Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP (SBS) 2013 Q4 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 fourth quarter of 2013.

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

We inform you that all participants will be only 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 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 Markets and Investor Relations; and Mr. Marcelo Miyagi, head of Accounting. Now, I will turn the conference over to Mr. Arruda Sampaio. Sir, you may begin your conference.

Okay. Well, good afternoon, everybody. Thank you for attending one more earnings conference call.

We have today a 12-slide presentation and we would like to discuss the main events in the period, but we will focus most of the slides to comment and to discuss the water situation in the Sao Paulo Metro region. And obviously, after the presentation, we will be open for a question-and-answer session.

So let's start on slide three. We have the Company's billed water and sewage volume, which moved up by 2.8% in the period. This is an increase of 2.7% in water connection and 3.5% in sewage connection.

The high temperatures, especially in the fourth quarter of last year, had a direct impact on the increased consumption of water and consequently also on the sewage volume. This was in line with expected growth of approximately 2.5% -- in fact, a little bit over in billed water volume, and between 3% and 3.5% in billed sewage volume, obviously the latter influenced by the Company's continuous investment in expansion of the sewage sector.

Let's move to slide four. We will very briefly comment on our financial results. Net operating revenue grew 5.4%, positively affected by the upturn in billed volume and tariff increases. Costs in selling, administrative, and construction expenses increased by 4% in the period. As a percentage of net operating revenue, these costs and expenses decreased from 73.2% in 2012 to 72.3% in 2013.

Adjusted EBITDA increased by 11.1% from BRL3.6 billion in 2012 to BRL4 billion in 2013. The adjusted EBITDA margin came to 35.4% in 2013 versus 33.6% in 2012. Excluding construction revenues and costs, the adjusted EBITDA margin came to 44.6% in 2013 against 43% in 2012 as income totaled BRL1.92 billion, a slight 0.6% increase over 2012.

Now on slide five, we will again very quickly review the main variations in costs in relation to the same period in the previous year. Costs and expenses moved up by 4% over 2012. Excluding construction costs, costs and expenses climbed 6.2%, due mostly to the increase of 35.6% in treatment supplies, 10.8% in payroll and benefits, and 10.7% in taxes.

On the other hand, credit write-offs expenses fell by 45.9% in the period. You will find more details on our earnings release regarding our costs in reference there.

So next, slide six presents the main variations in the items that affected our net income, which totaled, again, BRL1.5 billion. Net operating revenues increased by 5.4%, or BRL578 million, over 2012. Costs and expenses grew by 4%, or BRL317.9 million, below revenue growth. Other operating expenses, net of revenues, fell by BRL35.4 million. Financial revenues and expenses had a negative impact of BRL187.5 million of net income in the period. Finally, income tax and social contributions increased, due to the higher taxable debt.

Let's move now to slide seven. On this slide and the next slide, in fact, we will briefly talk about the Sao Paulo Metro region water supply system, and more specifically the Cantareira system, which is experiencing a water scarcity.

But first, let's understand the Sao Paulo Metro region water supply system. This slide shows a map of the system and supply areas, as well as the system's capacity and average production in 2013. As you can see, the system is very extensive and complex, comprising many treatment stations and their respective reservoirs, some of them outside the Metro region of Sao Paulo, such as the Cantareira, more than 55,000 kilometers of water networks, 1,200 kilometers of large water mains, 187 distribution reservoirs, and over 6 million water meters.

On this slide, we would like to highlight, on one side, the importance of the Cantareira system with a total production capacity of 33 cubic meters per second, which alone supplies water to a population of 10 million in the Metro region of Sao Paulo, being 8.3 million in a direct basis and 1.7 million on an indirect basis, and also highlight the broad interconnectivity between the water systems, which allows the transfer and partial exportation of water from one system to the other. In fact, since the hydrological scarcity events of 2004, we have invested heavily in increasing system interconnectivity, precisely to cover part of the water supply in regions where another system is experiencing operational stress or water shortage.

As we will see later on, this feature has been today responsible for approximately 20% of the supply now occurring to part of the region normally supplied by the Cantareira system, reducing with this artifice the pressure on the Cantareira reservoir.

