SABESP - Earnings Call - Q4 2024

Transcript

Operator (participant)

Good morning and welcome to SABESP fourth quarter of 2024 earnings presentation. With us here today are Carlos Piani, CEO, Danielle Zslaki, CFO, and Thiago Levy, Investor Relations. Before we begin, we clarified that the statements made during this presentation will not include projections or estimates of future events. However, they may contain forward looking statements indicating potential trends related to SABESP based on the reasonable expectations, beliefs, and assumptions of SABESP's management. As of today, these statements involve risks and uncertainties and are based on assumptions and factors such as market, regulatory, and economic conditions which may not materialize. In addition to the risk factors disclosed in SABESP filings with the Brazilian Securities and Exchange Commission and on its investor relations website.

Investors should understand that changes in such factors may lead to outcomes that differ from current trends and that undue reliance should not be placed on these statements. The full disclaimer will be presented next and must be read carefully by all participants. I will now turn the floor over to Thiago Levy who will discuss the results. Thiago, you may proceed.

Thiago Levy (Investor Relations Director)

Good afternoon. My name is Thiago Levy. I'm the Investor Relations Director at SABESP. Welcome to our fourth quarter earnings results call. Today I'm joined by our CEO Carlos Piani and our CFO and Investor Relations Officer, Mr. Danielle Zslaki. Before handing it over to Danielle, I'd like to share an important update. As the majority of our investor base consists of international investors, we will now conduct these earnings calls in English with simultaneous translations into Portuguese. Please note that this call is being recorded and all participants will be in listen-only mode during the presentation. For the Q and A session, we kindly ask you to submit your questions via the Zoom chat. Additionally, all the relevant files for this call will be available on our investor relations website.

With that, I will now turn it over to Danielle who will walk us through our 2024 financial highlights.

Daniel Szlak (CFO)

Thank you. Thiago, good morning to all our partners. Thank you for joining us today for a 2024 full year's earnings call. We will start by looking at our operational highlights. The company has produced and treated significant volumes of water and sewage, ensuring the quality and reliability of our services. Our customer base has continued to grow with an increase in both registered and active water and sewage connections. This growth is a testament to our ongoing efforts to meet the needs of our customers, the universalization targets and provide excellent service. Now let's move on to our financial highlights. For the year 2024, we have achieved net operational revenues of roughly BRL 21.7 billion, an increase of 8.8% compared to the previous year. Our EBITDA has grown by 18.8%, reaching BRL 11.4 billion.

Additionally, our net profit has seen a remarkable increase of 172% amounting to BRL 9.5 billion and allowing us to propose a BRL 2.5 billion distribution to our shareholders, which represents a 4.2% dividend yield considering our market cap at the end of 2024 and it is more than two and a half times 2023 distribution. Now moving forward. On the revenue front, the growth was driven by a 7.5% net price and mix increase, 3% growth in volumes where we added 35,000 new connections. These were partially offset by a negative 2% impact from the introduction of FAEP in July. On the EBITDA front, we had favorability driven by one, the revenue growth I just mentioned, and two, the reduction of 11% of our workforce with the incentivized dismissal plan from 2023. These two favorable drivers were partially offset by the increasing number of cities that receive municipal transfers.

It is important to remember that this last driver is a pass through in the rates and should be picked up in the annual tariff adjustments. Our operations have generated 53% more cash than prior year, reaching BRL 7.4 billion operating free cash flow in 2024, and we have deployed substantial investments in water and sewage infrastructure with a total investment of BRL 6.9 billion and growing. This demonstrates our commitment to accelerating the universalization and bringing dignity and a better standard of living inside our concession area. Finally, on the covenant side, we remain very comfortable, an important competitive advantage in times where base interest rates are high globally, where our net debt to EBITDA ratio stands at 1.8 and our interest coverage ratio sits at 5.1. We have also been able to maintain the same level of operational return on capital.

