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Companhia de Saneamento Básico do Estado de São Paulo (NYSE:SBS)

Q4 2009 Earnings Call Transcript

April 1, 2010 3:30 pm ET

Executives

Mario Arruda Sampaio – Head of Capital Market and IR

Gesner Oliveira – CEO

Rui Affonso – CFO and IR Officer

Nara Maria Marcondes França – Head of Accounting

Analysts

Michael Gaugler – Brean Murray, Carret

Operator

Good afternoon. ladies and gentlemen. At this time, we would like to welcome everyone to SABESP conference call to discuss its results for the fourth quarter of 2009 and the full year 2009. The audio for this conference is being broadcast simultaneously through the Internet and 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. (Operator instructions)

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Reform Litigation 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 risk, uncertainties and assumptions because they relate to future events and therefore depend on the 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. Gesner Oliveira, SABESP’S CEO; Mr. Rui Affonso, Chief Financial Officer and Investor Relations Officer; Mr. Mario Arruda Sampaio, Head of Capital Market and Investor Relations; and Mrs. Nara Maria Marcondes França, Head of Accounting.

Now I will turn the conference over to Mr. Arruda Sampaio. Sir you may begin the conference.

Mario Arruda Sampaio

Okay. Thank you. Good afternoon everybody. We wish you to join our conference call right now. First, before we move on ready to discuss results, we would like to highlight a few important issues that happened during the course of the year 2009. First from the corporate governance aspect, which is one of the foundations of our credibility. With this respect for the third consecutive year, SABESP was maintained in the Bovespa Sustainability Index.

Another highlight is that despite the credit crisis that affected the financial markets in 2008 and 2009, we continue to maintain this credibility. Recently the rating agency Standard & Poor's improved our rating from BB- to BB on a global scale, and this was already BB on the Fitch Scale. And from A+ to AA- on the (inaudible) followed also by Fitch, which is obviously recognition of the company’s capacity to honor its financial commitments even on a hectic environment.

On the regulatory side, the regulation framework has been improving and increasingly demanding greater efficiencies from the company. We did not stay still. We made progress in the negotiations with the municipality and managed to renew another 14 contracts, which now total 174 renewals, and more importantly we are in advanced stage of negotiations to sign a contract with the City of São Paulo. During the crisis, there was a doubt if we could be capable of financing our aggressive Capex program. What was earlier a doubt is now a fact. At least 80% of our Capex has been secured financing and overall since 2007 all the way to by the end of this year, it should have been already contracting finances to the amount of 6 billion [ph].

Most of these are already secured and signed, and some are in final more bureaucratic negotiations. We highlight with this respect the financing we are negotiating with the JICA Bank, IDB, World Bank, which all offer attractive rates long-term rate periods, enabling the company to expand its business could meet its target.

The last point to be highlighted is the progress in streamlining our workforce. In 2009, we reduced our headcount by 9.3% as a result of the TAC we signed with the State Prosecution Office. The TAC is a Conduct Adjustment Term to dismiss employees retired under the Public Social Security Program, what here in Brazil is called the ENESF [ph], and that still works for the company. And in addition to this we also dismissed 2% of our workforce which is capital out [ph] by our labor union agreement.

After this somewhat brief summary of what was 2008 for us in highlight, let us move onto the presentation. We have five slides, and let us discuss the main events of this. After that we will open for question and answers.

Let us move to slide three. On this slide, we show the 2009 billed water and sewage volume growth of 2.5%. This growth happened despite the decline in volume in the industrial segment due to the closure and/or reduction of production in a few industrial units, and also with the signing of a take-or-pay agreement, as well as the reduction in the volume in the public sector category that is municipal and state level due to the incentives for the reduction in consumption provided by the PURA, the program for the rational use of water.

We take this opportunity to highlight the results of water loss control in 2009. At the same billed water volume by 2.1% in 2009. The volume of water produced fell by 0.3%, mostly due to the decline in water loss rates, which was 27.9%, almost 28% in 2008, and it is now in 2009, 26%. This reduction of almost 2% in water loss occurred at the same time the company served the population of 1% bigger. So we reduced the loss. We maintained production and covered more people. Equivalent, in fact, more people equivalent to the population of the city such as São Paulo.

Moving on to slide now four, we will comment on our financial results highlighting how our financial performance would be if not for the provision for the amount to be paid to the retired employees already retired under the ENESF as mentioned. That will be dismissed on the company under the Conduct Adjustment Term, the TAC, as already mentioned before.

Net revenues in 2009 reached $6.7 million mainly due to the average increase of 4.9% in tariffs in 2009 in relation to 2008, resulting from the tariff adjustments of 5.1% in September ’08 and 4.43% in September of ’09, as well as the growth in the total billed volume of 2.1% for water and 3.2% in sewage.

