SBS

Good morning, and welcome to SABESP's Second Quarter of 2026 Earnings Presentation. With us here today are Carlos Piani, CEO, Daniel Szlak, CFO, and Thiago Levy, Investor Relations. Before we begin, we clarify that the statements made during this presentation will not include projections or estimates of future events. However, they may contain forward-looking statements indicating potential trends and related to SABESP based on the reasonable expectations, beliefs, and assumptions of SABESP's management as of today. These statements involve risks and uncertainties and are based on assumptions and factors such as market, regulatory, and economic conditions, which may not materialize, in addition to the risk factors disclosed in SABESP's filings with the Brazilian Securities and Exchange Commission, CVM, B3, and on its investor relations website.

Investors should understand that changes in such factors may lead to outcomes that differ from current trends and are under reliance should be placed on these statements. The full disclaimer will be presented next and must be read carefully by all participants. This presentation is being recorded and all participants will be in listen-only mode during the presentation. After that, we will begin the question and answer session for analysts and investors only. If you wish to ask a question, please raise your hand and submit it via Zoom Q&A informing your name and company.

I will now turn the floor over to Daniel Szlak, who will discuss the results. Daniel, you may proceed.

Thanks, operator. 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 SP Águas 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 five. 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 -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, Caieiras 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 I 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 2.5x 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.

But transformation of this scale is a journey, and there are areas where we still have significant work ahead of us, customer satisfaction being one of them. This quarter, I would like to focus on three of our corporate values that are particularly relevant to our equity story today: deliver results with purpose, be guided by ethics and safety, and put customer first. Let me start with delivering results with purpose. For us, this means delivering exceptional results while creating sustainable value for all our stakeholders. Sustainability is therefore not something separate from our strategy. It is embedded in the way we operate and allocate capital. This quarter, we received an upgrade in our MSCI ESG rating to BBB. Recognizing the progress we're making in integrating sustainability into our strategy and operations.

This is particularly relevant for SABESP, because many of the most important ESG issues are also fundamental business issues for us. Managing water resources, increasing system resilience, adapting to climate change, expanding sanitation coverage, and providing reliable and affordable essential services. We see this upgrade as recognition of the progress already made, but also as an indication of where we can continue improving. Now, let me move to another value that is fundamental to our transformation, be guided by ethics and safety. The scale of our operations has changed dramatically over the past two years. Two years ago, SABESP had a workforce of approximately 30,000 people, including our own employees and third-party workers, and around 200 construction sites in execution.

Today, our workforce is approximately 55,000 people, an increase of roughly 83%, and we have around 1,500 construction sites underway, 7.5x the level of two years ago. This extraordinary increase in activity is what allow us to accelerate universalization. But it also materially increases the complexity of our operations and our exposure to safety risks. Although our lost time injury frequency rate has declined year-over-year, recent incidents made it clear to us that we needed to go further. We therefore conducted a comprehensive review of our safety procedures and decided to raise our standards beyond Brazilian technical requirements. As you can see on the slide, we expanded the attention zone around underground infrastructure from 1 m-3 m, strengthened verification procedures from natural gas and other underground infrastructure, and made ground penetration radar mandatory throughout the attention zone.

We have also tripled the number of field inspectors, reinforced supervision based on project risk and complexity, and established mandatory training, qualification, and certification requirements for both SABESP and third-party employees. At the same time, we are increasingly using technology, including cameras and artificial intelligence, to identify underground risks and strengthen field monitoring. And finally, we created an operational safety group reporting directly to me, reinforcing accountability and ensuring that safety has the appropriate visibility throughout the organization. The message here is straightforward. The acceleration of our investment program cannot come at the expense of safety. As our construction program grows, our safety standards, controls, and capabilities must grow with it. Let me now turn to the third value I want to highlight today, put customers first. Over the past two years, the transformation of SABESP has accelerated significantly across virtually every dimension of the company.