These KPIs highlight our strong financial position and the financial strength of our business. Now I'd like to pass to our CEO Mr. Carlos Piani for the next chapter. Thank you and see you on the Q and A.

Carlos Piani (CEO)

Thanks Daniel. I would also like to thank you all for joining our fourth quarter 2024 conference call. We're proud of the opportunities we've embraced and the groundwork laid to address the challenges ahead. Let's start moving to the next slide and let's talk about our priorities. In our third quarter earnings call we presented a slide outlining the long term priorities of SABESP's new management team. These priorities fall in three main categories. First, new challenges created by the privatization and the new Concession Agreement such as the advancement of our universalization goals from 2033 to 2029 and the inclusion of informal enrolled consumers which were not previously mandatory in all concession areas. Second, operational efficiency setting a new performance standard for SABESP as a privately controlled corporation. Third, corporate foundations updating people structure, systems, and processes that will support sustainable long term growth.

Now with that said, I would like to take you through the progress we made on each of these fronts in the fourth quarter of last year. Let's move ahead starting with our CapEx program. In the fourth quarter of last year, we fundamentally changed how we contract works and projects. Previously, SABESP could only engage suppliers through public tenders. With the privatization, we adopted a request for proposal model, divided large projects into smaller packages to attract more suppliers and reduce execution risk, updated contract templates and streamlined payment processes based on a new project execution timeline. These changes allowed us to contract approximately BRL 15 billion in CapEx by year end, more than doubling our pool of qualified suppliers. We entered 2025 with nearly 100% of the CapEx needed to meet our universalization goals already contracted. The focus now shifts fully to execution on the new Concession Agreement.

We've taken important regulatory steps. First, we notified 550 clients about their termination of legacy discount contracts that lacked regulatory or tariff coverage. This represents a revenue gap of approximately BRL 480 million per year that we're working to recover. A small number of clients are challenging this legally, but we're cautiously optimistic that these issues will be resolved without any major litigation. We're also working with the remaining discounted consumers and now within the BRL 300 million limit set by the new Concession Agreement to help them meet the criteria that allow for us to recover this amount through tariffs. In parallel, we submitted to our regulatory agency a proposal for a new discount policy that addresses some of the needs of these terminated clients. This proposal was allowed under the new Concession Agreement and is currently under review.

Another historical regulatory gap came from billing reforms and cancellations not considered by the regulator during tariff reviews. Since August 2024, we've standardized this process resulting in a 28% reduction in the fourth quarter of last year compared to the full year average. We expect further gains in 2025. Finally, we submitted the company's regulatory asset base for the 2019, 2023 period and the 2024 period to Arsesp in the second half of last year, and we anticipate formal feedback in the third quarter of this year. Moving to the next page, operationally, we saw immediate improvements in the Southern Metropolitan Division. Targeted investments improved water flow for roughly 400,000 residents on the coast of São Paulo where the population multiplies during the summer. Our seasonal plan cut water shortages by 30% year over year, a significant win during peak demand. We also consolidated and standardized operations.

We reduced the number of operating divisions from 15 to 11, mirroring the division that is described in the concession agreements in terms of geography. Second, we merged all water, sewage and maintenance functions into single corporate divisions, unlocking future synergies in terms of processes, systems and inventories. Commercially, we concluded the Kaiju Unico enrollment campaign, adding 400,000 consumers to our Affordable Tariff Program. We are now focusing on those who lost benefits under the new rules and extended them for up to six months to allow them to have time to meet national eligibility criteria. We're working closely with municipalities to avoid exclusions. We also implemented new revenue assurance and disconnection policies. These will support better collections and help reduce non revenue water in this 2025 year. On the financial front, we introduced zero-based budgeting ZBB.

