SABESP 2Q18 Financial Summary
Business Context and Reporting Period
Companhia de Saneamento Básico do Estado de São Paulo (SABESP) reported its second-quarter 2018 results on August 9, 2018. SABESP is a major provider of water and sewage services in Brazil. The financial information is presented in Brazilian Reais (R$) and compares the period ended June 30, 2018, to the same period in 2017.
Key Financial Metrics
- Net Operating Revenue: R$3,672.2 million (includes construction revenue).
- Gross Operating Revenue (Sanitation Services): R$3,249.8 million.
- Costs and Expenses: R$2,617.5 million.
- Adjusted EBIT: R$1,055.6 million.
- Adjusted EBITDA: R$1,382.6 million.
- Adjusted EBITDA Margin: 37.7% (45.5% excluding construction effects).
- Net Income: R$181.9 million.
- Capital Expenditures (Capex): R$757.8 million.
- Market Data (as of 08/09/2018): Share price R$26.70; Market value R$18.13 billion.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 5.1% year-over-year (YoY). Gross sanitation revenue rose 12.0% YoY, driven by tariff repositioning (7.9% in Nov 2017, 3.5% in Jun 2018) and a 3.1% increase in billed volume.
- Profitability: Adjusted EBIT surged 41.2% YoY to R$1,055.6 million. Adjusted EBITDA grew 29.8% YoY. However, Net Income declined 45.2% to R$181.9 million from R$331.8 million in 2Q17.
- Cost Reductions: Total costs and expenses decreased 4.8% YoY. Salaries and payroll charges dropped 5.0% due to a R$73.3 million reversal of a provision for a Conduct Adjustment Agreement (TAC) and fewer retirements, partially offset by new provisions for a Knowledge Retention Program.
- Expense Increases: Electricity costs rose 21.8% due to higher tariffs and consumption. Financial expenses increased due to currency appreciation (USD and JPY vs. BRL) and lower capitalization of interest. Allowance for doubtful accounts increased R$22.3 million, largely due to lower payments from the municipality of Guarulhos.
- Construction: Construction revenue decreased 14.4% due to lower investment in served municipalities.
Outlook, Risks, and Commentary
- Forward-Looking Statements: Management notes that future results depend on economic conditions, industry trends, and operating factors. There is no guarantee that expected trends will materialize.
- Currency Risk: Significant exchange rate variations (USD and JPY appreciation against the Real) negatively impacted financial results and tax provisions in 2Q18.
- Credit Risk: The filing highlights specific collection issues with wholesale sales, particularly the municipality of Guarulhos, leading to higher doubtful account provisions.
- Operational Strategy: The company launched a Knowledge Retention Program to mitigate the impact of employee exits, impacting payroll provisions.
Investor Verification Checklist
- Verify the sustainability of the 12.0% gross revenue growth given the one-time tariff adjustments and the 3.1% volume increase.
- Assess the credit risk exposure related to the municipality of Guarulhos and the R$45.8 million allowance for doubtful accounts.
- Monitor the impact of currency fluctuations (USD/BRL and JPY/BRL) on future financial expenses and net income.
- Review the trajectory of the Knowledge Retention Program costs versus the savings from the TAC provision reversal.
- Confirm the timeline and funding for the R$757.8 million Capex, including the R$129.7 million allocated to the São Lourenço PPP.