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Companhia de Saneamento Basico do Estado de Sao Paulo (SBS -1.04%)
Q2 2020 Earnings Call
Aug 18, 2020, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Mario Sampaio -- Head of Capital Markets and Investor Relations
Okay. Good afternoon everybody. Welcome to SABESP's videoconferencing to discuss the results for the Second Quarter of 2020. My name is Mario Sampaio, I'm the Head of Capital Markets and Investor Relations. We will inform all participants that this videoconferencing is being recorded. The presentation accompanied with the slides are being broadcasted in the Internet through the company's website and the MZiQ platform. The presentation and earnings release will be available for download on the same portal. Questions made to speakers will be accepted through the video cast platform only.
But before we proceed, 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 no guarantee 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.
Let's move and introduce everybody that we have with us. Let's start with Mr. Rui Affonso, he is the Chief Financial Officer and Investor Relations Officer; we also have with us Mr. Agnaldo Pacheco, he is the Company Controller; Mr. Marcelo Miyagui, Head of Accounting; and also Mr. [Indecipherable] Head of Costs and Tariffs.
Now I will present the highlights for the second quarter, starting with some initial highlights. Let's start saying that this was in a typical quarter with the most intense month of social isolation due to the pandemic, which aggravated by the economic context or high stability brought adverse effects for the company. The effect of exchange rate devaluation on foreign currency debt and irrelevant impact had a relevant impact in the result. The consumption of commercial, industrial and public customers categories that have a higher tariff decreased and delinquency increased. These facts added to the bill payment exemption for customers and the residential, social and Residential Favela categories, along with the postponement of the tariff adjustment made this scenario even more challenging for us.
We did stand still during this time and kept things moving. On the operational side, we reduced cost, secured markets by signing contracts, 13 municipalities in the quarter and concluded the important negotiation with the municipality of Maua, which was previously served on a wholesale basis and which had a historic bad debt with SABESP.
From a financial point of view, we concluded the 25th and 26th debenture local bond issuance, adding them up sums to -- close to BRL2.5 billion in capital raising. We also reduced from last quarter -- previous quarter to this quarter our FX exposure from 55% to 34% and we have advanced in negotiations with other institutions that can provide funding for the company's strategic project and debt refinancing.
So let's go now to the numbers, starting on slide three. We will begin on slide three, where you can see a 2% reduction in total billed volume, 2.1% in water, and 2% in sewage. Excluding the volumes in the recently included municipality of Maua, and Santo Andre, the volume from the wholesale and also from the customers in the residential, social, and Residential Favela categories. However, as expected, the consumption mix change among the categories, volume in the residential category increased by 0.7%, while the commercial, industrial, and public categories were strongly impacted by the new dynamics arising from the COVID-19 crisis. Volumes fell by 18.4% in the commercial category, 16.7% in the industrial category, and 24.5% in the public category when compared to the second quarter of '19. The migration of consumption of the categories with the higher tariffs, the commercial, industrial and public impacts directly, obviously the average tariff prices and consequently our financial results.
Let's move now to slide four. Here, let's [Technical Issues] highlights. Income totaled BRL378.2 million in the second quarter of '20, compared to BRL454.4 million in the second quarter of '19. Although being heavily impacted by the COVID crisis, and consequently by the worsening of the global economic scenario, the expense containment measures implemented in the first quarter together with the agreement signed with the municipality of Maua resulted in a positive bottom line in the period. Adjusted EBITDA increased by 28.4% from BRL1.23 billion in second quarter '19 to BRL1.58 billion last quarter.
Net operating revenue grew by 10.9%, from BRL4 billion in second quarter '19 to BRL4.43 billion in second quarter '20. The agreement signed with the municipality of Maua [Technical Issues]. As for cost, administrative, selling expenses and construction costs, the increase was 4.9%, excluding construction costs effect, expenses fell actually 6.6%, contributing to an increase in the operating margin. The adjusted EBITDA margin was 35.7%, compared to 30.8% in '19. The adjusted EBITDA margin was 42% in the last 12 months. With the write-offs of revenue and construction costs that is this considering them, the adjusted EBITDA margin was 45.7% in second quarter '20 compared to 36.7% in second quarter '19, and 8.2% in the last 12 months.
Now, let's go to slide five. Here, we will analyze costs. Compared to the previous year, cost, administrative and selling expenses and construction costs increased BRL157.6 million or 4.9% as already mentioned. However, excluding construction costs, and also as mentioned, costs and expenses fell 6.6% from BRL2.52 billion to BRL2.36 billion. Compared to the previous year, nearly all expenses as you can see fell. Some of the most significant decreases were BRL113.3 million or 14.7% in salaries and payroll charges and pension plan obligations, mostly and mainly by the reduction in medical expenses, and of the consent for the retirees and the fact that the salaries were not adjusted this year.
The drop in general expenses also contributed significantly with a reduction of BRL134.7 million or 39.7% due to lower provision for payments of losses, closing of losses with the municipality of Sao Paulo in the second quarter of '19 due to the agreement signed and reduction also in the transfer to the municipality fund of Sao Paulo as the municipality revenues fell during the period. It's worth noting that 45% or BRL36.4 million year-over-year increase in expenses with allowance for [Technical Issues] quarter, however, it is less than what we provisioned actually in the first quarter of this year.
Let's quickly then go to slide six. Let's analyze the changes in the results. Net income fell by BRL76.2 million, net [Technical Issues] by BRL434.6 million, costs and expenses including construction costs grew by BRL157.6 million, other operating expenses and [Technical Issues] positive BRL111 million. [Technical Issues] results fell by [Technical Issues] of the real against the dollar and the yen. Finally, income tax and social contribution fell by BRL55.5 million in the view of lower taxable income recorded in the quarter when compared to the same period in '19.