Every expense now has a defined owner and must be justified within a matrix management framework. We expect measurable cost savings in 2025. We also prepaid our most expensive debts. We hedged our foreign currency liabilities and we began raising new debt to support our heavy CAPEX requirements for 2025. Now let's move to the next slide to talk about people, tech and systems. In terms of people, we finalized our Level 1 and Level 2 leadership teams, achieving a 50-50 blend of internal talent and external hires. We launched a voluntary termination plan with over 2,000 employees enrolled, representing nearly 20% of our workforce. Their average tenure is 28 years with departures phased through April 2025. To ensure smooth transitions, we opened internal hiring for 200 new operational and back office roles and received nearly 1,900 applications, an extraordinary response on technology.

We renegotiated the SAP S/4HANA implementation contract and changed our integration partners, targeting a go live in the second quarter of 2026. We also strengthened our IT infrastructure and cybersecurity posture. Lastly, we've begun preparations to ensure full compliance with Brazil's upcoming tax reform expected to begin rolling out in 2026. Moving to the next slide, I would like to go over our 2025 plan pillars. Our 2025 plan is centered on six key pillars. First, CAPEX execution. We aim to connect around 1 million new units primarily for sewage treatment to meet our 2025 universalization targets. This is priority number one. Second, regulatory gap reduction. We have clear actionable plans and aim to resolve a significant portion of these outstanding gaps in 2025. Third, metering and collections. We're accelerating meter park modernization and strengthening our collection policy to boost measured volumes and cash flow.

Fourth, cost efficiency. With ZBB routines now in place, we expect to see a reduction in operational expenses from through the year. Fifth, operating and maintenance productivity. We review outsourced contracts to ensure our suppliers also pursue productivity gains. Sixth, and lastly, culture and digital transformation. We're driving a shift toward higher performance through new rituals, routines, and processes along SAP. 2025 will see progress on CRM upgrades, OT solutions, and the rollout of our advanced metering infrastructure mandated in São Paulo and São José dos Campos. These projects will make SABESP home to the largest smart water metering network in the world by the end of 2029. In closing, I would like to say that we've only been at the helm for five months, but we are energized by the road ahead. 2025 is the year when SABESP's transformation will truly begin.

With that, let's open the floor for questions.

Operator (participant)

Thank you. We will now begin our Q and A session for investors and analysts. We kindly ask that you submit your question via the Zoom Q and A and informing your name and company.

Carlos Piani (CEO)

Good afternoon everyone.

Thiago Levy (Investor Relations Director)

We're going to start. Welcome to the Q and A session. We're going to start with a question that has been coming up a lot since we released the results, which is the bridge from the reported EBITDA to the adjusted EBITDA, and I'll pass to Danielle to explain that and go on, Danielle.

Daniel Szlak (CFO)

Thank you, Thiago. Thank you, everyone. Thank you for your questions throughout the day and here on the chat. Thank you for being here. It's always good to connect with all our investors. On Q4 we basically had five sets of adjustments. We've had an accrual for taxes on unbilled revenue that we've done that the company was not doing before. We've also made an accrual for BRL 630 million for the SABESP voluntary termination plan portion. That's basically for severance and we've also given an incentive to the internal people that was approved by the board right after we joined the company to accelerate the unitization of works that had been in construction for a while.

We have been able to accelerate that throughout and you can see that in our work in progress assets that has been a reduction in that number year on year, which we expect to continue maintaining the pace. Those were the two items inside the personnel line. That I think also answers a lot of the questions that were on the Q and A. We also did our annual inventory cycle. We have been able to significantly expand that and we have implemented new policies for inventory cycle counts that generated an impact of BRL 95 million for slow moving and inventory differences. We have also had BRL 60 million of consulting firms of post privatization PMI and also some expenses that we had to incur throughout Q4 to help with the mitigation of the cyber incident that we had.

Last but not least, there were also some costs from the privatization offer that were booked in Q4. We had some in Q3, some of them were booked in Q4 mainly with regards to positive insurance and some other minor PP&E assets that we wrote off. Those were the adjustments that we've included in the Q4 EBITDA thinking about what we believe is the recurring profitability and underlying business.

