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Edited Transcript of SBSP3.SA earnings conference call or presentation 28-Mar-17 5:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP Earnings Call

San Paulo Mar 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP earnings conference call or presentation Tuesday, March 28, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mario Arruda Sampaio

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Presentation

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Operator [1]

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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 full year of 2016.

The audio for this conference is being broadcast simultaneously through the Internet, on the website, www.sabesp.com.br, and on the Engage-X platform, where you can also find the slide show 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 Mr. Marcelo Miyagui, Head of Accounting.

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

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Mario Arruda Sampaio, [2]

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Okay. Thank you. Well, good afternoon, everybody. Thanks again for attending our conference call this time to discuss our results for 2016. We'll also go through the water situation in the Metro region of São Paulo, for 2017 to '21 investment plan and the investments we have been undertaking to improve water security in the São Paulo Metro region as well as other issues we find of interest of shareholders and investors. This will be a 7-slide discussion, and at the end, we will have the Q&A session.

So let's start on Slide 3. Here, we show the company's billed water and sewage volumes, which was up by 4.4% last year. This is an increase of 4% of water and was an increase of 4.8% in sewage when compared to '15.

Here, we also show our billed water volume since 2013. And as you can see, driven by the water crisis, a significant downturn occurred until the second quarter of '15. And again, since then, we have been seeing a recovery, although still below pre-crisis level, and we'll comment some of that later.

Now let's go to Slide 4. Let's go through our financial results. The net operating revenue increased 20.4% over '15, chiefly due to the 15.2% tariff increase since June, 2015. 7.8% of that increase relative to the ordinary tariff adjustment, and 6.9% relative to the extraordinary tariff revision granted by ARSESP to compensate for lower volumes due to the water crisis.

Also highlighting the 8.4% tariff increase since May last '16, the 4.4% upturn in total billed volume, as mentioned before. And the reduction in bonus granted to BRL 187 million in '16, due to the end of the bonus program. If you remember, we canceled that, compared to the payment of BRL 926 million during the 2015 year.

Now it's worth noting also that the revenue increase driven by the factors I just mentioned was partly offset by the end of the contingency tariff, also the same date by the way in April '16, which in '16, totaled BRL 224 million against BRL 499 million in '15.

Cost and selling, administrative and construction expenses increased 21.1% in the period. Adjusted EBITDA increased 15% to BRL 4.6 billion, coming from BRL 4 billion in '15, while the adjusted EBITDA margin came to 32.4% in '16 against 3.9% in '15. If we exclude construction revenues and construction costs, the EBITDA adjusted margin was 43.3% in '16 against 46.6% in '15. Net income prevented a significant variation, in total, BRL 2.9 billion against BRL 536 million for 2015.

Let's move on to Slide 5. This is where we quickly go through the main variations in costs for last year. Compared to '15, including construction costs, there was a 21.1% increase in cost and expenses. If we exclude construction costs, cost and expenses increased by 26.6%.

Now given these variations, it's worth analyzing them excluding relevant extraordinary items that occurred in '15 and '16. If we disregard the facts of the transaction of the São Paulo state reimbursement in 2015 in the amount of BRL 696 million and also deduct from the year of '16 the nonrecurring gains obtained due to the migration of 3,572 participants of the defined benefit plan to the defined contribution plan, which generated in the early reduction, net of incentive, in the amount of BRL 307 million in the actuarial deficit, cost and expenses including construction costs would have grown 15.5% last year.

As for the main items that increased, we highlight estimated loss for doubtful accounts, which came from BRL 2.4 million in '15 to BRL 90.4 million in '16. General expenses was a 83.2% variation. Electricity up by 14.4% and services by 10%. It's also worth noting the 1% decline in payroll benefits and pension plan obligations, and noting that they were driven greatly by the above-mentioned early reduction of the actuarial deficit, which the total deficit amounts to BRL 334 million, but given that this value was partly offset by the extraordinary contribution and migration expenses paid by SABESP to those who migrated, in the amount of BRL 26.8 million, in net terms, the impact of the migration was the already mentioned BRL 307.4 million.

