SABESP - Q1 2024

Transcript

Luiz Roberto Tibério (Head of Investor Relations)

Hello, good morning, everyone, and welcome to our earnings call for Q1 2024. I'm Luiz Roberto Tibério. I am an Investor Relations Superintendent. André Salcedo is here with us. He's the CEO. Cátia Pereira, the company's CFO and IR Director, Director, and Marcelo Miyagui, who's the Accounting Superintendent. I'll turn it over to André, but before that, I'd like to share some announcements and guidelines. There's simultaneous translation into English, and this call is being broadcast. This presentation and the video will be available for download on the Investor Relations website. You can send in your questions in writing using the platform's chat. The call will last one and a half hours, and we'll have time for questions and answers from investors, analysts, and journalists.

Also, we'd like to mention that there might be forward-looking statements in this reference, in this call, referring to our business outlook, operating and financial results estimates, and they're based on the management's expectations and beliefs and on available information today and do not constitute any investment recommendation. Forward-looking statements do not guarantee performance. They involve uncertainties, assumptions, and risks presented in disclosed documents filed by Sabesp. Therefore, they depend on future events, and they might or not come true. So investors need to take into account industry and other operating conditions that might affect future results and might lead to results that are substantially different than the ones presented here. Now, I'd like to turn it over to André Salcedo. Over to you, André.

André Salcedo (CEO)

Thank you, Tiberio, and good morning, everyone. So let's have a look at our performance of Q1 2024.

We tried to follow the adjustment journey of the company and to conclude some steps of the restructuring that we started last year. There are some levels of accommodation for the new shared service center and the new IT strategy. Important to point out, the performance of our engineering operations teams and regulatory team, with the support of everyone on the company in defining the contribution for the regulatory model for the privatization process. So we had many debates and discussions. Really, management invested a lot of time to design a balanced model for privatization. Also, a subsequent event after Q1 is that there was another tariff adjustment with actual gains for the company, which is a result of a good communication with the regulatory agency.

There is technical support to our claims, and we've been having very good communication with ARSESP, and they understand our needs, and that's why that was reflected in the tariff adjustment that goes into effect today, actually, enters into effect, this adjustment. Even more important than that, the definition of a new regulatory model of a single contract. In this quarter, we end a journey started in December 2022, of designing what the new model should be, the new regulatory model, a model that would be the foundation for other future processes. It's a challenging process because there's a regional perspective and natural resources sharing considerations, but we work with the state government, with the environmental department of the state and other departments. The UFC team, our consultants, consultants to the state government, ARSESP, also engaged in this process.

Everybody trying to build together and work together so as to provide good services and also as to be able to attract private capital, because investments are considerable, and that would ensure predictability levels along this journey, which is a long journey. It would be a 36-year contract, taking into account 2024 as year one. We are very excited, actually. So it was really important what we've been doing last year, this year on putting together this contract, and now with the new regulatory framework, I think we're going to be able to capture more value in the company going forward. Also, in the company, it should be pointed out our good market timing because of a very well-thought-out plan in the past. We concluded a very important funding process that will enable us to speed up this year, nearly BRL 3 billion in the ventures.

Combining green financing and social agenda, and the preservation of reservoirs, oceans, and rivers with our blue certification. We are very happy. We think we can replicate the certification structure for the coming debenture issuances. With the certified bonds and very well-defined commitments in resource allocation and investments that do have an impact, and change lives of people and communities, and reduce human impact on the environment. So we're really happy with this event in Q1. Also, as a subsequent event, which is very important as well, something that Cátia worked on with her team, and Bruno, which was to reduce the company's risk. One of the important deliveries was that we approved our hedging policy that was introduced in April, with contracts that are a pilot project, so we understand how it works and its behavior over time.

So we are testing this model, and this is going then to be an ongoing policy of hedging against FX exposure. Because we are exposed in our pricing and revenue dynamics. In the 2023 earnings call, I mentioned that we are still speeding up the process of investments, bringing forward the new investment plan for after the privatization. Up until April, we launched 43 packages of linear networks to clean up the Tietê River. And we renovated the most important sewage plants in Barueri, São Miguel, and also smaller sewage plants in Guarulhos and other sites. So that then we speed up the process of treating sewage. So these packages add up to more than BRL 16 billion. The constructions are going to be carried out in 2024, 2025, 2026, and we are very excited with the engagement of suppliers.

