Companhia de Saneamento Básico do Estado de São Paulo - SABESP (SBS) Q3 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the SABESP's Conference Call to discuss its results for the Third Quarter of 2015. 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 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. Mário Arruda Sampaio, Head of Capital Market and Investor Relations; Mr. Marcelo Miyagui, Head of Accounting. Now, I'll turn the conference over to Mr. Sampaio. Sir, you may begin your conference. Mário Arruda Sampaio: Thank you and again good morning, everyone. I would like to thanks again for participating in this one more conference call. I like to move to the presentation, today we have 12 slides to discuss the main events in this quarter. After that we will have our usual question-and-answer sessions, and hopefully clear all the doubts. So let's start on slide three, here we can see water and sewage billed volume in the third quarter of 2006. These water and sewage billed volume fell 5.8% when compared to the same period of the previous year. As a result of the limited water availability and the measures we have adopted since February last year, the balance supply and demand and that this is important, at the same time has maintained a 24/7 water supply to the population. The water crisis metric considerable reduction in water production volume. It has fallen 11.1% this quarter and 15.9% in the first nine months of 2015. Moving to slide four, we will comment on our financial results. Net operating revenue grew 13.2% when compared to the previous. If we exclude construction revenue, net operating revenue was up 7.8%. Cost and administrative selling and construction expenses rose 10.4% in the period, if we exclude construction cost and expenses increased only 1.9%. Adjusted EBITDA came to BRL903.2 million against BRL742.4 million in the same period of last year. There is a increase of 21.7%. Note that over the past 12 months adjusted EBITDA totaled BRL3.5 billion. Adjusted EBITDA margin is stood at 28.3% against 26.3% in the third quarter of last year. Over the past 12 months, EBITDA margins came to 31.0% and excluding construction revenue and cost, adjusted EBITDA margin totaled 40.4% from 35.8% in the third quarter of 2014 and 43.5% over the past 12 months. This quarter we have a loss of BRL580 million compared to a profit of BRL91.5 million in the same period of last year. Let's move to slide five here we comment on the main variations in costs and expenses when compared to same period in 2014. As mentioned before, cost and expenses were 10.4% higher than third quarter last year and excluding construction cost, these cost and expenses rose 1.9%. This variation was mainly due to reductions in cost and expenses such as 76.4% in write-offs of credit, 23.2% with general supplies, 23% in general expenses, 4.1% in treatment materials and 1.5% in the services. This later with a considerable with a considerable weight in our costs. This favorable result was negatively impacted by increases – an increase of 40.8% in electricity terms and this is something expected and by the way, included in our extraordinary tariff revision, if you recall. Also an 11.6% with the depreciation and amortization and 3% with salaries and payroll charges. For further details on each of our costs and variations, please refer to our press release. On slide six, we show the main variations of the items that affected our results which again resulted in a loss of BRL580 million. Starting with net operating revenue, there was an increase of BRL373.5 million or 13.2%. Cost and expenses including construction costs grows BRL240.7 million or 7.4%. Once again excluding construction costs, cost and expenses grew 1.9%. For a comparison purpose at cost and prices, considering this quarter average inflation measured by the EPCA of 9.53% on an annual. Cost and expenses increased 0.8% including construction cost and decreased 6.9% excluding construction costs. Other operating revenues and expenses had a positive variation of R$60 million. Financial expenses and net inflation and exchanged adjustment increase R$1.2 billion and the primary impacted this result is the appreciation of dollar versus real of 28.1% and the yen appreciation versus the Brazilian real of 30.5%, and last in the same quarter, last year the variation was 11.3% and 2.8% respectively. Last but not least, income tax and social contribution decreased R$336 million, when compared to the same period of the previous year positively impacting net income. Let's move to the slide seven and in this slide and in the next slight eight also we will analyze the rainfall on the Cantareira and Alto Tietê Systems. Although average rainfall expected for the month of October was not reached in the São Paulo metro regions. Three main reservoirs that is the Cantareira, the Alto Tietê and the Guarapiranga, it came in very close to the historical averages. As we can see on slide seven in the Cantareira System rainfall in the month of October 2015 came to 89% of the average for this month, in fact much higher than recorded last year in October. Rainfall up to yesterday added 77 millimeters, which represent 48% of the historical average for the month, which is 160 millimeters. With regards to this system alone talking about on the Cantareira, remember that the second portion of the technical reserve was made available on October 24, 2014, it was restored by the end of February 2015 and we have not use this yet this year and hopefully, we will not use it. An important factor that has helped to reduce the withdrawal of water from this system and its recovery, is to transfer of water from other production systems to serve customers, originally supplied by the Cantareira system. Remember, that the production systems involved in this process, are primarily that Guarapiranga, the Alto Tietê, Rio Grande and Rio Periodo. On slide eight, we will comment on rainfall on the Cantareira, -- I'm sorry on the Alto Tietê system which is today our third largest water production systems, and that again serves the metro region of São Paulo. As you already know, this system was largely utilize, just to provide to water to areas originally covered only by the Cantareira system due to its proximity. Prior to the water crisis, the number of people served by this system was close to R$3.8 million, now it serves approximately R$4.5 million. Similar, to the Cantareira system, the rainfall in October did not reach the average for the month, but what was quite close with 81%. And by the way significantly above rainfall, we observed last rain season that is from October 2014 to September 2015 when rainfall was only 20% of the average in fact it was in history. Up to November 12, rainfall reached 86.4 millimeters or as 67% of the monthly historical average which is a 129 millimeters. On slide 10 -- nine and 10, let's analyze water inflow into the Cantareira and Alto Tietê systems. Just remembering that in fact this is what really makes the reservoirs dynamics happen. Moving to slide nine, we can see that the water inflows to the Cantareira System reservoirs came to 14.8 cubic meters per second in October, which despite being below the historical average is almost triple the volume recorded in October last year, when rainfall – sorry water inflow totaled only 5.2 cubic meters per second. Yesterday, water inflow was 26.8 cubic meters per second that is averaged quarter in flow, this is higher than the monthly average in November 2014, which was 8.8 cubic meters per second, however as you certainly know we're still halfway to the end of the month. Note that in July 2015 the National Water Agency, we call ANA, and the São Paulo State