Release Date: March 25, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Companhia De Saneamento Basico Do Estado De Sao Paulo (NYSE:SBS) achieved a significant increase in net profit by 172%, amounting to 9.5 billion.
• The company reported a strong financial position with a net debt to EBITDA ratio of 1.8% and an interest coverage ratio of 5.1%.
• Operational cash flow increased by 53% compared to the previous year, reaching 7.4 billion.
• The company successfully contracted approximately 15 billion in CapEx by year-end, more than doubling its pool of qualified suppliers.
• SBS has made significant progress in regulatory steps, including the termination of legacy discount contracts, which could recover approximately 480 million in revenue annually.

Negative Points

• The introduction of Fauspi in July had a negative 2% impact on revenue.
• There are ongoing legal challenges from a small number of clients regarding the termination of legacy discount contracts.
• The company faces challenges in executing its CapEx program, with a focus now shifting fully to execution.
• There is uncertainty regarding the timing of benefits from lower discounts to large clients, expected to be more material in the second quarter of 2025.
• The company is still in the early stages of its transformation post-privatization, which may lead to non-recurrent events and challenges in the short term.

Q & A Highlights

• Warning! GuruFocus has detected 8 Warning Signs with SBS.

Q: Can you explain the bridge from reported EBITDA to adjusted EBITDA? A: (Daniel Slack, CFO) In Q4, we had several adjustments, including an accrual for taxes on unbilled revenue and a 630 million reais accrual for the voluntary termination plan. We also incentivized internal personnel to accelerate the unitization of works in progress. Additionally, we conducted an annual inventory cycle, resulting in a 95 million reais impact for slow-moving inventory. Consulting fees and costs related to the privatization offer were also included. These adjustments reflect what we believe is the recurring profitability of the business.

Q: Can you detail the manageable cost performance, especially the personnel line, excluding the redundancy program's impact? A: (Daniel Slack, CFO) Excluding the voluntary termination plan, we saw a 5.5% reduction in personnel numbers year-on-year. We revised processes, including CapEx and indirect cost allocations, which contributed to the personnel gain quarter-on-quarter. We executed 40% of the year's CapEx in Q4, absorbing more costs.

Q: Any updates on the Universal Lisa Sao Paulo program's timing? A: (Carlos Piani, CEO) The process is managed by the state of Sao Paulo, and we expect it to conclude by the first or second quarter of 2026. We are interested in participating and will evaluate the opportunity when it arises.

Q: Will we see the benefits of lower discounts to large clients in Q1 results, or is regulatory approval needed? A: (Carlos Piani, CEO) The impact will be more material in Q2 2025. The timing of meter readings and contract terminations affects this. We are awaiting regulatory feedback on the new discount policy, which may also impact the timeline.

Q: What is your expectation for personnel savings following the voluntary dismissal program? A: (Daniel Slack, CFO) We do not expect additional costs related to the voluntary dismissal plan. The costs have been accounted for, and no further expenses are anticipated.

Q: Does the reduction in contract assets indicate an increase in CapEx? A: (Daniel Slack, CFO) Yes, we are focusing on utilizing existing inventory and removing bottlenecks to integrate these into our CapEx plan. This approach helps maintain discipline and aligns with our regulatory requirements.

Q: What are your thoughts on the Para sanitation option, and will you participate? A: (Carlos Piani, CEO) We are early in our transformation and focusing on opportunities within Sao Paulo. While we evaluate all opportunities, the Para option is less likely due to its complexity and location outside our primary area.

Q: When could we see the full impact of removing tariff discounts on the P&L? A: (Carlos Piani, CEO) The full impact will likely be seen in the second half of the year, with the third quarter reflecting the complete effect as contracts and meter readings align.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.