We are adjusting the packages and contracting conditions, so as to be more competitive and to be working with the investment funds as well, so that we can speed up mobilization of resources for construction companies. Finally, and maybe an important point today, is the privatization process status. Up until March this year, we had concluded the public consultation process. We disclosed all the final materials in April. The URAE assembly is scheduled for the 20th of the month. This assembly will review the new concession contract and the annexes, and other items. URAE governance and how it's gonna work. Also, the board is going to be elected, and the executive board, just like an entity, approve the municipal sanitation plan. Also, on the 20th, we will hold the general assembly to change the bylaws that will enter into effect later.

Today, the expectation that we have is that the offering will be made in June. It might even be concluded in June itself. We should conclude the waivers in the coming days. Cátia will give you more details about that, if you want. And after the contract is approved at URAE's company, the company would be able to sign the contract. So that's what I had for you. So we've been working hard to improve the different elements of the company. It's important to point out, as I mentioned before, that there's going to be some volatility, especially in material and service cost, and the resignation plan. This quarter was slightly below our expectations, but we're working hard to improve figures, just like we did in the past.

January and February, there were some agreements that had been signed before, and that had an impact on our performance. We are coming up with new ways of negotiating with, consumers, that will reduce the risk of a contract breach through collection services and other means of payment that will reduce our risk. So that's what I had for you, and later on, I'll be available, available for your questions. Thank you.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you, André. Now I'll turn it over to Cátia. Cátia, over to you for the financial highlights. Cátia, your microphone still. Ah! You were on mute, Cátia. Can you hear me now?

Cátia Pereira (CFO and IR Director)

Yes. Good morning, everyone. So welcome to this earnings call. We see that there's an increase in revenue, a 15.6% increase in revenue.

This is a growth because of the increase in tariff of 9.56, and the increase in 5.5 of volume, and there's also the effect of the tariff mix. Looking at the margin, I'll highlight there, is that the adjusted margin without the effect of the non-recurring effect, which was the APS agreement, which was what Andre was mentioning, and this also was part of the explanatory note of the 2023 results and the agreement we had with, the health insurance. It's a non-recurring event, that without that, we would have 2,591. EBITDA margin was 45, and then it grows to 49.6. And net income, also, there was a 31.9% growth. Also, not taking into account the non-recurring events, so that we can really assess the company's performance.

We see the KPIs as well, in the slide. Looking at this quarter, but also at the journey the company is on. We see the past 12-month average, it's a rolling average, that shows us the performance not only of the last quarter, but what's been happening in terms of revenue. Comparing 2023, the previous year, and Q1 2024, there was an increase, and there is the volume effect, and the tariff effect, and the mix effect. Again, looking at the 12-month average allows us to account for season, seasonality. When we compare quarter-over-quarter, there's different behaviors because of seasonality. But without seasonality, we can see the clear trends in a graph like this. The same applies to the EBITDA per cubic meter.

Again, we see the trends over the past 12 months, and we see 2023, 232, and Q1 2024 to 40. So this is the upward trend we see today, and we, in the company also, we also look at figures quarter over quarter to try to find improvement opportunities for the company. Having a look at our volumes, there was a 5% increase in water, 5.7% in sewage. Our greatest volume is in residential consumers. This is where we see most growth, but there's also marginal growth in volume in the other consumer categories. But average is a 5.5% increase. In December 2023, there was similar growth rates, and there's a mixed growth that has an impact on revenues, which is slightly larger than we see today.

So basically, that's because of the mix and because of the vacation period, where there's a consumer migration. The people travel from São Paulo City to other places, and before because of that, there's a lower average tariff. That's why it's important to look at the quarters, taking into account this volume growth. But when we look at mix and average tariff, we see these differences because of seasonality. So this is an, this is an important point. This is the financial performance of the company. Net income, 1Q 2022 was BRL 747. There's a significant increase of BRL 705 in revenue, which is a 15% growth in revenue. Construction results, again, this is a proxy. There's nearly no impact on results.