Thiago Levy (Investor Relations Director)

Great, thank you. We're gonna switch to the second question which came a lot as well from Maria Carolina from Safra, Marcelo Saframitau and Vladimir from XP. It's regarding the personnel line. Can you detail the manageable cost performance, especially personnel line X, the impact of the redundancy program which was implemented in December. Can you comment on that reduction in the personnel line for the fourth quarter, this versus fourth quarter 2023?

Daniel Szlak (CFO)

Sure, absolutely. Thank you, Carol and Marcelo, and I think someone else also asked that question.

Thiago Levy (Investor Relations Director)

So.

Daniel Szlak (CFO)

Yeah, so thank you. Thank you for the question here. Super important, I think on that front, right. When we exclude the impact of the voluntary termination plan and all the other aspects that I just mentioned, we have basically two impacts. We had the voluntary dismissal plan in 2023. Year on year there was a gain from that and we had a 5.5% lower personnel number in terms of number of people year on year on Q4. On top of that, as we came in, we've been revising many processes. Right. Like I mentioned the one for example on the inventory cycle counts and so on and so forth. We've done that in Q3 as well. We've started focusing on the core processes and the most critical ones, the ones that we believe are mostly linked to the business.

When we look at them, one of the processes that we've revised was the CAPEX and the utilization process. We've revised also the pickup on indirect costs linked to CAPEX or not. We've adjusted that to what we believe reflects the best and the most accurate number. The sum of those two things is actually what drove the personnel. Again, quarter on quarter. Keep in mind that this adjustment that was done in Q4 with regards to the methodology on the indirect pickup was done in Q4 for everything that happened in the year. On top of that, when we look at the CAPEX for the year, we've been able to significantly accelerate the CAPEX in Q4.

Carlos Piani (CEO)

Right.

Daniel Szlak (CFO)

We've executed 40% of the CapEx of the year in Q4, so we've also absorbed more of that. I think the combination of those three things is actually what drove the G&A / gap / increase

Thiago Levy (Investor Relations Director)

Excellent. The next question is from Bruno Amorim, from Goldman Sachs. Is the company involved in the universalization São Paulo program? Any updates you could provide on the timing?

Carlos Piani (CEO)

I'll take this one. Livy, thank you. Thank you for the question. This process is being managed by the state of São Paulo, so we do not control the timing. What we have been told is this is something to be, I think, concluded by the beginning, first quarter, maybe second quarter of 2026. From our side, we're interested. I think we have a huge presence in the state of São Paulo. Despite the fact that we're early days in our transformation, I think we cannot lose the opportunity to look at opportunities in our own state. For sure, we'll take a look and we'll evaluate the risk-reward relationship of this opportunity when it arises. We have had early discussions, but I would say these have been still early days. Nothing that, at least from our side, has been material.

I think things will pick up, I think by the second half of the year.

Operator (participant)

Okay.

Carlos Piani (CEO)

Okay.

Thiago Levy (Investor Relations Director)

The next question comes also from Bruno Amorim and also Carolina from Safra, asked that we will see the benefits of the lower discounts to large clients already in first quarter results or are you waiting for any approval from the regulator to implement a new prices?

Carlos Piani (CEO)

I'll take this one as well. Thank you, Bruno. Carolina, I think we'll see this impact more in the second quarter than first quarter. We're not going to see as much. I think there's a timing of the reading of the meters of each customer at the time of the termination of the contract. We also had a little bit more higher number of injunctions at the beginning that we were able to win. I really believe that this change will be material more starting on the second quarter of 2020. Having said that, we also expect, we expect a return by the regulator on the new policy. We haven't had a return yet and that may also impact how this plays out. I think it's going to be more material in the second quarter than first quarter.

