COMPANHIA DE SANEAMENTO B SICO DO ESTADO DE SAO PAULO-SABESP ADS'S 2026 Q2 Earnings Call

Good morning, everyone, and thank you for joining SABESP's second quarter 2026 earnings call. I'm Daniel Szlak, CFO, and I'll present our operational financial highlights for the quarter. After which, I'll hand the call over to our CEO, Carlos Piani, to update you on our priorities. We'll then open the floor for the Q&A. In Q2 2026, total water production reached 779 million cubic meters, 4.3% lower year-over-year. As mentioned last quarter, consumption continued to be affected by milder weather conditions compared to the prior year, as well as the application of S&P Aguas operational rule of the night pressure management, implemented for approximately 10 hours per day to enhance the system resilience during Q2. Our active customer base remains stable, with 9.5 million water and 8.2 million sewage connections.

The slight year-on-year reduction is primarily driven by increased revenue assurance actions and the verticalization of the cities in which we operate. Quarter-over-quarter, we see an increase in both water and sewage connections as a result of the universal access program. Turning to slide 5. Before I begin, I would like to clarify that this quarter we started to consolidate EMAE's results into our operating figures. Therefore, the figures presented in this slide include EMAE's contribution. Adjusted net revenue grew by 9.4% year-on-year, mainly reflecting the tariff and the expansion of customers. Adjusted EBITDA was BRL 3.5 billion, down 2.3% compared to the same period of last year, with an EBITDA margin of 58.3%. This performance reflects investments associated with our customer service initiatives, as well as inflationary pressures, which I'll explore more in the next slides. Adjusted net income totaled BRL 1.2 billion.

The decrease versus the prior year reflects the higher net debt to fund our universal access program. Cash conversion and generation remained solid, with operating cash flow reaching nearly BRL 3 billion in the quarter and a solid conversion above 75%. Moving to slide six, before diving deeper into the quarter, I will briefly go through the reconciliation between reported and adjusted figures. From this point onwards, I will focus on the adjusted figures, excluding the effects that do not reflect SABESP's operating performance. As in previous quarters, we exclude construction revenue and financial asset bifurcation effects, which are merely accounting in nature. Keep in mind that while SABESP does not record a margin for construction, EMAE still does. We also exclude BRL 68 million, mainly related to the Jaguari incident and EMAE's figures.

Given EMAE is much smaller than SABESP, we will exclude its figures from the next pages so that we can properly discuss the core business performance. However, investors can find more information on EMAE's performance in the appendix, in our filings at CVM, and on EMAE's own filings, given it is also a publicly traded company. Turning to slide seven and exploring our revenue drivers. Adjusted figures increased 6.7% year-on-year. The quarter was also affected by two additional factors. Milder weather conditions, with average temperatures about 1.1% lower year-on-year and our ERP implementation. Excluding these effects, underlying revenue would have grown by about 10%. Price contributed 8.7%, driven by January 2026 tariff cycle, partially offset by reforms, which will be subsequently adjusted in 2027's tariff review. Second, volume contributed 1.1%, explained by a 1.0% contribution from new units and 0.6% from metering upgrades.

These were partially offset by the negative weather impact on consumption. Finally, mix was a negative 3.1% effect, which is split into 2.3% from category mix, mainly reflecting the expansion of low-income tariffs versus the year ago, and a 0.6% impact from band mix driven by weather. On slide eight, we provide additional color on revenue performance. Roughly 2 million units now have access to discounted rates representing an increase of about 15% year-on-year, and almost doubling what we had before the privatization. This reflects our commitment to expanding access to sanitation services while supporting vulnerable populations. An interesting fact is that the new social tariff program has driven average price to consumer to be flat versus where it was before the privatization. For SABESP shareholders, these discounts are contemplated within the regulatory framework and are expected to be addressed in future tariff reviews.

We also experienced a temporary slowdown in meter replacement activity due to import constraints, which affected the pace of upgrades in the quarter. Moving to EBITDA on slide nine, adjusted EBITDA declined 3.2% year-on-year to BRL 3.5 billion. Starting from the top, the positive contribution from net revenue was more than offset by a strong lap in cost versus a year ago. G&A saw an impact as Q2 2025 benefited from BRL 230 million in reversals of legal accruals. Service costs were driven by investments in customer experience initiatives, including the expansion of service channels with agencies and Poupatempos, reinforcement of field operations, and strengthening of customer service capabilities, expanding the call center and changing its provider. It also includes higher customer communication and marketing outreach efforts as part of our commercial plan.