Costs and expenses, we see the breakdown there because it's important to understand what is recurring or not recurring. So we see the AAPS effect, which is BRL 162 million. That was an important agreement for the company, because last year we had expenses of BRL 45 million because of a deficit of healthcare insurance, and with this agreement, we will no longer have any future responsibilities. We will no longer have costs or expenses in the future related to retired employees and their dependents. So that's the driver for this agreement. So there is going to be a clear benefit for the company, and there was another cross case in the company that could also generate a post-employment benefit for employees. So this was a very important agreement for the company that will ensure us better future results, visibility, and no future impacts.

So that's why we entered into this agreement. Of the BRL 272 million thereof costs and expenses, there's this important impact of depreciation. I'll give you more details later on. And events, such as the bad pay allowance and service variation, so this is the expenses there other than AAPS. Other expenses are not as impactful. Financial expenses is BRL 79 million. Quarter-over-quarter, there was a benefit last year of FX variation with the appreciation of, the real, and this year we are moving sideways. There was an impact of the US dollar on Q1, which was offset by the yen. When we used Q1, the FX variation was closely null, but when comparing it to 2023, there was a loss, so to speak, because back there we recognized the financial revenue from FX variation.

In addition to that, there's also an increase in some debts last year. One, we had almost 1.5 of new debts, and that's the breakdown of financial results of expensive income tax. That's the consequence of our results, and net income 823, without adjustments. AAPS is just highlighted there, but there was no adjustments in this net income figure. Some details here. As was expected, we've been delivering the PDI that was designed back there and approved and introduced starting in July 2023. 1,360 people resigned by Q1, and in June, the plan will be concluded with... Looking at the net of 4.8, actually, that figure, when we look at that financially and using the resignation plan alone, the effect would be much larger.

In May, there was also an increase of 4.9 of union agreement and salary adjustment. So year-over-year or quarter-over-quarter, without the resignation plan, that figure would be 5% greater. So 4.8 shows the impact of the resignation plan, PDI. I know you're going to see in the second half of the year, after the PDI has been concluded, we will have a greater capture, and in a one-year horizon, that what we see is the 15% reduction. Of course, always comparing to the baseline, which was when the program was introduced, because over time, there are salary adjustments every year, so that's also something that needs to be taken into account. General supplies also moving sideways. We are working hard on general supplies and treatment supplies, junior consumption and demand planning.

Looking at the T+1 after pre-privatization, so that's going to be more predictability, long-term contracts, so that there's going to be no seasonality impacts. There was a positive impact of consumption and prices of some supplies. The reservoirs were full in Q1, so we could manage water treatment, so that's a benefit that was captured by the company. And in services, there was a BRL 60 million increase. Part of that impact is from maintenance of systems and pipelines, so we see that effect on Q1. Electricity is aligned with what we presented last year for the same Q. Again, with the same strategies that were designed, looking at the free market and distributed generation, making progress with the solar panels. So we've been working to have a supply of renewable energy and with managed costs.

General expenses was a big impact. We have the breakdown there so that you have visibility of general expenses. You see what the municipal fund is, so there's. That's a pass-through to the tariff, and this is not managed by the company. Significant increase because of the increase in revenue, but also because of new municipalities that are now receiving after Q1 last year. So the impact is larger than the revenue because of that, and in general expenses, what we see is the AAPS, which is, was the agreement we mentioned before, and BRL 68 million, which is general expenses, which is updates of ongoing processes and. So even excluding APS, there's been this increase of ongoing processes. There's nothing new, nothing significant, just an update.

In depreciation and amortization, there's nearly BRL 120 million increase because of the increase of immobilization last year. We ended the year with BRL 6.3 billion of fixed assets, and this that generates depreciation and amortization expenses. We see a small graph below showing the performance of fixed assets, because this is what has an impact on depreciation expenses. The PCLD, which is the bad payer allowance, there's nearly BRL 30 million impact. In Q4 last year, we mentioned that there were two very good quarters, and there was an important non-recurring event then, that had an impact on our Q3 and Q4 results. Also, structuring actions are underway with the customer team, working with new types of collection, and also speeding up service termination or suspension.