But that transformation has also generated incremental demand across our customer channels. More construction, more connections, changes in our systems and processes, and a much greater pace of activity inevitably create more interactions with our customers. We recognized that our customer-facing infrastructure needed to evolve at the same speed as the rest of SABESP. In the second quarter, we decided to accelerate both OpEx and CapEx investments across our entire customer service platform. Our commercial plan is organized around three priorities. First, strengthening our customer service infrastructure and capabilities. We created a dedicated customer experience executive team, added approximately 200 FTEs, including internal and outsourced personnel, expanded our physical presence with 12 new stores, 34 stores retrofits, and 20 new Poupatempo service centers, and strengthened our call center with a new provider, enhanced capabilities, and 120 additional service positions.

Second, redesigning the customer journey and improving every point of interaction with SABESP, with particular attention to our low-income customers. Since privatization, the number of customers with access to discounted tariffs has nearly doubled from approximately 1 million to almost 2 million households, with an average discount of approximately 66% compared with the standard residential tariff. For us, universalization is not only about connecting households to water and sewage infrastructure, it is also about making those services accessible, affordable, and easier to navigate. And third, significantly increasing communication with our customers. We're transforming SABESP at an unprecedented speed, but the benefits of that transformation need to be understood and experienced by our customers. That required us to communicate more frequently and more proactively about planned maintenance, construction, water conservation, service changes, and the improvements we're delivering.

In the second quarter, our proactive customer communications were approximately 2.4x the level of the second quarter of 2025. These initiatives are already producing tangible improvements. Average handling time in June was 87% lower than in December 2025, and complaints across critical channels declined 31% quarter-over-quarter. All together, we expect approximately BRL 800 million of spending and investment in commercial initiatives in 2026. As the new operating model becomes fully implemented and reaches maturity, we expect part of the remaining cost base to normalize and the overall structure to become increasingly efficient. Ultimately, our objective is very clear. We want the customer experience to catch up with the transformation already taking place across the rest of SABESP.

Before we move to Q&A, let me leave you with one final thought. Two years into this transformation, SABESP is a very different company. We are investing and executing at an unprecedented scale, accelerating universalization, strengthening the resilience of our operations, and building the capabilities required for the next phase of our journey. But transformation is not only about doing more, it is about doing it better. That means delivering results with purpose, raising the bar on safety, putting our customer first, and continuously improving business efficiency to generate the resources needed to help fund this transformation.

We have made significant progress, but we know there is still a lot to do. Our ambition remains unchanged: to build the global leader in water and sanitation while creating sustainable long-term value for our shareholders and for society.

With that, we can move to the Q&A.

Thank you. We will now begin the Q&A session for investors and analysts. To ask a question, please submit it via the Zoom Q&A, informing your name and company. Our first question comes from Mr. Bruno Amorim from Goldman Sachs.

Hi, good morning, everybody, and thank you for the opportunity to ask a question. How much of the higher costs in the second quarter are either transitory or subject to future tariff coverage, in your opinion? Just a follow-up to that, can you also better explain the nature of the components of the bridge in the bottom of slide nine, especially the revenue and timing components, which you exclude from the calculation of the underlying EBITDA? Thank you so much.

Hi, Bruno. Thank you for your question. This is Daniel. Good morning, everyone, once again. Maybe I'll start from the back. I think it helps explain the early part of your question. On page nine, what we tried to bring was: What are the things that we've decided to do? What are things that are new versus what we've been communicating with the market? One of the things that we started to disclose is the effect that weather has in our results. This is a good practice that happens across the globe with our peers. We started to disclose that, as this is very material to the business, and something that will oscillate positive or negative depending on the quarter, and to bring that sensitivity to the market.

