Companhia de Saneamento Basico do Estado de Sao Paulo (SBS)
Q3 2012 Earnings Call
November 21, 2012 11:00 am ET
Mario Arruda Sampaio
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Francisco Navarrete - Barclays Capital, Research Division
Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to SABESP conference call to discuss its results for the third quarter of 2012. The audio for this conference is being broadcast simultaneously through the Internet on the website, www.sabesp.com.br. In that same address, you can also find the slideshow presentation available for download. [Operator Instructions]
Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of SABESP's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of SABESP and could cause results to differ materially from those expressed in such forward-looking statements.
Today with us, we have Mr. Rui Affonso, Chief Financial Officer and Investor Relations Officer; Mr. Mario Arruda Sampaio, Head of Capital Markets and Investor Relations; and Ms. Nara Maria Marcondes França, Head of Accounting. Now I'll turn the conference over to Mr. Arruda Sampaio. Sir, you may begin your conference.
Mario Arruda Sampaio
Okay, thank you. Good afternoon or good morning for some of you. Let's start this presentation, but to let you know, we have 6 slides. And after we go through the slides and present the overall results for the company and a quick comment on the offset of the development, we will open for question and answers. Let's start on Slide 3. Here we show the company billed water and sewage volume, which was 3.2% above the same quarter in 2011. This higher volume resulted from the 2.5% increase in water connections and a 3.3% upturn in sewage connections, this is in line with the company's expectations to grow with billed water volume by around 2.5% and its billed sewage volume anywhere between 3% to 3.5%. This later influenced by the high investments that the company has been making in this segment, meaning in the sewage segment. In the third quarter of 2012, the water loss ratio remained flat at 25.9% in relation to the same period in 2011. We understand that with the contracting of the investments that are financed on the Japan International Cooperation Agency program, our water loss program, more of a loss reduction program, which is scheduled for conclusion early -- somewhat early 2013, we shift to a greater decline in this indicator as we move into next year.
Let's move to financial highlights on next slide. Net revenue was positively affected by the 6.83% tariff increase as of September 2011, and a 3.2% upturn in billed volume as mentioned in the previous slide. Cost and expenses grew by 2.3% in the period as a percentage of net operating revenue, however, cost and expenses fell from 75% in third quarter 2011, and 73.4% in third quarter 2012. EBITDA increased from BRL 814.2 million in third quarter 2011 to BRL 902 million in third quarter 2012. EBITDA margin increased to 33.3% versus 31.4% in last quarter -- sorry, third quarter 2011. If we exclude construction and revenue costs from the total revenue, EBITDA margin was 42.4% this quarter versus 41.6% in third quarter 2011. EBIT moved up as you can see by 11.7% from BRL 646 million in third quarter 2011 to BRL 721.8 million in third quarter 2012, net income increased from BRL 68 million in third quarter 2011 to BRL 361.8 million in third quarter 2012.
Let's move to the next slide and discuss the variation costs, help explain all the numbers we went through. Obviously, this explanation will be in relation to the same period of the previous year that is then in comparison with the third quarter of 2011, cost and expenses grew by 2.3%. The main factors behind this upturn were the increase of 310.5% credit write-offs, 8.5% in supply, 8% in general expenses and 6.7% in service. Note that the somewhat small variation costs and expenses was heavily impacted by the 0.1% reduction in payroll and benefits, which accounts for a large portion of our total cost. Expenses with credit write-offs increased by BRL 53.4 million from BRL 17.2 million in third quarter 2011 to BRL 70.6 million this quarter, largely due to the additional provision for overdue agreements with private clients in the amount of BRL 14.5 million and for the overdue debits with state public entity in the amount of BRL 26.7 million. Expenses with supplies, increased by BRL 3.6 million or 8.5% when compared to the same period of the previous year from BRL 42.5 million to BRL 46.1 million, mostly due to water and sewage operating system's preventive and corrective maintenance in the amount of BRL 2.4 million and maintenance of water and sewage connections and network totaling BRL 1 million. General expenses increased BRL 15.5 million or 8% from BRL 194.2 million to BRL 209.7 million, predominantly due to the increase of BRL 4.7 million in the provision for transfer of funds. The municipal environmental infrastructure fund as defined by the service contract and agreement we have signed with the municipal government of São Paulo. Also the increase in the provision for losses amounting for BRL 2.4 million and the increase of BRL 1.7 million due to the beginning of the billing from the use of water in the Baixada Santista water basin. This is a Santos sports area water basin since February 2012. Services increased BRL 16.4 million or 6.7% from BRL 245.1 million in third quarter 2011 to BRL 261.5 million in third quarter 2012 most explained by the BRL 8.6 million increase related to advertising campaign, focused on socio-environmental initiatives. This BRL 5.9 million increase related to fleet renewal and growth reform through a rental program. They also shipped a water production system performed under a public and private partnership, provided an increase of BRL 4.1 million due to the start-up in September 2011 of the additional 5 cubic meters per second water production capacity. This increases mentioned above were partly offset by BRL 10.1 million reduction with social and environmental activities related to the agreement with the municipal government of Sao Paulo, remembering that this agreement we established prior to finding the contract -- the service contract, but we have still commitments still related to that agreement that we have to perform and undertake an impact as you can see.