So this year, to give you an idea, basically, we doubled the number of service disconnections, giving our contracts negotiated with our global maintenance suppliers. So that's what we've been working on. In Q1, there was no fee round. We started late in March, actually, but there was the effect of not having had that, and events such as new agreements. So we are working on that, so as to introduce new payment methods that can help consumers, and will also ensure our revenues. We are adjusting that, and the customer team is working hard on that. Last year, we ended with 3%, and now it's 3.4% of the bad payer allowance, and this year, in the short and mid-run, we wanted to remain on a 3% level.

Before we start using digital payments and different types of payments, so that then we will be able to reduce the default level. So there's this accommodation period, but again, 2023 is the starting point for this journey in 2024. And so this is the baseline we are adopting. Looking at our indebtedness, again, the indebtedness level or the net debt adjusted EBITDA is 15.8 net debt. With the effect of the funding this first Q, we are a low leveraging rate. This is going to be good for us, so that we can comply with our investment level.

So this leveraging rate will enable us to, in the coming few years, to increase the indebtedness ratio, of course, respecting our covenants, so that can improve our capital structure, and so that we can be able to make the investments that are required, and that will be greater in 2029. So we ended with 1.67. The good margin and an EBITDA, that at net debt, adjusted EBITDA or just EBITDA financial expenses are also very good. We still see the 12% of debt in foreign currency, and the next quarter we're gonna be 100% real linked debt, pegged to our indicators in Brazilian real. So that's it for me, and I'll be available for your questions later on.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you, Catia. Well, so, well, that's it in terms of our presentation. A session of questions and responses.

Now, we begin the Q&A session. You can send in your, your questions in writing only, using the Q&A button in this platform. First, we will take questions from analysts and investors, and then we will take questions from journalists. Well, that said, we already have some questions. Let's begin. Carolina Carneiro says, "Well, good morning, everyone. We have two questions. One, in addition to the AAPS agreement, what other initiatives are underway in terms of personnel that will have an impact on the company's turnaround and should be highlighted? Two, on the new contracts with URAE, are there any variables, such as asset base, to be used in initial calculations and the OpEx, because they have not been disclosed. Do you know when these pieces of information will be disclosed?"

André Salcedo (CEO)

Good morning, Carol. In terms of personnel, we have different initiatives.

There are initiatives of when we're still state-owned, and then there's the resignation program and centralization of management and CapEx and overall management of service agreements that have been-- many of them have been migrated to the CS fee. So these policies are on the way. So that's why we see a journey of reduction in the long run. That might be some noise in quarter-over-quarter, but structurally, the unit cost and the several lines tended to just... The AAPS agreement has a different reasoning, which is risk mitigation. It's something that was a good opportunity for the company when it was presented. As Cátia mentioned, we had an agreement with the healthcare insurance company.

SABESP was the guarantor of payment flows, and we had to make, we had to make some payments to them because of actuarial imbalances that happened in 2022, and we wanted to solve that problem. We started to charge from beneficiaries, and that's what led to this agreement. Together, we combined two issues: one lawsuit that we didn't know what the outcome would be, but it could have been a significant impact on our balance sheet. Even if we are entitled to charge the beneficiaries, that was not beneficial for us. We did the agreement to mitigate risk, first and foremost, and this was very beneficial for the company.

As a state-owned company, we don't have such leeway, but as we become a privatized company, there's going to be other opportunities for agreements that will mitigate risks, and that will help us reduce current liabilities. As to the URAE contract, the asset base is being validated. According to our Sabesp orientation, we hired independent consultants. It's probably going to be ready by the end of May. And that and the OPEX, Sabesp and the government know how important it is for you to set this figure as early as possible, and we are working on that. OPEX itself has a calculation formula starting in 2022, with a number of factors. That's Annex 8, I think. So there you find the formula. Later on, we can put you in touch with our regulatory team that can give you more details on this formula.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you. Thank you, Andrea. Next question asked by Gabriel Francisco. He says, "Hello, and thank you for answering my question. Can you explain if part of the increase in the service line is due to more outsourcing because you have fewer headcount? Is there an effect of consultants, and legal, and financial advisors because of, privatization process? Is the service expense level the same you can expect for the future if nothing else changes?"