Let's now move to slide seven. This slide we will update on the company's initiative to guarantee the execution of investments and refinance of debts during this year. As we mentioned in the call for the first quarter of 2020, BNDES opened a program that provides for the suspension of debt service for a period of up to six months [Technical Issues] we managed to suspend the debt service for five months, which is equivalent to a total of BRL130 million that will not have to be dispersed this year and that will be added to the principal of the debt that will be paid in the remaining terms of the contract, so something very attractive. Also in relation to BNDES, we obtained an advancement [Technical Issues] period that will go into our cash immediately now in July, it went in July actually. In the case of the program the same similar program that provides for the suspension of debt services with cash economic asset at other social bank, we have already requested and are actually waiting for a statement from the bank.
With regards to the IDB Inter-American Development Bank and the World Bank, also both multilateral institutions, we requested advances and reframing of project that in case they are approved and was anticipation of disbursements that could reach almost BRL500 million and now we are actually waiting for them to come back to us with their appraisal and what is possible or not to move-on for this year. We will have something, but we want to know how much this year.
On the side of funding from the capital markets, on July 10, the 26th debenture issues, we issued the 26 debenture in the amount of BRL1.045 billion. This debenture was structured according to Law 12-431, in this case, then being classified as an incentive or an infrastructure debenture as you can see by the terms we obtained. So being a specific [Technical Issues] first series in the amount of BRL600 million with interest rates at IPCA plus [Technical Issues] seven year bullet maturity. The second series was issued in the amount of BRL445 million with interest of IPCA plus [Technical Issues] per year and maturity of 10 years with the organization in the eighth, ninth and 10th year.
As a reminder, the company has already mandated IDB invest for a loan in reals of up to BRL600 million. The structuring process is in advance and when it's completed, we'll add resources for cutbacks and to support the company's liquidity. Adding up all the funding efforts so far, we understand that we have already secured a volume of funds that allow us to redeem the main debts due by December of this year in advance.
Let's now move to the next slide for matters related to regulation. We have recently had very important definitions in July on the 15th, SABESP published resolution, 1021 authorizing the application of the tariff adjustment index of 3.4026%, which reflects the annual adjustment of 2.4924% and the compensatory adjustment for the 0.888%. The later actually refers only to the compensation for the postponement of the application of [Technical Issues] since the exemption from payments of the Residential Favela categories has said that it will treat this matter together with the discussions on the third tariff review.
So regarding the clients on Residential Social and Residential Favela, SABESP's resolution 1038 was published on the last 14th extending that actually the exemption under the same conditions as the previous exemptions, but this time until September 15. Regarding the tariff review, have concluded the public consultation on methodology and WACC. There was acceptance by ARSESP of relevant contributions from SABESP for both topics. It is our view that so far the process is evolving in a technical, transparent and a very balanced way. Some highlights of the response are, the consideration of effects of the COVID-19 crisis on consumption history, the level of [Technical Issues] proposed is not feasible to be achieved period to the current ones. So that's an issue that will be discussed in public [Technical Issues]. The story related to the exemption from the residential tariffs that will be dealt with in a specific residence.
With respect to the regulatory asset-based inclusion of investments into December of 2020 and old claim from the company assessed open the possibility to evaluate exclusions made in the first tariff review and that is scheduled for the second quarter -- second half, sorry of 2020. In addition, the new tariff structure which is under preparation and it is scheduled for completion in December. [Technical Issues] issue of fundamental relevant is related to the WACC. The final result reached 8.9%, representing an increase of 72 bips over the preliminary number of 7.38%. In addition, as can be seen from the slide, cost of equity was significantly above the preliminary proposal, even above current levels.
Let's finalize with our comments. Final remark on July 15, Law 2020 -- sorry July 15, 2020 Law 14026 [Phonetic] was sanctioned by the President which extinguishes the figure of the program contract, increasing compensation, competition in the sanitation sector. In addition, it imposes transparency in setting the service targets, encouraging operators to act more efficiently. Additionally, by creating conditions for the National Water and Basic Sanitation and agency called [Technical Issues] and to establish guidelines for the performance of state and municipal regulatory agencies. The law minimizes regulatory uncertainties, creating an attractive environment for investments in the sector. However, the final assessments of the changes actually introduced in the Brazilian sanitation will only be possible after deliberation and approval by the National Congress on the maintenance of the lifting of the 11 presidential vetoes which Law 1426 [Phonetic] was enacted.
The company understands to have competitive advantages in this scenario, either because its contracts already contemplate goals that meet or even anticipate those contained in the new regulatory framework or because of the access it has to public and private capital in the financing of its projects or due to its high level of governance. The great exposure to the market that has characterized its performance in recent decades shows the best is prepared to compete in expanding its participation in the sector.
These are our comments. Now let's move to the Q&A session. So let me see here. If we have questions, do we have questions?
Questions and Answers:
Mario Sampaio -- Head of Capital Markets and Investor Relations
Okay. Showing no questions. Rui, you want to take the word here for the closing remarks?
Rui de Britto Alvares Affonso -- Economic-Financial and Investor Relations Director
Okay. We would like to thank everybody to joining us in this conference call. I believe that the silence from your side is due to the great participation in the conference call we have had in this morning, but we are open 24 hours a day. Well, 24 hours a day is Mario and his team, to ask you any kind of concerns you may have. I'm sure you have and to continue our discussion anytime you want.
Again, thank you very much for your participation. And we will be together in the next quarter. Thank you very much.
Duration: 20 minutes
Call participants:
Mario Sampaio -- Head of Capital Markets and Investor Relations
Rui de Britto Alvares Affonso -- Economic-Financial and Investor Relations Director