Department of Water and Energy, you probably listened DAEE, determine that the SABESP would reduce water extraction from the Cantareira system from 13.5 cubic meters per second to 10 cubic meters per second in November. However, due to the ongoing recovery of the Cantareira during the beginning of this rainy season with water reservation better than the previous year, and the beginning of operations also of the interconnection of the Rio Grande reservoir with the Alto Tietê Taiaçupeba reservoir. What we'll make possible of this flat system to reach out additional areas supplied by the Cantareira. Water extraction was maintained by the regulatory agencies at 13.5 cubic meters per second. Important that this decision will put less stress on the other systems and avoid the need to eventually adopt very drastic measures to maintain water supply for the population, maintain uninterrupted, right? With regards to the proposed renewal of the Cantareira System water, right, the decision was postponed to 2017 until there the water volume that can be distracted by us from the Cantareira will be constantly assessed and determined by the regulators according to reservoir levels and recovery rates. Let's move to slide 10, we can see here, that the water inflowing to the Alto Tietê system totaled 12 cubic meters per second in October, which is 75% of the historical average and above the 8.2 cubic meters per second recorded last year in October. Water inflow up to November 12, that is again yesterday of 22.4 cubic meters per second is already above. The average volume recorded for the entire month of November 2014, which was 9 cubic meters per second. Let's go to slide 11. Here we showed, how much the situation of the reservoirs and that is on all reservoirs, that supply the metro region of São Paulo has improved from 2014, compared to 2015 for the month of September. This improvement was driven by two factors. The first was increased rainfall, as we mentioned before and consequently also water inflow between October last year and March when compared with the same period in 2013 and 2014. The second factor and very -- and also very determinant of this improved scenario, where the initiatives adopted by the company, most of which you already know about, such as the implementation of bonus program, pressure reduction procedures to reduce water losses and transfer of water between systems, all of which allowed us to bounce water availability to demand. As a result of these two factors in September 2014, reservoirs level were higher than last year and you have to remember that in this comparison, the last year first quarter of the technical reserve was incorporated in May, which means that the volume available for the dry season, last year was substantially higher than the same period this year, such that we have actually balanced system according to the supply. But on the up next slides, we will discuss these differences in further detail as well as emergency works that have been concluding in 2015 and have increased water availability and capacity to transfer water between systems. Our initiatives that have improved water security during this year and for next years. In other words, the balance between water supply and demand in the region, the increase in water security in the beginning of the rainy seasons are all very positive factors that allow us to say that today we are in the better structural and short-term situation than last year and in a better position to face 2016. Let's move to slide 12, here we compared 2014 and 2015 reservoir use during the dry season, which starts in April and ends in September. As you will see the figures demonstrate that we are in a better and more stable situation this year than in the same period last year. As you can see water inflow in 2015 was 12% higher than 2014. At the same time, water withdraw from the production systems was 20% lower. Even withdraw is being higher than inflow, the deficit reduced substantially from minus 23.38 to minus 4.81 cubic meters per second. This was possible due to the measures adopted by SABESP to adjust demand to water supply and availability as well as the rainfall 33% higher this year during this period than last year. By the way, rainfall this year in this period, the dry period was the highest one, since 2009. Let's go to the slide 13, this is a quickly to convey the same thing, but to compare in the month of October 2015 to 2014 and check on the balance between supply and demand, as you can see, it is slightly but relevant – has a slight but relevant improvement endorsing a current and more robust position of the company. On slide 14, this is our last slide, we present in detail, the investments in execution and under development for the period between 2015 and 2017, all of which are vital to cope with the water crisis and improve water security in the metro region of São Paulo. We remind you once more that the main objective for the investment executed this year and 2016, is to increase water security in the Guarapiranga, in Alto Tietê systems, enabling them to increase production and transfer more water to the areas originally supplied by the Cantareira. In another words, the objective is to reduce the São Paulo metro region figures dependent on the Cantareira system. At the end of September, the main project aiming to ensure water supply to the São Paulo metro region was inaugurated, which is the interconnection between the Rio Grande reservoir and the Alto Tietê system reservoir called, Taiaçupeba. This will allow the transfer of up to 4 cubic meters per second from the Rio Grande to the Alto Tietê system reservoir. In addition to this project, during this year, the Guarapiranga system production capacity was expanded in one cubic meters per second. Also finalized this year were projects that expanded the transfer of water from the Guaratuba stream and connect the Guaió river to the Alto Tietê system. In this last case, is actually increasing water availability. For 2017, we have two large projects for 2017 or due for 2017, we have two large projects in progress. One is the construction of the São Lourenço water system that will draw water from another river basin, that is the [indiscernible] river basin, with a maximum production and supply capacity of 6.4 cubic meters per second. The project, which is being conducted through it public, private partnership has already executed 17.8% of the total investment and again it's due for the second half of 2017. The other important project is the interconnection in between the Jaguari reservoir located in the Paraíba do Sul River Basin and the Atibainha dam reservoir that is part of the Cantareira System and the PCJ reservoir -- PCJ Water Basin, who's contract have to execute this was signed in October. Just remember that this project will allow the transfer of an average of 5.13 cubic meters per second and a maximum of 8.5 cubic meters per second of water from the Paraíba do Sul into the Cantareira System. The works are expected to be concluded in mid-2017 and the company that was awarded the contract submitted a bit of R$555 million that is – it's well announced below that the highest the value allowed. We remind you once more that this interconnection is part of the São Paulo macro metropolitan water plant. This plant lists the measures aiming to ensure the water supply to the São Paulo retro region and then joining metro regions in and population dense areas for the next decades. The interconnection was originally expected to be implemented in 2020 – into 20, but obviously for – due to the crisis was anticipated for now. Well, this ends our presentation and now we will be available for questions and answers.