Cátia Pereira (CFO and IR Director)

Thank you, Gabriel, for your question. Actually, what you see there is a demand effect. It's not associated to outsourced services in operations. Depending on our needs in the future. We will need to hire contractors, but in operations and maintenance, we already have contractors, so that increase is not directly related to that. It's not related to the fact that they're lower headcount. We are still consolidating the service levels.

We are centralizing some activities that were being carried out by the business units, and, in April, we concluded the centralization process. Now, we are in this transition of this migration to shared services model, and also strategic procurement is something that is also being incorporated by procurement. So this is a number of initiatives underway, and we are migrating contracts, but they have different expiration dates. And as contracts expire, a strategy that we adopted last year is that any new contract or contract renewal is for 12 months with a termination clause, so that we could go through the privatization process, having the ability to talk and bilaterally negotiate our agreements. So we still see this level of expenses in the company.

We are working to reduce it, and in 2025, the expectations is that we're gonna have the full benefit, so the company will have been privatized for a while, the contracts will have expired, and we will scale up what we are negotiating. So in the coming quarters, we expect to see similar levels, but as of the second half of the year, there will be some reductions. But the benefit, the full benefit and the big incentive and opportunity of doing things differently is something that we will see after the company has been fully privatized. There are some important levers. The way we are structured today as a company gives us a much better view of what can be achieved. It's a long question, did I answer it?

Luiz Roberto Tibério (Head of Investor Relations)

Yeah, I think you covered everything.

He also asked if there's an effect of hiring consultants or legal advisors.

André Salcedo (CEO)

There's a value that is supported by the government. Consultants that we hired have a contract that is mostly based on success fee, and nearly all of them follow the privatization law. So there is the expense, but the government can reimburse us later on. So it's a state law, Gabriel, that defines how that should be carried out.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you. There are two questions asked by Marcelo Sa. First, election of board members per ticket. This ensures that strategic will appoint three board members, three board members from the states, and three independent board members. In the bylaws, there is the possibility of adoption of multiple votes. If a relevant shareholder tries to enforce that, can it make this board composition unfeasible?

The second question is about the poison pill. The bylaw says that would be the largest value between 200% of the capital increase price that happened in the past 36 months, and 200% of the average price of the past 90 days after the tender offer announcement date. It's not clear to me what happens if this poison pill limit is achieved in four years of the due. So only the 200% of the average price of the past 90 days would be taken into account?

André Salcedo (CEO)

Marcelo, in the bylaws, there would be nine board members, and the government would appoint no more than three board members. That's in the bylaws. That's the makeup today, and also, there's a minimum number of independent board members.

So that's the structure today, and if there's a strategic shareholder, it is likely that they will also appoint a board member, even an independent board member. That would be possible as well. The multiple vote is a right of shareholders, and that does not make the bylaws invalid. Of course, there are changes in the dynamics because you wouldn't have a ticket, but you would have an individual vote per board member. So indeed, these are two different mechanisms: the multiple vote or the ticket vote. These are two possible mechanisms according to our bylaws. Poison pill. I don't understand your question. I'm reading it again.... Basically, it's the largest of the two figures. It's the largest of the previous 90 days, or the stock issuing price.

So if there's no increase in capital, this metric is not taken into account. So only one of the items is valid. Thank you. Next question, Vladimir. Actually, two questions by Vladimir. First one: Good morning. The new municipalities who have had approved funds, why is there the new collection? Is this the privatization? And the second question: The PCLD value, which is the bad payer allowance, is substantially higher than that indicated in the non-recoverable revenues of the new regulatory framework. Can we expect value convergence over 2024? What has been doing? I'll answer, I'll answer the first one. Thank you, Vladimir, for your question. So the new contracts, the new municipal funds, have been waiting for approval of our CESPs for many years. They had filed for that many years ago.

The largest municipalities already have their established funds, and the smaller municipalities had not realized that there was this opportunity. They need a municipal law to be passed, and then after that, they have to file with our CESP, and then our CESP approves that, and then we make payments after the approval by our CESP. And if there's any retroactive payments to be made, we make them according to what our CESP decides. So for us, from the economic point of view, this is neutral because there's a full pass-through to the tariff. And the impact of the new municipalities is not relevant, and that's not to do with privatization. In the post-privatization model, it is much more clear the type of discipline that will guide the payments made into the municipal funds. The totality will be included in the tariff.