Let us now move on to the next slide. In fact, for the next three slides, we will show the level of the reservoirs that comprise the Sao Paulo Metro region water supply system, and specifically the Cantareira system, as well as information on recent rainfall and temperature conditions in the region, the two most important factors in determining the flow of water to reservoir and water consumption.

So on slide eight, we show historical data on all of the reservoirs that compose the system between 2003 and 2014. As you can see, reservoir levels did not recover during the rainy season in the Cantareira and Alto Tiete systems, as they usually did in previous years, highlighting that the Cantareira system has more -- was more affected. In fact -- but on the other side, all the other systems' reservoir levels recovered normally.

In the specific case of the Alto Tiete system, reservoir level recovery would have been even higher had not been exporting -- has not been this system, exactly, exporting water to serve part of the population covered by the Cantareira system, and this has been returning since we began the program in February, as we already mentioned.

On slide nine, we show the Cantareira system's monthly reservoir levels since 2003. As you can see, unlike in previous years, the reservoir level recovery which normally occurs in October and continues until March, the rainy season in the Sao Paulo Metro region, did not happen in this cycle.

On slide 10, you can see the rainfall in the Cantareira system reservoir from October to February was substantially lower than the period average, while the temperature in the Sao Paulo Metro region was higher than in the same period last year.

The rain shortage in the period had a direct impact on water inflow to the Cantareira system reservoirs. As you can see, in January, February, and March, the inflow was lower than the minimum recorded in the respective months since the system was built in 1973.

As for the high temperatures, it is worth remembering that such conditions increase water consumption and therefore affect all the systems that supply the Sao Paulo Metro region.

We would like to remind you that the Cantareira system reservoirs are located in the PCJ river basin, composed of the Piracicaba, Capivari and Jundiai rivers, whose water availability is also responsible for supplying several cities in the interior of Sao Paulo, including the city of Campinas and its metropolitan region.

The PCJ basin is responsible for supplying water to approximately 20 million people, including Sao Paulo Metro region population covered by the Cantareira system. Considering the water situation in the PCJ basin, the national water agency, the [en anna], and the state electricity and water department, [CACE], together, the public bodies responsible for granting water use in this state ordered a reduction in the minimum authorized water outflow for the reservoirs comprising the Cantareira system from 33 cubic meters per second to 27.9 cubic meters per second. So that immediately complied with measures in the areas covered directly by the Company and passed on the reduction in the same proportion to the municipalities in the Sao Paulo Metro region that are covered by the Cantareira system and receive this water from us on a wholesale basis.

Let's move to slide 11. Here, we highlight the Company's initiatives to deal with the low reservoir levels of the Cantareira system, and it is, in fact, on other water supply systems of the Sao Paulo Metro region. These are short-term measures and aimed to guarantee continuous water supply in the region until the beginning of the next rainy season, this October, and water availability, in fact, throughout 2015 cycle.

On February 3, the Company launched a bonus program for consumers served by the Cantareira system. The program consists of giving a 30% discount in the total bill, that includes water and sewage, for consumers who reduce their water consumption by 20% in relation to their average consumption in the last 12 months, that is from February 2013 to January 2014. This strategy of encouraging rational use of water and reducing consumption volume was successfully applied by the Company in the water scarcity period that we faced in 2004.

In terms of water volume, the goal of the bonus program, together with the transfer of water from the Alto Tiete and the Guarapiranga systems to the areas normally served by the Cantareira system, and other operational initiatives is to reduce the pressure on the Cantareira water reservoir.

So far, we have managed to reduce demand and, consequently, water production in the Cantareira system by 3 cubic meters per second, sufficient to meet the previously mentioned limit imposed by the two public agencies, [anna] and [CAEE]. The results obtained with the bonus programs are already noticeable. Today, we can say that 37% of the population served by the Cantareira system has met the reduction goal and received a 30% discount on their water and sewage bill.

Regarding the financial impact of the discounts and revenue decline, we believe it is still too soon to comment on and predict trends for the program's complete cycle that should last until December. What we know is that there will be an impact and that matters will be taken by management to minimize this impact on the Company's liquidity and financial balance. We will talk about this later on.

