Bank, and FAT funds. Those were directed through the BNDES Bank. All this totaling close to BRL1 billion.

These are, as you probably know, the national funding sources with the most appropriate conditions for sanitation projects, in terms of interest and amortization profile. We're talking 12, 14, 15, 24 year terms here.

These funds are intended to sanitation projects in the Sao Paulo [natural] region, the Baixada Santista and Campinas natural region also. Of this amount, close to BRL800 million is for sewage projects, and BRL200 million for water projects. The disclosure of the selection of projects is an important part of the process that allows to access the funds. Next steps comes with the financial agents verifying and validating the technical aspects of the project, and assessing project and Company risks.

According to the schedules disclosed by the Ministry of Cities, this all should be finalized hopefully by June 2014.

The main focus of the projects that obtain financing for the water is to expand production and reservation capacity in the natural regions as such, to secure for a longer time our current levels of services, which is 100%. In sewage, the goal is to reach full election coverage and treatment largely in the Sao Paulo natural and Santos natural regions. This is our target by 2020.

Now, with these 18 projects, the sum of funding already secured, or in process of being secured, that were object to a selection conducted by the Ministry of Cities in 2012 and 2013 reached BRL3.4 billion. What is important, that this is ensuring greater liquidity and certainty in the execution of the Company's investment plan for the period until, in this case, 2017. In other words, we have very little investment financing -- great investment financing, reducing our liquidity risk for the period.

Let's move now to slide 8. Here, we will comment on a very important item for SABESP, the adjustment -- the tariff adjustment announced by ARSESP on November 1. As you all know, since October 23, ARSESP's Board has presented the minimum necessary quorum to deliberate on matters related to SABESP's tariff revision, and/or adjusts, which had been on hold since August 2013.

On November 2, ARSESP disclosed Resolution 435, authorizing its 3.1451% tariff adjustment, effective as of December 11, 2013. This adjustment initially considered inflations measured by the EPC, which in August 2012 and July 2013, plus 6.2707%. ARSESP deducted from this figure the X Factor for the period, which was 0.4297%, resulting in an increase of 5.8410%. ARSESP also estimated the revenue gains the Company had with the 2.3509% increase as of April 2013, leading, in this case, to an additional discount of 0.9249% in the index.

On the other hand, ARSESP also estimated SABESP's revenue losses related to the delay with the tariff adjustment to appreciate at 0.6538%, and added the estimated amount to the index.

The product of these changes and considerations resulted in an increase of, as mentioned, 3.1451%, to be applied as of December 11, and the details, you can see in this slide.

Let's now move to slide 9. With this -- in this case, we will talk about ARSESP Resolution 434, which defines SABESP's new tariff revisions schedule, for the cycle still between August 2012 and August 2016. March 10, 2014 was established as the date for the publication of the initial tariff maximum price, the P0, and the efficiency gains factor, the X Factor, for the tariff cycle.

ARSESP also established the future stages for the conclusion of the tariff revision according to this new schedule. First, SABESP will present the adjusted asset base by December 5 this year. In fact, regarding this stage of the regulatory agency's (inaudible) findings, SABESP has already filed a response to [9], and the remaining will be delivered certainly on time.

On January 10, 2014, ARSESP will disclose its proposal for the initial tariff maximum price and the X Factor, and at the same time, begin a public consultation period and call for a public hearing, which, in fact, should be occurring on February 5. And so, February 5, the public consultation period will be concluded, and the public hearing will be held.

Well, we will know ARSESP's opinion and over the asset base and all the methodology by the beginning of January, 2010. On March 10, as we mentioned, the final initial tariff maximum price and the X Factor results will be published, as well as the substantiated report on the contributions that were received during the public consultation period. And at the same time, ARSESP will provide the schedule for the definition and implementation of SABESP's new tariff structure. So, tariff structure discussions will not happen until we each get the new schedule as of March 10.

That concludes our initial remarks, and we would like to open now for questions and answers.

Thank you. (Operator instructions) It appears that we have no questions at this time. I would like to turn the conference back to you, SABESP, for their final remarks.

Okay, well, thank you, everybody, for participating and listening to the speech. And -- but we're always available in case you would like to cover some specific questions. Call us.

Thank you, and see us next quarter. Bye bye.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.