In São Paulo, we pay 7.5% of São Paulo Municipal Fund, and only 4% is recognized in the tariff. But after privatization, the totality of that is going to be included in the tariff. The same will happen to the other municipalities. You still need a municipal law to be passed, and then they need to file that with our CESP, which needs to approve that. And in the next tariff cycle, there is a payment of or a reimbursement of the payments made and the inclusion of future payments.

Cátia Pereira (CFO and IR Director)

And now the question about bad payer allowance. When you look at irri...

The regulatory model says that you should take into account the past 60 months in terms of non-recoverable revenues, and we're taking into account the average of bad payments before the pandemic, so the percentage is much lower than what we see in 2024. So eventually, there's going to be a convergence. I don't think it's going to be 2024. When you look at 60 months, basically, we're talking about five years. And irrecoverable is that what you cannot collect in the five-year horizon. So, but this is a PCLD of 260. When you see of irrecoverable, according to the regulatory agency, they look at the tail. So having a 3.4% bad payer allowance does not mean that we won't try to still collect. So we still pursue collection of above 360.

In accounting terms, we do the allowance, but commercially, we're still working to collect those amounts. So there are different concepts in the timeline. It's a 5-year horizon, 60-month, and the, the bad payer allowance is, 360-day or 1-year horizon. Eventually, they will converge when we look at the 5-year, average. So in answer to your question, in the... According to the new regulations, if I'm not mistaken, it's 1.9 as a target. So we will try to achieve that, but we are still working on that with our customer team. 1.65, not 1.9. So there's still some ways ahead before we know when we're gonna be able to get there.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you, Catia. Next question, asked by Liliana Yang. She says, "Thank you for this opportunity, and, congratulations on your delivery so far." Two questions.

One, what did our Sabesp not recognize in terms of Sabesp tariffs, referring to the IRT of May 2024, or 6.4%? For example, the repass of the municipal fund of the São Paulo City, is it 4% or 7.5%? Two, what should be the offering format, and when we will have more details about that? For instance, the price to be paid at the offering by minority investors, is it going to be the same paid by a strategic investor? Thank you.

André Salcedo (CEO)

Thank you, Eliana, for your questions. There are two important points that were not addressed by the tariff adjustments, and that are recognized in the new contract, that have an impact on, on the, the revenue. First, fixed demand contracts, so key accounts.

In 2023, there had BRL 720 million discounts that were not recognized in the tariff. In the new contract, there is a BRL 300 million forecast to be recognized in the tariff. We will be adjusting this volume of the 720 in our budget. This is a very important point. This was not recognized in the tariff adjustment, even if there was an item therefore, which was not included in the new regulation. The second point that had an important impact is reforms and cancellations. We talked to the regulatory agency about that issue, that we have the obligation of letting them know the billed amounts. But in that period, in that time frame, we are not able to review all of the requests for review.

And in the new contract, it's going to be 90 days, and this addresses 90% of the problems we have with wrong measurements of revenue, because the figure may be polluted by reforms and cancellation, which should account for 2% of the revenue in the 2022 values. And as to your first question, the value of the tariff with-- includes 4%. The 7.5% is the new regulatory framework. The second question is the privatization offering. This is being led by the government. They've been having meetings with the privatization agency, so the government is analyzing that. We give them support whenever they request us to.

Our advisors and consultants are also at their government's service, but the figures have not been set yet, and I, I think that this is going to be published as soon as possible, as soon as the model is established.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you, Andre. Next question, asked by Luiza Candiota, and she says: "Good morning, and thank you for taking our questions. Could you share more details about your vision regarding the final documents of a public consultation regarding the new regulatory framework? What were the most important contributions made by the company and addressed points? We see that commercial programs will be included in the tariff with an annual limit. That said, what should be the strategy to apply tariff discounts going forward?"

André Salcedo (CEO)

Overall, there's changes in revenue, so there's commercial agreements. There's going to be a budget for existing contracts.