Thiago Levy (Investor Relations Director)

Okay, next question also comes from Marcelo from Itau. What is your expectation in terms of personal savings following the voluntary dismissal program? Is all the costs related to this program booked or could be more.

Daniel Szlak (CFO)

Hi Marcelo, thank you for the question. I'll take this one. Look, we try not to give guidance, really. We've given information that we believe is going to be material enough on the presentation to try to estimate that in the models. With regards to any additional cost that we expect to incur, no, there aren't any additional costs that we expect to incur with regards to the voluntary dismissal plan.

Thiago Levy (Investor Relations Director)

Okay, let me see if we have any more. Just came one from an investor. Does the reduction in contract assets from BRL 7.4 billion in 2023 to BRL 4.8 billion in 2024 indicate that there will be an increase in the red beyond CAPEX?

Daniel Szlak (CFO)

Thank you. Thank you. Thiago, take this one. I think the answer is, the short answer is yes, right? I think one of the things that we've been trying to do since we got here is really to look at what the company had in inventory and try to understand why wasn't that already put into work, right? Because that's the trigger for the unitization and really try to remove the bottlenecks and make this part of the CAPEX plan that we have because these works have been executed for some reason there and make sure that we take advantage of that and don't reinvent the wheel. One of the things that we did was in line with that and there was also an accrual for people to incentivize that like I mentioned on the adjusted numbers for the quarter. We believe that we were successful there.

One of the most important things is for us to keep the discipline here as we grow the CapEx. Naturally, some of the works that we're going to do are going to be more long term in terms of length with regards to construction cycles as we expand, for example, wastewater treatment station, it's a longer tenure work than, for example, putting a new connection, for example. Our job is really to try to make sure that we maintain this as current as possible. Really to make sure that we're following what we have in terms of interest on capital throughout the construction period from the regulation and we're not exceeding that. That's the way we've been approaching that.

Thiago Levy (Investor Relations Director)

Okay, some other questions that are coming in, coming up. One question now from Guilherme Lima, from Santander. What are your thoughts on the Para sanitation auction? It would make more sense to expect you not to participate as it is outside of São Paulo State.

Carlos Piani (CEO)

I think we're early days at SABESP. We're a little bit over five months. Would that be ideal? Probably not for any opportunity. Right. Inorganic opportunity, easier, smaller in our home turf, the state of São Paulo, harder and more challenging concessions. They're more complex. More complex and not as similar to what we have. What I can tell you is that we look at everything as this also, these processes help us learn more about the industry. I would say that from a relative perspective, taking the previous question of universalization, I think it's easier to look at universalization than Pará. Right. Regarding any partnership with Equatorial, what I could tell you is Equatorial has a comparative and competitive advantage, both of them, because it has a concession in the state, it knows the region pretty well.

If Sebastian decides to go through, I don't see a reason. Not if Equatorial didn't want to go as well. I would say that this is early days. There's nothing currently that's saying that we're going to do this. We're focusing on the transformation, looking at every process that is on the market, but no decision has been made yet. I would say less likely, but it's a risk reward relationship at the moment. Nothing concrete to comment.

Thiago Levy (Investor Relations Director)

Okay. We have, going back a little bit to the topic of the big discounts, I have another question here from Jean Pimentel as a follow-up in the same question. Tariff discount considering the current term of each contract and assume you are able to remove the discounts. When could we see the full impact on our P&L?

Carlos Piani (CEO)

I think the full impact on the P&L probably would be on the second half of the year. Every cycle. Every discussion, every metering cycle would be, would be done probably if we, on average, we have some customers that had a 60 day termination clause, but others had longer and so forth. It is not linear, just one, one size fits all. I think this will be concluded probably by the second quarter and the full impact would be on the third quarter where everything happened. Okay, it is a ladder, it is going like this and probably we are going to end the second half with the full impact with the, not annualization, but the quarter, the full quarter on the third quarter.

Daniel Szlak (CFO)

That's it.