Another ongoing measure is implementation of equipment and infrastructure to capture the water available in the Cantareira system reservoir, which is currently below the reservoir's gravity outflow level, thus impeding its use. This water availability is being called technical reserve. So the initiative to capture the technical reserve will require investments in equipment and work of approximately BRL80 million and should be ready for use in June.

The volume of the water that we will be able to extract from the technical reserve is equivalent to approximately 20% of the current Cantareira system's storage capacity and should be sufficient to supply the populations served. By this system -- by the Cantareira system, until the beginning of the rainy season in October and November, this is a scenario that is already considering a very low, extreme low, rainfall. In fact, we are using the lowest observable historical theory, so it is a very conservative projection.

In addition to these measures, we announced today that the Company will extend a bonus program to all municipalities in the Sao Paulo Metro region directly served by SABESP. The expansion of the program to the other systems is necessary in order to extend the benefit of the bonus to those who do not belong to the Cantareira system, and it has been saving water, and also to regulate consumption in all the supply systems as they can serve part of the population served by another system, and it is the current case with the Alto Tiete/ Guarapiranga systems, providing water to the Cantareira system area.

Now let's move to our next slide, slide 12. On this slide, we would like to show everything that SABESP has done, is doing, and will continue to do in order to maintain regular and quality water supply. Specifically in this case, we are showing it is for the Sao Paulo Metro region. All this is a result of the Company's long-term plans, which is in compliance with and has the consent from all government bodies responsible for the long-term planning of water availability and supply in the region.

Between 1995 and 2013, SABESP invested BRL9.3 billion, resulting in an increase of 15 cubic meters per second in water availability, production capacity, transport, reservation, and distribution. This means water for an additional 5.5 million people. Just for comparison, the city of Salvador has 2.9 million people and the city of Fortaleza, 2.6 million people, which means that the increase was enough to serve these two cities joined together.

In numbers in this period, our investments have increased water source availability by 14.9 cubic meters per second, increased production capacity by 15.5 cubic meters per second from 57.6 cubic meters per second to 73.2 cubic meters per second, increased treated water reservoir volumes by 130,000 cubic meters, added another 175 kilometers of [main] and 11 kilometers -- 11,000 kilometers of distribution network, implemented approximately 1.8 million new water connections, reduced water losses and reduced water losses by more than 9%, whatever methodology to estimate water loss is adopted. So this is what we have done.

Regarding what we are doing to ensure supplying the next four years, we highlight three initiatives among several others, the first of which is the water loss reduction program. In this case, the Company has already made relevant progress, but continues working to further reduce losses. In this case specifically, investments will total BRL5.9 billion between 2009 and 2020.

On the other hand, it is worth noting that the loss reduction program has time and volume limitations in relation to increasing water availability to regions, which forces us to expand production in water -- to expand production and water [service]. This is what we are doing with the construction of a new water system, the St. Lawrence system, which will expand water production by 4.7 cubic meters per second. The project has already been contracted and is being implemented at this moment. And we will absorb investments of BRL2.2 billion and startup is scheduled by 2018.

SABESP's third initiative is the construction of an interconnection between the [zhaware] reservoir located in the [paraeba desue] river basin, which has excess water, and the [acibaenia] reservoir in the PCJ basin, which belongs to the Cantareira system. With this interconnection, it will be possible to send water from one system to the other in order to improve both systems' balance and water availability.

This interconnection was already included in the water resource steering plan of the Sao Paulo macro metropolis, developed by the state water secretary, with implementation by 2020. This is a more extreme climate variation observed recently, and in order to further secure water supply for the 20 million inhabitants that use the PCJ river basin, the Sao Paulo state government and SABESP decided to anticipate its construction so that the interconnection will be available as of 2016.

On slide 13, more specifically, you can see that this project provides for the possibility to transfer five cubic meters per second to eight cubic meters per second of water between the [Juraidai] and the [atchibaena] reservoirs. Once in place, the interconnection will initially help in the recovery of the Cantareira system reservoir level, but in general will reduce systemic risk in several future scenarios, benefiting the two regions served. That is, the PCJ river basin that serves the Sao Paulo Metro region, and the [para hiba desue] basin, which in fact also serves partly -- or greatly the Rio de Janeiro city.