With regards to cost and expenses, we can highlight that excluding the tax revision for the retired employees as mentioned before. The increase would have been 6.7%, close to the revenue growth of 6%, somewhat in line with the company's efforts to reduce costs. As for our EBITDA, which reached 2.7 billion that is 3.5 lower than in previous year, and then EBITDA margin for 2009 of 40.7. If not for the tax revision EBITDA would have been 2.9 billion and EBITDA margin would have been 42.9. That means not so for from the 44.7% of 2008.

On the other hand, net income deserves a careful analysis since the amount of 1.54 billion is significantly higher than the 63.6 million in 2008. This difference was due to the provision for expenses relating to the disputed portions of the complimentary benefits paid to the retired employees and pensioner, pursuant to law of 4819, which probably you have knowledge of most of that. And the amount of 409 million, and the recognition for the provision of the actuarial commitment to the beneficiaries of the respective laws in the amount of 535 million.

If this adjustment did not exist the net income in 2008 would have been close to 1 billion. Considering this amount, growth in 2009 net income would have been 36.2% over the previous year through significant results. In fact, if we exclude the affect of the tax revision, net income would have reached 1.5 billion, representing a growth of close to 50% over 2008.

Let us move now to slide five. Slide five we discuss the main variations in cost in relation to 2008. Compared to 2009 there was an increase of 10.2% in cost and expenses. This increase would have been 6.6% if we exclude the tax revision effect. The main items that affected this result were expenses and severances, which increased 32.3%, payroll and benefits which rose by 15.1%, and general expenses which increased by 9.4%.

With regard to services, we know this is an increase of 222 million [ph], 32.3%. In the first place, we highlight the increase in demand, and the amounts of the Global Sourcing services agreements in the municipalities covered by the regional system, and the increase in maintenance services in the Metropolitan region of São Paulo, in addition to greater allocation of funds to the Water Loss Reduction Program, and the intensification of operations to meet the demands of the Córrego Limpo Program with the São Paulo Municipal Government and the Canal Limpo Program, which is somewhat equivalent with the municipality of Santos.

We also highlighted expenses related to the Taiaçupeba Public-Private Partnership, which are accounted as expenses and the urbanization efforts as part of the agreement with the City of São Paulo in the amount of 29.6 million.

Another factor that affected the service item was the spending on advertising campaign in the amount of 25.9 million with the objective of showing the population the work and the benefit that SABESP brings to the quality of life of the population living environment. And now to mention that, everybody has to remember that more than double our investment plan, which means that we are more than double on the recurring base affecting the urban area, which obviously demands more communication.

But again we also want to highlight that the communication programs are important, especially the ones that are social environmental programs such as the (inaudible).

On the other hand, it is worth highlighting that expenses with risk contracts for the recovery of credits, in the amount of 20.1 million, due to the intensification of collection operations, which on the other hand led to a 321 million increase in collection in 2009, which means more cash. With regards to payroll and benefits, it must be noted that this variation of 15.1% reflects expenses with the tax provision. Excluding this effect, the increase would have been only 4.3%, well below the variation in total costs and expenses, net of tax revision which would have been 6.6%.

The increase in 32.5 million in general expenses was mainly due to the provision for legal contingency, and expenses related to the contract program agreement with the municipalities we have renewed concessions in the amount of 5.6 million.

Finally, we noticed a declining 28.1 million in credit write-offs, with increased revisions in 2008 for the overdue debt of the municipalities, which the company provides treated water now on a wholesale basis, those six municipalities in the Metro Region of São Paulo.

Let us move to slide six; here we discuss the main variations of cost in 2009. The main variations of these items affecting net income were net operating revenue grew by 378 million, operating costs and expenses increased by 420 million. When compared to the previous year remember that this includes tax revision explained during the presentation in the amount of 146.6 million [ph], without which the increase in cost would have been 273.5 million. Other revenues and expenses represented a variation of 1.013 billion [ph].

Note here that this amount is impacted by the non-recurring provision made in January 2009 over the 2008 results that were immediately restated at that time. Regarding the complimentary benefits for retired employees and pensioners [ph], in addition to the corresponding actuarial liability totaling 955 million, which we already detailed and commented as we went through slide four.

Excluding this effect from 2008 restated results, the increase would have been 68.8 million. The net financial results contributed to an increase of 504 million. The main factors affecting this variation were the devaluation of the dollar in relation to the (inaudible) in 2009, remembering that in 2008 there was a devaluation of the Real, and a reduction in monetary variation liability due to the decline in IGP-M [ph] inflation index at the reference rate, which are indexed to some of our loans and debentures.

Finally, there was a variation of 165.8 million in taxes as a result of the higher tax base due to the higher income level in 2009. Let us move to our last line, seven, we will now comment on the projected investments for 2010 and the funds raised by the company to continue this Capex trend. But before let us highlight that the Capex for 2009 reached 1.8 billion, somewhat little bit over with what we had for plan.