Thiago Levy (Investor Relations Director)

Okay. Okay. Getting a little, some more questions here. Elon Arbitman from Achievo Investment. Can you give a little bit more color in the rise over here in PLD?

Daniel Szlak (CFO)

Thank you. Thank you. Thank you, Elan. Thank you, Thiago. Look, Elan, I think it's less about 2024. Specifically, it's more about 2023 where the company had major agreements with large customers and whereby the company was able to recover important amounts. I would take the advantage of your topic. I think this is one of the regulatory gaps that we have as a company whereby we are looking at many different solutions here and changing how we see collections. We have a stretcher targets in our 2025 plan for collections which should implicitly reduce that. Even more than that, we're looking at different ways of payments. Right. The company barely uses credit cards. That automatically offloads the risk of the balance sheet of a recurrence in delinquency. We are increasing the budget for cuts in water for delinquent accounts.

This is actually growing by more than 2x for example. We are looking at many, at all the levers that we have to pull. We are actually at this moment working out as a big fat ton of renegotiations, a big campaign of renegotiations. All in all, I think we have a lot of opportunities here. Dennis, who is our new Head of Customers and Technology, comes from this revenue insurance industry. We are cooking up a lot of good things on that front.

Thiago Levy (Investor Relations Director)

Now just one, one, I think one last question that we have here from Gabrielle Mosica. Does the company have an ongoing severance plan and what is the target?

Carlos Piani (CEO)

I don't understand. If the severance plan is a terminate open termination plan, the plan that we had in place, we opened and closed. Basically, that's it. We may open new termination plans moving forward. Differently from the one, the four, the last one before ours, it was open for a year. This one was a very short run. This was basically a 30 days program. We may use this lever again. There is no open termination plan open as we speak. No major expectations on personnel reduction as per now. In different conditions, if they exist, they would follow the rules that we have in place. There is a price, there is a severance, additional severance to be paid until the end of January 2026.

That would be the case, we would need to pay that extra severance to what's legally due to any employee that we lay off.

Thiago Levy (Investor Relations Director)

Okay, we have another question coming from an investor. How should we think about the mix of consumers? As you expand penetration of service towards universalization, are these areas materially over indexed to consumers who fall under low tariff rates?

Daniel Szlak (CFO)

Thank you, I'll take this one. Thank you, Frazier, for the question. Very important one. When we think about our mix, right, and what happened in 2024 and what we would see probably going forward, right. When we look at 2024, we had a BRL 200 million high impact from mix in the top line. Most of that impact came from the new rule for vulnerable social tariffs. A part of that impact came also from that expansion that you just mentioned. I think this is where the FAEP, which is the Fund for the Universalization to amortize the impact of the universalization, comes into play to help that also in having more consumers in the social mix. As we go through tariff cycles, we should see that rebalance throughout the market mix, right.

That is where FAEP comes into play to avoid that from happening. To amortize that impact to be very big with the consumers. As we grow, naturally thinking about what we still have to cover, especially in the metropolitan regions, we should see an increase in the most social and vulnerable modes of tariff.

Operator (participant)

Thank you. The Q and A session is now over. We wish to give the floor to Mr. Carlos Piani for the company's closing remarks.

Carlos Piani (CEO)

Thank you, so again, thank you all for joining our call. I think these are still early days of our tenure here at SABESP, a long-term road ahead of us. I know that's challenging to do a big transformation being a publicly listed company. Be patient with us. We are very excited with the outlook. Maybe we are going to have some non-recurring events because we are going to try to clean as much as we can of everything, everything that we find. We are very excited with the opportunity. I think the team is excited. I think a lot of opportunities are ahead of us. We are all committed to the long term of the company and I hope to see you all on the next quarter results in May. Thank you all. Have a nice day. Bye bye.

Operator (participant)

SABESP earnings presentation is now closed. Thank you very much for your participation and we wish you all a very good day.