The second part, which is still on net revenue, about BRL 60 million of that, and combined with the second item on the bridge of timing, is related to the SAP go live. The part that's hitting revenues is mainly due to a higher fiscal fees or higher sales tax rate based on the go live of the system, because we had fewer invoices coming in where we are able to take tax credits from them. We had more accruals to reflect the actual cost of the quarter, and hence we expect that to transition down in Q3. We expect to recover that in Q3. When we look at the timing part of cost, I would say half of that is Q1 expenses that moved to Q2, and the other half are Q3 expenses that moved into Q2. I'll expect half of that will be recovered over Q2.

Thinking about all the other things, and I'll leave the customer experience to the end, because that's the part that we want to dive a little bit more. We had this year, for one quarter, oil prices at $115, $110. That put an additional pressure to our chemical costs. That was about a 20% average increase in cost to our chemicals. There are chemicals that increased more than that, chemicals that didn't increase, that are linked to the supply chain that comes all the way from the Middle East. In that aspect, we had extraordinary costs. Now our task and challenge is to negotiate that back down to the current levels, and to try to bring that back for the second half of the year. We're already making progress to that, but we still have some things to be done.

Thinking about the commercial plan, as Piani highlighted in his speech, we expect to spend about BRL 800 million this year in many areas. Some of that we'll see through cost, some of that we'll see through revenue. On the revenue front, one thing that we didn't mention here, but we had BRL 50 million increase in reforms in this quarter, just rounding the numbers. We expect to see that continue. One of the things that we used to do when we think about reforms, we were more reactive than proactive when we saw that there was an increase in consumption volume towards a given connection. What we did was we anticipated the resolution time by being proactive in flagging that to the consumer and treating that. It increased a part of the cost also.

Comes from increasing the number of people that actually do that job, and to reduce the friction on the consumer front. That is about BRL 50 million in the quarter, and we have another BRL 150 million on the cost side that we flagged also on the bridge. That is mainly related to the communication outreach that Piani mentioned. About half of that is related to that. The other half is mainly linked to the expansion of customer service agencies such as Poupatempos, increasing to 100 people on the service agencies that actually provide a service to the population. Another 120 people call it on the call center, so that we can solve a backlog of tickets that we had that accumulated. As we grew, what we started noticing that we grew, and we started also being more on point on collection.

As we started doing that, we realized that we had to also expand our service capacity to be able to meet the questions or the concerns that the clients had, and we wanted to improve the service. That is a little bit of the general picture. Of that general picture, what we expect based on the rules 106 by ARSESP and all the other rules on our contract, we expect that about a little bit more than half of that, to some extent, will either be a pass-through or it will be something that we will recover through the histogram, in upcoming tariff cycles. When you think about that, a part of the amount that Piani flagged, is also in anticipation of the public hearing that closed with regards to discounts to large clients.

We have already placed a number inside that BRL 800 million, assuming that discounts live very soon, to be conservative. The rest of that, I would say that half of the half, so about 20%-25% of that we expect to stick, and the other half we expect to improve through productivity as we transition more to digital channels rather than physical channels. This is more or less what we expect going forward and how we see this transitioning. I do not know if I was able to answer everything, Bruno, but of what I remember you asked, I think I addressed it.

No, that is helpful. Thank you. I will let others ask. Thank you so much.

Thank you. Remember that to ask a question, submit it via the Zoom Q&A informing your name and company. Our next question comes from Mr. Arthur Pereira from J.P. Morgan.

Hi, good morning, guys. Still on these investments in commercial efforts. You mentioned that out of the BRL 800 million, you should consider OpEx and revenues just to make sure that nothing goes into CapEx. You mentioned the BRL 150 million in expenses in the second quarter, BRL 50 million in revenues. The reminder BRL 600 million, should we consider in the second half of this year, or was anything already disbursed in the first quarter? On the expenses, was this fully booked as third-party expenses, or also personnel? Because personnel expenses increased quarter-over-quarter. Maybe just wanted to recap a little bit what you see as underlying. You exclude the BRL 150 million in this quarter on the underlying figure that you presented. How much of this OpEx on the commercial efforts should we consider as recurring in the coming years, thinking about 2027 onwards?