Obviously, for more detailed explanation, we have our press release, and you can always call us for more info. Now let's move to Slide 6. Here then we're going to quickly go through the main variations between '15 and '16, in the items that affected our net income, which totaled BRL 2.9 billion. Net operating revenues increased BRL 2.4 billion or 20.4%. Cost and expenses including construction costs increased BRL 1.9 billion or 21.1%. Other operating revenues and expenses recorded a negative variation of BRL 137 million. Net financial expenses and monetary restatements and exchange variation had a positive variation of BRL 3.2 billion, due to the depreciation of the dollar and the yen against the real in '16, which was 16.5% and 13.9%, respectively, compared with the appreciation of the currencies in 2015 -- in this case, 47% for the dollar and 45.9% for the yen.

Finally, income tax and social contribution increased BRL 1.1 billion due to the increase in operating revenues and in financial results, in this case, driven by the exchange rate variations mentioned above. These increases were, obviously, partly offset by higher operating cost and expenses.

Let's move now to Slide 7, and let's comment on the reservoir levels and the water production in the Metro region of São Paulo. In the pluviometry and effluence graphs for the Cantareira system, you can observe that after a very rainy January, the month of February and March, still going but we're at the end of March, presented a rainfall and effluence below the historical average expected for the period.

However, if we consider the period from October last year to February this year, still in our rainy period, the 991 millimeters rainfall for the period in the Cantareira system was exactly equal to the average expected for the same period.

As for water inflow, the expected historical average for the mentioned period is 52.7 cubic meters per second. And as of this March, this end of March, the average inflow was -- or is around 39 cubic meters, so we're below that. But nonetheless, and despite of this behavior in rain and affluence in the Cantareira system, we can see that the total stored -- water stored in the reservoir that are part of the São Paulo Metro region's entire water systems, made of 5 water systems, is in a very favorable situation.

The water volume available today if we just consider the technical reserve volume is equivalent to the volume available in the beginning of June of 2013.

Now if we consider the technical reserve volume, which today we have the ability to tap, today's volume is greater than the same -- is greater than the last 4 years for the same month. In other words, we're in a much better water situation than even in 2013.

In numbers, the reservoir of the Metro region of São Paulo, considering the Cantareira system technical reserve, held over 1.2 trillion liters of water. Just for a comparison, the same date in the year of '16 and '14, the volumes stored were 900 billion liters and 600 billion liters, respectively. The year '16 was marked by the discontinuity of the measures adopted through '14 and '15 to guarantee the supply of the Metro region of São Paulo. And in spite of this, the water production volumes continue below those seen in 2013 before the installation of the crisis.

Now until the beginning of 2014, the average monthly water production in the Metro region of São Paulo was approximately 69 cubic meters per second, reaching peak during the year of over 70 cubic meters per second.

During the crisis, water production fell to as low as 50 cubic meters per second on average on a month, I think it was February or March of '15, compared to today when it's already approaching 63 cubic meters per second. Well, the explanation for this recovery, not to the levels pre-crisis, resides essentially in the change in consumption habits of the population, which we all know and hear aggressively and positively to other plans to reduce consumption and then the impacts of Brazilian economic crisis and the impacts on economic activity in the average family income.

While the greater -- as shown here, the greater availability of water and lower water consumptions, when we relate that to water production, is a clear indication that the water crisis scenario is in the past, and the water available in the reservoirs in the Metro region of São Paulo is sufficiently to safely supply its population and, by the way, our consumers -- customers.

Now let's move to Slide 8, let's talk about investments in 2016 and what we're going to do and plan in '17 to '21. In '16, investments totaled BRL 3.9 billion. This figure includes investments with noncash effect.