[Operator Instructions] And our first question will come from Larry Tedeschi from STRS Ohio. Please go ahead.

Hi, good morning. On slide 14 for the total – for 2015 you're adding 6.5, I guess like cubic meters per second. What is that as a percentage of your total -- your total number for the whole system? Mário Arruda Sampaio: Okay. This is Mário, let's do the math here. But the total system prior to the crisis is about 75 cubic meters. So, that is about 8% additional, almost 9% addition to the previous water availability in the metro region of São Paulo.

Okay. And what -- and so that – so the 75 is pre-crisis, what is – what are you seeing right now? Mário Arruda Sampaio: Well again this is water capacity availability.

I see so, does not worked out. Mário Arruda Sampaio: Okay. So prior to the crisis. Okay. I'll answer in the different way. Today we – the availability is equivalent to what we're extracting, hopefully going up as we showed on the other slides. But today, we're exacting about 54 cubic meters, 53 cubic meters per second. But in fact, if you take that figure then we're extracting more than – the addition is more than 10%.

Okay. That's what we're looking for. Thank you. Mário Arruda Sampaio: Okay.

And our next question will come from Kelleen Kiely from Pzena Investment Management. Please go ahead with your question.

Hello. My question is just on the relationship between rainfall and water in flow in the Cantareira system. What needs to happen for there to be a basically better inflow because the relationship between rainfall and inflow is not as correlated as I would expect it to be; better rainfall than inflow. So what is preventing better inflow and what needs to happen for that to improve? Mário Arruda Sampaio: Kelleen, in short, without the technical guides around this, it is that the soil is very dry and the ground water is very low, and ultimately what we need is the soil to be soaked up so then the water can run without penetrating to the ground, and thus increase the correlation between rain and inflow. Okay?