Thank you, Arthur. Thank you. Long question. I will try to remember everything. I wrote down most of what you said, but let me know if I missed something. Look, thinking about 2027 onwards, as I said, I think about 20%-25% of that is what I expect will stick, given to some extent we will recover a part. Sorry, let me put it in a different way. A part of that, which is a majority part of that, will stick. But half, more than half of that will come back, through the tariff cycles, which is the part that is linked to revenues and large clients discounts and mandatory communication as we go commission construction work. These are things that are mandatory by the regulation. Anything will get eventually reimbursed.

Another 20% are things that we are increasing costs, and that will stick. The remainder of that, we expect we will see in productivity, over the next years improving. We do not expect that to stick over 2027 and so on and so forth. From an NPV perspective, the only lagging part is going to be the 20% that will stick in terms of cost. I know that is where you are going. In terms of personnel, a small portion of that is in personnel. I do not expect to see a big part of that landing in personnel. I would not model that. My view is that the oscillation that you see in personnel is more linked to timing of benefits and things like that do not even deemed worth of calling out.

In terms of the timing of conversion, you are right. We have cycled through BRL 200 million, give or take, of the BRL 800 million that we mentioned. We will see the next BRL 600 million over the next quarters, between Q3 and Q4. That is where we expect we will land. Did I miss anything?

No. I think, Daniel, you got everything, but just let me try to give a 10,000 feet overview. What we are doing, we are taking the customer by the hand. Instead of letting him complain, we are preempting any big variations on customer bills and bringing those customers to a conversation, see if there is any, according to the regulatory framework, any reforms that are available for that increase. What happened before was we were reactive, waiting for the client to complain. Now we proactively, we are using the rules of the game, the lower arms, and trying to give that benefit to the consumer.

That is the piece of the commercial investment in broader sense that goes through revenues because it is a bill reform. Okay? This is basically an anticipation of something that we are going to be compensated through different tariff revisions moving forward. Just to be clear on that front.

The second piece that I think is worthwhile, we invested a lot, much more than I think it is a recurring basis on communications. Besides everything that we are doing that we need to communicate, we are communicating all these changes to the consumer so he can appreciate and know what are his rights. Of course, this has a bump at the beginning, and then this has a reduction, and in general, independent if it has a regulatory recognition or not, and part of these communications are also regulatory compliance that can be compensated through the tariff cycles.

To be very specific on one of the measures that Daniel made is that we created, as I mentioned on the opening of the call, we created an additional group that is small. I don't think it is relevant for you guys to model, but we have a dedicated team to improve the experience with the consumers. Yes, there is a pickup increase on personnel, but we don't believe that this is going to change the trajectory that we had before.

Very clear. Thank you.

Thank you. Our next question comes from Mr. Francisco Navarrete from Bradesco BBI.

Morning. Can you hear me well?

Yes.

Okay. Thank you, Piani and Daniel, for the call. Just have two questions, if I may. One is, if you could comment about the CapEx level in 2Q 2026. I think maybe the pace at which the CapEx showed in 2Q was a little bit below expectations, and if you could talk about that and then tell us what your ambition for the CapEx for the full year 2026. That is one question. And then the second, I know you already explained part of it, but if you could provide more detail on the revenue gap that we are seeing. I think we are estimating something that seems to be a little bit higher than in the first quarter.

If you could help us understand that. I know in the press release you already mentioned BRL 177 million of mix, but what else should we consider there to close that gap? Thank you very much.

Navarrete, thanks for the question. I will make a brief introduction, pass to Daniel, and maybe I will come back. But in terms of CapEx, usually the first quarter is the softest quarter of the year, because people are tired of pushing until the end of the fourth quarter, given all the incentives that we have, annual revisions of the regulatory asset base and so forth. There is a seasonality, there is a pacing, and it is back-ended. This is natural as expected. The second comment I think it is worthwhile, the works that we were pursuing at the beginning of this journey, we are less than two years in, were the projects that were closest to us, basically here in the north region of the metropolitan area of São Paulo, they were known and so forth.