Now of this total amount, the BRL 3.9 billion that I mentioned, BRL 1.8 billion refers to noncash effect investments, which means no money was outlaid dispersed by SABESP. Of this BRL 1.8 billion, BRL 1.3 billion refers to the San Lourenco PPP.

It is worth noting -- just a second. Okay. It is worth noting that the BRL 1.8 billion investments forecast for 2016 did not include the above-mentioned noncash effect investment. In 2016, water investments absorbed BRL 2.6 billion or 67% of the BRL 3.9 billion investments, still reflecting the prioritization and adding of -- for adding water security to the Metro region of São Paulo. This mix will continue for 2 more years, when in 2019, the pace or the rate of investments in sewage will accelerate, reaching over 60% by 2020.

The investment forecasted for '17, this year, excluding noncash impacting investment is BRL 2.3 billion, and again, 67% or over of which is allocated to water. For the full period of '17 to '21, the plan is to invest BRL 13.9 billion, BRL 7.1 billion of which in water, and BRL 6.8 billion in sewage collection and treatment.

And once more, just noting that this figure does not include investments with no cash effect, such as the mentioned PPP. As of 2019, it's important to note that the rate of sewage investments will increase, and into '20, they will be prevailing over water and will be slightly over 60%.

Now let's move to Slide 9. Here, we'll talk basically some of the updates, but let's start by talking about the 2 main investments we have been undertaking to expand water availability and production capacity, and therefore, increasing the water security in the Metro region of São Paulo.

In 2017, let's start with this one, the interconnection between the Jaguari reservoir and the Paraíba do Sul river water basin and the Atibainha reservoir, which is part of the Cantareira system, will add 5.4 cubic meters of water availability. This interconnection will add, again, 5.4 cubic meters of water availability, will be completed.

So by the end of this year, we will be in a more robust position than we have been before. Now for early 2018, although we're working to anticipate this, as I'll mention later, the San Lourenco PPP should be completed, and we'll add another 6.4 cubic meters per second of both water availability and production. So in total, these 2 projects will add over 11 cubic meters per second of water availability to the region, the latest by first quarter '18. Nonetheless, for the San Lourenco production system, we have already 64% complete, although, as I mentioned, the delivery is on a contractual base for the first quarter of '18.

We are working hard with them to anticipate the delivery by the end of '17. In terms of the interconnection between the Jaguari and Atibainha reservoirs, 43% of the project has been completed by the end of this '16, and we expect to reach 75% of completion by mid-'17.

Let's talk quickly about the second extraordinary tariff revision. Here, we would like to highlight the main events in the period from April to June, when the preliminary tariff and the WACC will be disclosed and implemented.

This week, we will deliver to ARSESP our appraisal report on the RAB, so we are on time. Between April 1 and 26, the regulatory agency will prepare the initial technical note with a preliminary tariff reset and the WACC, so they'll be doing their homework. Between April 27 and May 19, ARSESP will disclose its technical notes proposal, and we'll open the public consultation, and we'll close the period in May 19 with a public hearing around the preliminary tariff and WACC. And again, at that moment, the WACC and the asset base will become public knowledge, not only that, but also the proposed -- initial proposed tariff reset.

Between May 22 and June 8 then, the regulatory agency will analyze all the contributions received after the public consultation [ph] and hearing, so you should expect SABESP to file contributions, which will potentially disclose what are our views on what we think should be the preliminary tariff.

And then between June 9 and 10, the final technical note for the preliminary tariff will be published and a tariff reset will be authorized, remembering that the final tariff will be disclosed in April 2018. So that ends our presentation here, and we're open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) It appears that we have no questions. Now I'll turn the conference back to SABESP for their final remarks.

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Mario Arruda Sampaio, [2]

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Okay. No questions, that does [ph] mean you can call us, and we will be totally available for any questions that may come up later on. Thanks a lot. And see you in about 45 days or more for the next quarter results. Bye-bye.

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Operator [3]

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