We also saw inflationary pressures associated with the geopolitical environment for about BRL 28 million in the quarter, affecting mainly chemicals. We also wanted to share with investors a perspective of where we see the underlying EBITDA for the quarter. Excluding the gain from 2025 legal victories, ERP timing effects, customer experience, and extraordinary inflation, underlying EBITDA would have grown close to 20% year-over-year in the quarter. Deep diving into costs on slide 10, personnel expenses remain controlled, increasing 1% year-on-year despite a 4.4% wage adjustment behind inflation. This was largely offset by the workforce optimization initiatives implemented over the last quarters with the voluntary dismissal plans. Power costs increased 2.2%, mainly due to transmission and sector charges, including the new one from UNGA. However, migration to the free market helped mitigate part of these pressures, with 88% of total consumption now sourced through the free market.

Moving to the next slide, reported net income reached BRL 1.5 billion in the quarter. The main driver behind the year-on-year decline was the increase in financial expenses, reflecting a higher average net debt balance for the quarter. The increase in interest expense is consistent with the financing needs of our accelerated investment program. Depreciation and amortization expenses also increased, reflecting the expansion of our asset base, which grew from approximately BRL 55 billion to BRL 70 billion year-on-year. These effects were partially offset by a lower effective tax rate, which declined from 34% to 29%, driven by interest on capital paid in April. Moving to slides 12 and 13, we will update you on our CapEx. Investment execution remains one of the highlights of our transformation and continues to demonstrate our ability to bring definitive solutions to historical issues.

CapEx totaled BRL 7.5 billion year-to-date, an increase of roughly 16% versus a year ago. We also ended the quarter with more than BRL 40 billion in contracted backlog through 2029, providing strong momentum for future execution. We would like to remind our investors of the historical seasonality of our CapEx, which is usually higher in the second half of the year. The sector targets continue to evolve at a fast pace. As of July, we virtually met water targets for the year, and our sewage collection and treatment targets have reached 90% and 82% respectively, giving us a good runway for this year and the next one. Physical evolution remains strong across our key programs. We delivered two new sewage treatment plants, Caveiras and Água Vermelha, which together add 0.4 cubic meters per second of treatment capacity. 127,000 additional people now have access to treated sewage in their households.

In the countryside, phase one continues to advance, with 11 projects in execution representing BRL 5.1 billion in investments. The next phases continue to advance as expected. Turning to slide 14, our balance sheet remains strong and well-positioned to support the investment cycle. Gross debt totals BRL 52 billion, while net debt stood at BRL 34 billion at the end of the quarter. It is worth highlighting that 54% of our debt is now covenant free, and once we reach our capital target for the year, we will have two-thirds of our debt with no financial covenants. Our average cost of debt remains close to CDI, with a 6.1 year weighted average maturity. In addition, 64% of our debt matures from 2031 onwards, reflecting the long-term profile of our financing structure.

We also ended the quarter with BRL 17.4 billion in cash, which covers more than four years of amortization and provides substantial liquidity and flexibility to continue executing our investment plan. Finally, on slide 15, our net debt closed at 2.5 times EBITDA, a level we deem appropriate for a company executing one of the largest infrastructure investment programs in Brazil. Return metrics also showed resilience, even in a higher for longer interest rate scenario. ROIC was 10% and ROE was 17%, reflecting the strength of the business as we continue investing for future growth. With that, I will now hand over the call to our CEO, Carlos Piani, to discuss our priorities in greater detail.

Thanks, Daniel. Good morning, everyone. Before going to the operational highlights, I'd like to revisit what we call SABESP's culture on a page. This is the framework that has guided our transformation over the past two years. It brings together our purpose, our long-term dream, the strategic paths we need to execute to get there, and importantly, our values, which define how we want to get there. As we've completed two years since privatization in July, I think it's useful to look at how far we have come, and equally important, where we still need to improve. We have made significant progress across several of our strategic paths. We have accelerated universalization and strengthened water and sewage security, resilience, and quality through both organic and inorganic investments. We have advanced innovation and digital transformation, made important progress in business efficiency, and continue investing in people development.