Okay. And is there – I mean is there any guideline you can give us in terms of how much more – how much more saturation there is to, before we get to the point where we or how much more saturation you need to see before you get to the point, where you most of the incremental inflow actually or a rainfall becomes inflow, any numbers you can put around that? Mário Arruda Sampaio: Kelleen, from what I hear from the technical group and who is next to me also sits everyday with a technical guys and as a Director. And is that – it is -- there's so many variables in fact in place and on a short-term and long-term that this correlation is almost impossible to establish, it is definitely a moving correlation given how the rain pattern was in the previous wet and summer season that determines how much water will be and how much land will be sold throughout the next water rainy season. So I'm just trying to explain to you that this is something that, it could be thousands of models and again thousands of statistics, but unfortunately we can't see that happen. And do not have a way to answer to you. If we did we would be a much more confident of what would be happening in the next months. Okay. I mean, we're confident...

Okay. Thank you. Mário Arruda Sampaio: You got it, already. Okay.

[Operator Instructions] Our next question will come from [indiscernible]. Please go ahead.

Yeah, hi. This is Bill [indiscernible]. Yeah solid a quarter. I just curious, what is – in terms of El Niño, has there any been predictions about Niño impact in southern Brazil – what are malls look like? Is that confer a higher amount of rainfall projected through the wet season? And then secondly, if there is much more rainfall occurring, would that delay any of these initiatives planned for 2017, if you got burdens of rainfall? Thank you. Mário Arruda Sampaio: I'm going backwards. If we do get very good rains and everything is very positive on hydrologic and reservoir levels, we will not change the plan. We will not fall back on [indiscernible] in the future plans that we have listed. The plan is really to – is to execute this and bring water security to a much higher level than we have prior to the crisis. So, no, we're just going to continue with investments. Pertaining the El Niño impact, as a general rule, the El Niño whatever intensity it has, it has a very clear impact in the northern part of Brazil and a very clear impact in the southern – south of Brazil. But unfortunately, where we are and we call the southeast region, it continues to provide a very erratic pattern. So if you go back to all the El Niño impacts in previous years, you potentially will see that you can't conclude in the southeast whether it brings more rain or less rain. In fact, this is a very erratic region in terms of establishing patterns for range and dry period in terms of annual range and annual drop. So Bill unfortunately, it is uncertain.

Okay. Thank you. Mário Arruda Sampaio: Welcome.

This will be the final announcement [Operator Instructions] And we have a follow up question from Kelleen Kiely from Pzena Investment Management. Please go ahead.

Hi, thanks. I'm just curious on the covenant waiver with IDP, was there any cost to get that? Mário Arruda Sampaio: Just a second. Kelleen, yes there was – as you potentially read on the explanatory notes but it's just business, we did not and will disclose the value.

Okay. Okay. And one last one..? Mário Arruda Sampaio: Okay.

Okay. And one last one, if you don't mind. Is, When you benefited in the quarter from some provision adjustments. Can you give us any insight into the prospects for continuing to have some of those benefits in the quarters to come? Mário Arruda Sampaio: Kelleen, it is very hard to give any perspective on provisions, okay. What we can say is that we have been very diligently and aggressively working on our accounts receivable, whether from municipalities or from what we call, wholesale customers. We are acting and utilizing legislation to enforce them to negotiate and pay two bills and et cetera. And we can anticipate how much of that we will – what is the return of that in terms of money, cash, and the impact of that in terms of provision. But definitely, we are looking after with very strong activities around it. So unfortunately, we don't have the number, but I am telling you the actions we're taking. Okay.

Thank you.

Our next question will come from Matt Christ from Gramercy. Please go ahead.

Hi, guys. Just had a quick question on the construction revenue from the quarter; it was a significant contributor to your revenue and EBITDA growth. Could you just put some more color around the construction revenues that you generated? Mário Arruda Sampaio: Okay. Second. Let me answer the first question, I believe was the question in terms of construction revenue and effect on the EBITDA. You have to – to reach EBITDA you have to – you have the revenue – construction revenue and you also have the construction costs. So one minus the other, which is really the – the fact on EBITDA, is that was R$22 million. So, it's almost nil.

Got you. Mário Arruda Sampaio: So, that's one. The higher construction revenue, it's basically the higher in the period, investments that were accounted for, okay, okay?

Okay. Thanks. Mário Arruda Sampaio: Welcome.

At this time it appears to be no further questions. I'll now turn the conference back to SABESP for their final remarks. Mário Arruda Sampaio: Okay, everybody, thanks again, this quarter for your time, and we will be back next year for fourth quarter numbers and see you there. Bye-bye.

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