Investments in this interconnection include the construction of tunnels, pumping stations, dams, reservoirs, totaling approximately BRL500 million. SABESP will be responsible for its execution and construction.

Considering, on the other hand, that the estimated time for the execution of this project varies between 12 and 14 months as of the beginning of the works, which should be in a couple of months, and that the corresponding disbursement should happen between 2014 and 2016, we believe that the Company has enough time to make the necessary adjustments to its investment plan and work on adequate funding.

Moving to our last slide, we will talk about the investment plan and we will make some additional considerations, beginning with the tariff revision process. As you must all know, on March 12, [areses] held a public hearing on the regulatory agency's proposal for the final tariff of SABESP's first tariff revision. At the time, SABESP made a presentation in which it explained its methodology for estimating water losses and the different methodologies and criteria available for measuring that, and proposed an alignment on [house swanna lies] and measures.

The Company also highlighted an issue in our [seds] proposal that the Company believes merits in more detailed discussion, more specifically the criterion used for excluding pipelines from the asset base. SABESP's contributions were delivered to Areses on March 17; contribution deadline was March 19. The next step in this process is the disclosure by Areses on April 10, of the final tariff, the [pew zero], and the X factor, that is a productivity factor.

Moving to investments, we invested BRL2.7 billion in 2013, more than a number that is -- a figure greater than in 2012. Of the total invested amount, BRL1.1 billion was allocated to water and BRL1.6 billion in sewage.

In terms of geographic distribution, BRL1.6 billion went to the Sao Paulo Metro region and BRL1.1 billion to the regional systems. Note that the large volume in the regional system is associated with the [owned alima], the [clean waste] program, in fact the largest sewage de-pollution program in coastal areas in Brazil.

We had also disclosed our new CapEx plan. The Company plans to invest BRL12.8 billion between 2014 and 2018; BRL3.9 million of which is water, [bracklen] water, BRL6.3 billion directly in sewage, and BRL2.5 billion in several water and sewage operational initiatives.

This investment plan is an update of the previous plan and incorporates the years of 2017 and 2018. It was developed focusing on expansion of a water and sewage system so as to expand the coverage of sewage collection and treatment services and increase and protect their water sources in order to meet growing demand in the 363 municipalities we currently operate.

However, this plan was developed and approved before the water scarcity situation became evident in the Sao Paulo Metro region, which means that it does not incorporate immediate investments we are making to face the situation or those previously planned for after 2018, such as the interconnection between the [zharwardee] and the [aitchibanya] rivers.

Due to the water scarcity situation we are facing and its expected impact on cost and revenue as a result of the bonus program and the investments to capture the technical reserve, the Company's management has decided to adopt an immediate contingency plan program on the 2014 budget and reschedule and prioritize annual investments so that the immediate effect of the measures will minimize the impacts on the Company's financial balance and maintain its liquidity in a situation similar to the one observed in the original budget plan.

More specifically, the Company has already approved the budget contingency plan and reduction of BRL700 million in 2014. It is important to note that this measure will not necessarily imply in an equally similar decline in the Company's OpEx and CapEx over 2013, but there will not be a significantly higher increase. Investments for 2014 will be rescheduled so that their pressure on the Company's cash flow will be lessened. With these measures, we believe the Company will remain robust from a financial standpoint.

Well, that is what I have to say now. We will open for questions.

(Operator Instructions). Michael Gaugler, Brean Capital.

Thank you for the overview on the water supply situation. It was very, very helpful. Certainly kind of looking at this, I am wondering, beyond what you have outlined here in the presentation, is it feasible to perhaps drill more wells or even consider adding desalination capacity to augment surface water supplies in the short term?

Michael, I am sure that our technical group, the guys that meet, manage, they look at all the alternatives. I mean, as you know, the water scarcity in Sao Paulo Metro region is in its [essence]. There is less water available for [capture] here than in the dry areas of Brazil.

So we believe that the technical group has gone after the most readily available sources, and the technical reserve seems to be the quickest way to bring both water availability into the system. I believe -- we have not heard from the technical group these alternatives you mentioned, okay?

