SABESP 2Q14 Financial Summary
Business Context and Reporting Period
Companhia de Saneamento Básico do Estado de São Paulo (SABESP) reported its second-quarter 2014 (2Q14) results on August 15, 2014. SABESP is a major provider of water and sewage services in Brazil. Financial data is presented in Brazilian Reais (R$) in accordance with Brazilian Corporate Law. Comparisons refer to the same period in 2013.
Key Financial Metrics
| Metric (R$ million) | 2Q14 | 2Q13 | 1H14 | 1H13 |
|---|---|---|---|---|
| Net Operating Revenue | 2,754.1 | 2,796.3 | 5,546.1 | 5,441.3 |
| Net Income | 302.4 | 361.7 | 780.0 | 857.9 |
| Adjusted EBITDA | 661.7 | 911.4 | 1,677.6 | 1,832.9 |
| Adjusted EBITDA Margin | 24.0% | 32.6% | 30.2% | 33.7% |
| Earnings Per Share (R$) | 0.44 | 0.53 | 1.14 | 1.26 |
| Net Financial Result | (21.6) | (207.3) | 5.9 | (179.9) |
| Cash and Cash Equivalents (End of Period) | 1,823.7 | 1,782.0 | 1,823.7 | 1,669.1 |
| Capital Expenditures (1H14) | 1,182.3 | 1,007.7 | 1,182.3 | 1,007.7 |
Note: Capital Expenditures for 1H14 calculated as sum of Acquisition of intangibles (1,130.1) and Purchases of tangible assets (52.1) from Cash Flow statement.
Material Changes vs. Prior Period
- Revenue Decline: Net operating revenue decreased 1.5% in 2Q14, driven by a 3.6% drop in gross operating revenue. This was primarily due to a 1.8% decrease in total billed volume and an R$ 88.1 million payment of a bonus under the Corporate Program for Water Loss Reduction. A 3.1% tariff adjustment since December 2013 partially offset these declines.
- Cost Increases: Total costs and expenses rose 14.8% year-over-year. Key drivers included a 12.1% increase in payroll and benefits (due to wage increases and retirement provisions), a 19.1% rise in services (advertising and credit recovery), and a 17.0% increase in treatment supplies (activated carbon for algae control).
- Profitability Compression: EBIT dropped 38.6% to R$ 439.1 million, and Adjusted EBITDA fell 27.4% to R$ 661.7 million. The Adjusted EBITDA margin contracted from 32.6% to 24.0%.
- Financial Results Improvement: Net financial results improved significantly from a loss of R$ 207.3 million in 2Q13 to a loss of R$ 21.6 million in 2Q14. This was largely due to a favorable exchange rate variation of R$ 84.2 million (USD and JPY depreciation vs. BRL) compared to an expense of R$ 201.7 million in the prior year.
Outlook, Risks, and Management Commentary
- Operational Efficiency: Non-revenue water loss (IPF) decreased to 23.8% and micro-measured water loss (IPM) to 30.8%, attributed to the Corporate Program for Water Loss Reduction. Water production volume fell 5.6% as a result.
- Debt Management: In June 2014, SABESP issued R$ 500 million in debentures (19th issuance) maturing in 2017 to settle financial commitments due in 2014 and 2015. Total debt amortization scheduled for 2014 is R$ 278.8 million.
- Capital Expenditures: The company invested R$ 728.4 million in 2Q14 to expand and protect water sources and sewage systems across 364 municipalities.
- Risks and Contingencies: Management highlighted risks related to general economic conditions, industry factors, and operating assumptions. Specific contingencies include provisions for lawsuits (civil and labor) and credit write-offs, which increased significantly (R$ 61.6 million in 2Q14 vs. R$ 18.8 million in 2Q13).
- Forward-Looking Statements: The filing contains forward-looking statements regarding dividends, capital expenditure plans, and future operations, which are subject to risks and uncertainties.
Investor Verification Checklist
- Verify the sustainability of the 1.8% decline in billed volume and its impact on future revenue streams.
- Assess the long-term cost implications of the 12.1% increase in payroll and benefits, including pension plan actuarial changes.
- Monitor the effectiveness of the Corporate Program for Water Loss Reduction in stabilizing margins despite volume declines.
- Review the exposure to exchange rate fluctuations, noting the significant swing in financial results due to currency variations.
- Confirm the adequacy of provisions for credit write-offs and legal contingencies given the sharp increase in these line items.