For 2010, we expect the investments to be in the order of 1.8 billion with the main funding sources being international multilateral banks and the BNDES for this year. In addition to the 294 million that we have recently signed with BNDES in the beginning of 2010 for the (inaudible) program, the program that is now being put in place in the City of Santos in the Santos metro region.

The company is in advanced stage of negotiations and expects to sign very soon a final signature of a loan agreement of $600 million with IDB for the project Tietê. Another 190 million we will be signing soon with JICA, hopefully by the mid of this year also to support the Onda Limpa program, and $366 million worth of financing also from JICA were expected to sign by the end of this year to support the corporate water loss reduction program.

Anyway those were our initial comments. Let us open now for questions and answers. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) The first question we have from Michael Gaugler of Brean Murray, Carret.

Michael Gaugler – Brean Murray, Carret

Good afternoon everyone.

Gesner Oliveira

Good afternoon, Michael.

Rui Affonso

Hi, Michael.

Michael Gaugler – Brean Murray, Carret

Congrats on a great quarter.

Gesner Oliveira

Thanks.

Michael Gaugler – Brean Murray, Carret

I have three questions and they should go pretty quickly. Looking at the fourth quarter results, interest expense came in lower than we anticipated and I'm wondering as you look out at 2010, do you anticipate your interest expense in 2010 would be higher or lower than what we saw in 2009?

Mario Arruda Sampaio

Okay. That is one question Michael. If you can make them all now, we will figure out the best way to answer.

Michael Gaugler – Brean Murray, Carret

Okay. The second question was I noticed from the news reports that in the first quarter of 2010 you had some heavy rains and flooding in the São Paulo area. I was wondering if you expect overall volumes to be lower year-over-year for the quarter based on the weather impact. And then my third question is just any update you can provide on the 2008 20-F situation?

Mario Arruda Sampaio

Let me go on to 2008. It is Mario speaking.

Michael Gaugler – Brean Murray, Carret

Sure.

Mario Arruda Sampaio

2008. That goes backwards. As I asked Nara to help us check if there is any specific current issue on the fourth quarter interest expenses that we may want to highlight to see how much we can comment on that as far as we don't give you any guidance. Sorry Michael.

Michael Gaugler – Brean Murray, Carret

Sure.

Mario Arruda Sampaio

So, on the 2008 20-F we should be filing any time soon, we do have already a waiver from (inaudible), that it goes all the way through the end of May, but we still have some extra time if needed to file the 20-F. There is no impediments on us right now in filing the 20-F except for doing the hard work to get it done, almost at the same time we have to the 2009 20-F.

We should be putting the 20-F hopefully by the end of this month, the 2008 filing. Well that is one part. On the first quarter rain, I think I don’t know if you want overall comment, it did rain a lot and the weather but was still very warm. I think it would be very fragile to say that because there was a lot of rain people consumed less water, and we could have an exceptional lower volume for the first quarter. It is too soon to know.

After all, we're not even commenting on the first quarter. We are commenting, sorry Michael, on the December numbers. Okay. But overall as a rationale I think we should not comment, because we haven't really observed anything odd around that.

Specifically on the flood side, I can kind of comment, but we did have some issues on the flood side regarding most people understanding that the company was responsible for the flood which was absolutely incorrect. In fact, we have been supporting the flooded areas more than anything else. But again, we did have to answer more questions than to address problems. I am not sure if Gesner wants to comment something extra on the flood question.

Gesner Oliveira

Just a comment that we did have many situations in which we had to have exceptional operations in order to help the municipalities, sometimes including our sewage services, sometimes including our water services, and sometimes just helping the municipality due to the difficulties that the municipality had with the flood. But it was a very exceptional, very exceptional event that Mario said we will comment on that in detail in the next quarter.

Mario Arruda Sampaio

Michael, I think the fourth quarter lower interest expenses had an impact on the – in English, it is going to be hard right now. But the revision of a provision we had from – with São Paulo I understand. So, eventually something not recurrent that not sure you can assume that interest expenses would – it is a new pattern for interest expense that would actually think that as we move with the investment program, overall we should be adding more as we move on this year, next year and the next year, more interest expenses. At the same time we know that interest rate should go up as we move on.

But anyway I'm not sure that addressed well your point, and let me see if there is any other detail from Nara here. Just a second. I think that is it Michael. If anything, we can scrutinize that better and make the point later on. Okay.

Nara Maria Marcondes França

Okay.

Michael Gaugler – Brean Murray, Carret

That is fine, Mario. Thank you. I appreciate the time.

Mario Arruda Sampaio

Okay. Bye-bye.

Operator

(Operator instructions) It appears that we have no further questions at this time. I will turn the conference back to SABESP management for their final remarks.

Mario Arruda Sampaio

Okay. Thank you very much for those who participated in this call, and we will certainly be back in a couple of months with the next quarter. Bye-bye.

Operator

Hey, thank you everyone for your time. The conference has now concluded. At this time you may disconnect your lines. Thank you. Take care.

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