The contract inventory is at BRL 720 million of discount. It's going to be adjusted to BRL 300 million. This is going to take some time. There's a forecast, and then we're gonna be working with the regulatory agency, that the figure grows in the future, but then... It's to be something we build together with the agency. So to look at the new commercial agreements and not be limited to, to BRL 300 million, but the context that with the new consumers, the unit cost will decrease for everyone. So this is an important point to be addressed. In terms of cost, we had the recognition of PPR of, the employees. This is an important point that is going to be recognized in expenses. Sharing efficiencies in the first cycle up until 2030, we capture 100%.

The company captures 100% of efficiencies generated, and then 50% in the second cycle, 75, and then 90%. An interesting point of the municipal funds that can help us reduce. The municipal fund allow us to keep some pass-throughs if there's any municipality that doesn't pay. So because it's an important mechanism for us. We'll be able to retain resources from municipal funds in case the municipalities don't pay their deals with us. This is a very important mechanism.

Luiz Roberto Tibério (Head of Investor Relations)

The next question, asked by Gabriel Francisco: Can you give us more details on the cost basis for 2022, that is the basis for the OPEX calculation in the tariff review according to the new regulation? It seems to me that some costs, such as the management bonus and others, are removed from the calculation base.

Do you have any idea of the magnitude of the costs no longer taken into account?

Cátia Pereira (CFO and IR Director)

Actually, the basis was 2022, because that was a closed year that was audited already, and then it was used for the analysis for the new contract. 2022 had not been closed yet, so the baseline is 2022 because the figures had been audited already. And as to... Well, Andre answered that, that one of the achievements was the recognition of the bonus, as something not to be discounted. But as we say here, and I can give you figures later on, it's a hundred million, roughly one hundred million. It's not that significant. An important point here, that is part of the new contract, is that there's going to be an obligation, which is the insurance, mandatory insurance.

This is an account that was the company's insurance premium, that because of the requirement that there will be in terms of coverage, we will have that as a pass-through into the tariffs. We are going to present the company's insurance program for our SaaS, when that is approved, that's going to be passed on through to the tariff. So this is going to be an expense that is going to increase for the company, because there's more coverage requirement, insurance, but that is going to be introduced in the tariff as a non-manageable expense.

So that's helpful when we look at what is discounted today in the regulations is going to be in the contingencies lines, and insurance is going to be helpful, and, we'll be able to treat that in a structured way, in a more comprehensive way. And there are some other initiatives that we adopted to reduce risk, that are also going to be helpful for our contingency management. Thank you.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you, Cátia. Thank you, André. So that was the last question from investors and analysts. Again, if you want to ask questions, you can use the Q&A button. And, so this was the last question from analysts and investors, and now we can answer questions from journalists. Actually, there's an additional question here. Adela Souza asks: The initial tariff, P0, is going to be in the contract signed by URAE before privatization?

André Salcedo (CEO)

Good morning. The formula is there. The P0 tariff will depend on the conclusion of the 2023 asset base. So we wanted to announce that as soon as possible. But by the 20th, I'm not sure that's going to be... have been approved by our SaaS. So probably this contract is going to be signed as is today.

Luiz Roberto Tibério (Head of Investor Relations)

Okay. Thank you. Okay, we can now answer the questions from journalists. Thais Hirata asks: What's not ready yet in terms of offering, the offering model? Doing the offering in early June, is it viable? Is it not just- is it not too short a time?

André Salcedo (CEO)

Thank you, Thais, for your question. The regulatory model, I don't think it's going to be adjusted by the URAE meeting, because we think it's been concluded already.

So at URAE, we already have the new concept for the regulatory framework, so that is set. As to the offering model, there are some points that are still open. The price, for instance, it's going to be different prices or not, and some other details. So the government needs to set that, and then the process is that there's a meeting with the state privatization team, and then they announce to the market what they decided. So that doesn't need to be ready by the URAE meeting. It's a different logic. It's a construction of a new contract model that has an impact on the offering, but it's not part of what URAE needs to approve. And the June timeline, it is feasible today, yes.

Ela é uma janela que pega do final de maio até o início de agosto. The window is from end of May until beginning of August. So with the current figures, we can have an offering up until the beginning of August. In case we needed to change that schedule, we have this flexibility to adjust the schedule up until August.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you, André. Thaís has another question. It's a follow-up on the P0 tariff. So if I understood you correctly, privatization would begin without the initial tariff. Is that correct?