Sure. And then, I just had one other question. With the final tariff coming up on April 10, I believe the last time we have spoken -- and correct me if I am wrong -- that the OpEx reduction language had been reduced. It had been, I believe, BRL600 million and was now roughly BRL450 million. Just wondering if that is accurate.

Michael, the OpEx reduction in relation to the amount we had in the business plan is lessened. Let me just check the exact number here. Give me a second.

Michael, we are looking at it, but it is definitely not the BRL600 million. I just want to see if we can have a better number for you. Michael, we are looking at it to be more precise. Let's do this. Do you have another question? Let's take it or move on. And before we end the call, I will let everybody know, okay?

Okay. Those were my only two questions. So feel free to move on.

Okay. But we will answer before we finish. Okay. Thanks, Michael.

[Hassan Dosa], [Water Asset Management].

I have a quick question for you on the tariff. In the note that was published, the 4.67% increase, can you help me understand as to what portion from your understanding is inflation that is included in that 4.67%?

Okay. Let me check that. I found it. I found the exact number. We don't have it split up [for that] here. But the inflation component, in our view, inflation being inflation from November to April, and there is a projection there, should be -- the difference -- the real increase, the above inflation increase, is around 2.32%. So the difference to 4.67% is inflation.

Got it. That's helpful. So just so I understand it properly, this recommendation that came out earlier in the month, so basically the recommendations from last year, which I believe was also 2.3% and change, so their recommendation of a real increase of 2.3%, approximately, that hasn't changed. So it's really -- that is sort of right now where it has been in terms of a 2.3%-something real increase versus your original request, I believe, was like 13%.

Let's put it this way. I don't think you can compare the 2.35% with the 2.32%. The 2.35% was in anticipation because it would be a final one, adjustments later on, which never happened, okay? So that 2.35% was not as clear as to whether it incorporated inflation or not. In fact, yes, after all, use the 2.35% as part of inflation. So you can't deduct from -- at least we can't; we didn't -- that the 2.35% was the above inflation increase proposed at the time, okay?

So this is your estimate. This is not our estimate. This is your correlation. We don't correlate that way, okay? What we see is around 2.35% -- 2.32% above inflation increase, bringing the tariff all the way to April application now, okay? That's what we see.

Perfect, and just to make it apples for apples because as you correctly highlight, I am stripping the inflation out from the 4.67%, which, I agree with you, your inflation plus the 2.3%. And the last question is just to make it apples to apples, that 2.3% compares with your request of a 13% increase, right? So we should compare -- they are recommending 2.3% and you guys asked for a 13% real increase, something in that magnitude, correct?

Let me put it this way. When we started the process, we filed our business plan. That business plan with that level of OpEx, with that level of investment and other variables, implies in a 13% increase, which belongs in this process. So you can also ultimately say yes, our beginning -- our start request on a very different business plan than today in terms of how much volume will be invested and so forth was 13%. Now what they are saying is 2.35% above inflation. Yes. But it is not -- again, [a bid ask] situation anymore.

Okay. Fair enough. But thank you for the clarification.

[Javier DiFiore], [Elliott].

Could you comment on if you still expect that the Sao Paulo royalty tax, which is around BRL300 million to BRL400 million you are paying, will be passed through, and what is your expectation on the timing for that to be passed through to the tariff?

Okay. Just a second, please. Javier, our understanding is that the royalty -- which we don't call royalty; we call a transfer -- is a pass-through. Our understanding that it is suspended until the entire tariff process is concluded. So we don't expect its application anytime soon. There is a lot to do on tariffs still.

Okay. But this will be passed through eventually.

Well, that is how it is built into the contract we signed with the city of Sao Paulo and the state government as a pass-through to tariff. Okay?

(Operator Instructions). And there appears to be no further questions at this time. I would like to turn the conference back to SABESP for their final remarks.

Okay. I think we still owe Michael and all you guys an answer on that difference, but, Michael, definitely is not the BRL600 million. We will see if we can get the information precise out and let you know, okay? But it is definitely less. It is closer to the BRL350 million difference.

So said that, I want to thank everybody for attending the call. Myself and Angela, we are available here in the investor relations area and hope to be seeing -- talking to you soon. Thank you.

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