André Salcedo (CEO)

No, that's not correct. The methodology of P0 is not being established. So the variables are there, except the 2023 base.

If the offering is done without that defined, that's adjusted in the next tariff cycle. It's not a problem. Whatever is not available today can be recognized later in the next tariff cycle.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you, André. Next question, by Alberto Alerigi Jr., says, "This apparent hurry for privatization with many non-defined points, don't you think that create legal risks that could compromise the process and, and its legitimacy? Why is there such a hurry for such a complex process?"

André Salcedo (CEO)

That's an excellent question. I think it's the opposite. We've been making very well-founded decisions since the beginning of last year, when hired a UFC and defined the phase zero and the foundations of why going forward with the process, the benefits that would be accrued, all of the details in phase one, a notification to municipalities, definition of the new regulatory framework.

Everything's been done with great technical rigor. The final model, as I mentioned earlier today, is very innovative and has been adopted elsewhere, and I think this is what should be done, not only here with this regional view and interdependencies and coexistence of assets and natural resources that serve to more than one municipality. There's the URAE meeting and then the 30-day time, and the offering follows the rules of the equity markets. As new information is made available, we can change the offering schedule because we want people, investors who wanted to take part in the process to be comfortable. As I mentioned before, in answer to Thaís' question, we can have the offering up until early August, and this is a decision that we make together with the other parties.

So we decide when the best time for the offering would be. It's a robust regulatory model, which is very suitable to the sanitation challenges today, and all of the important variables are defined in the contract model. So it's the opposite of what you say. Everything is being done very carefully with all of the technical consideration, and the state government is also doing its part, and there's also the legislative processes in parallel. So we're doing things according to a schedule, and this is something that is going to be a breakthrough in São Paulo and in Brazil as a whole. And we are confident that the process is being led the best way possible.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you, André. Thaís has another question. "If you don't have the offering by August, do you think it would be done still in 2024?"

André Salcedo (CEO)

Well, the...

We today are working with the first Q window. We don't have a plan B. In case there's anything that will make us rethink, well, then we will see what would be the best way to go about it.

Luiz Roberto Tibério (Head of Investor Relations)

So, yes, so these were the questions from the journalists. I now turn it over and to Cátia for your final remarks.

André Salcedo (CEO)

So I'd like to thank everyone in the company, the superintendents, the operating teams, and everyone in the company. This has been a very fruitful journey. We've been learning a lot, and it's a transformational transformation journey for the company, for the consumers. And the company is being able to respond to changes in a very positive way. So what we've been doing in 2023, 2024, is the result of hard work, dedication.

I'm not going to name names because I don't want to be unfair, but I'd like to thank everyone, the support teams, financial team, HR, engineering, operations, customer, regulatory, new business. Everyone's been working really hard in this process. Also, the company has had this unparalleled ability to mobilize whenever there's any event that put lives at risk. Last week, there was this atypical weather event in Rio Grande do Sul, and very quickly, 40 people in the company were engaged: engineers, technicians, people in maintenance and operations, and they traveled to Rio Grande do Sul. There are 14 crews working in Porto Alegre and municipalities, working with the state government in Rio Grande do Sul to help with the disasters there, sending also water. We sent many trucks of water to Rio Grande do Sul to help them reestablish the services there.

Helping them reestablish the services, but also helping supply hospitals and shelters with water, with our trucks. So thank you to our heroes that traveled to Rio Grande do Sul, from people from SABESP and everyone who donated to help. I'd like to thank you all. I'd like to thank everyone in the company once again.

Cátia Pereira (CFO and IR Director)

Also, I want to thank everyone in my team. Everyone's been working very hard because of this privatization process, the turnaround process. So thank you everyone in finances. I'd like to thank my colleagues, the managers and directors and their teams. We've been rethinking this company, rethinking processes, and this is a journey. And every day there's more information, and we are always aiming for continuous improvement.

There's a long way ahead, but I'm happy to see that we've been making progress, working together so that we can deliver the best to society, which is to deliver sanitation, more affordability, and better results for the company. Thank you, everyone.

Luiz Roberto Tibério (Head of Investor Relations)

Thank you. With that, we end this earnings call. Thank you, everyone, and have a great day.