The change, why are we confident that we are going to pick up and we are going to pick up strongly the pace? Because as I think we highlighted in the presentation, Daniel can give a little bit more color. We are concluding the hiring of four phases. We highlighted two, but there is four phases of the universalization program for the countryside of São Paulo. That is where we are going to be measured next year. We need to pace that. We need to pick up in 100% of the municipalities of Dourado. There is a lot of volume of works that are being hired, and this gives us conviction that we are going to aim towards the BRL 20 billion at year-end.

Of course, there is a challenge. As always, it is not a piece of cake. I think what I can tell you guys is that we have an action plan to get there, and we know how to get there, right? Of course, we need to prove this on a daily basis, but we have the contracts now signed, and we have a plan to get there backended into the fourth quarter of this year.

All right. Just to complement here, going to the CapEx. We have about BRL 40 billion of backlog. Last quarter, we also had BRL 40 billion of backlog, so we executed almost BRL 4 billion and continued with BRL 40 billion, which means that we contracted BRL 4 billion through the quarter. We are now in the final stages of contract. Final, no, but I will say over the next nine months or so, we will be contracting another BRL 20 billion, give or take. So, that will allow us to continue ramping up the CapEx. As it stands today, we have about 1,500 different CapEx fronts active.

We expect to reach at the end of next year, at some point close to that, which is going to be our peak, about 4,000 simultaneous work sites. That is definitely a big increase. As Piani alluded to, we have a lot of people working around internally and on the contractors front, these numbers are going to almost double by the end of next year. We are very well advanced into U-Factor targets for this year. As you can see from the presentation. Now we are turning our attention a lot to the U-Factor targets for next year. That is where we are, more or less, with regards to that matter.

In terms of the revenue gap versus the regulatory fronts, we have basically three items that are relevant. The first one is, as you mentioned, is the mix, about BRL 177 million from social tariffs and from consumption band mix because of the lower temperatures. The second part of that is the reforms that I mentioned, and as you correctly pointed out, about BRL 50 million in the quarter.

Then when you look at the remaining BRL 50 million that in our view that continues to exist, this is mostly related to large clients. Basically it has a BRL 50 million impact on the quarter that is mostly linked to very few clients that still have active contracts of discounts in half of that BRL 50 million. The other half is another gap that is driven by the injunctions that are still active. Every quarter, we have been reducing that number, but we still have some injunctions that are active that prevent us from charging the full price to some clients. Okay? So that is give or take where we see the regulatory gap today.

Thank you very much, Daniel.

Thank you. Our next question comes from Mrs. Sofía Grand from Moneda.

If it's not the case that she doesn't have her mic on, I can read her question here. I think it's directly to Daniel. What percentage of universal coverage have you reached so far, and how many connections remain to be achieved? There's some other questions. How do you plan to finance the CapEx for universal coverage, and what percentage of the total CapEx is expected to be deployed for sewage, and for water? How much CapEx is going to be used to improve the network?

Thanks. Thank you, Sofía, for your question. When we think about our percentage coverage, this is something that we don't have. I cannot give you a final number yet because we're still doing the census, right? This is going to be what's going to be used to calculate what is the percentage coverage. This is going to happen until the end of this year.

What I can say today is that from our target that needs to be met by adding a net new number of economies, we've met 105% of the three-year target for water, 90% of the sewage collection, and 82% of the sewage treatment. Which means that we're very advanced, as we think that we still have six months to deliver it. Like I said, our attention is focused right now in contracting what is 2027. As we progress and as we have the result of the census, we'll be able to update everyone as to what's the percent coverage compared to the 99% that we need to reach by 2029.

Okay. How are we going to finance the CapEx? We've been funding that mostly through debt, and we'll probably continue to do that over the next year, and expected by 2028 to start generating enough cash flow to be able to continue funding that with less percentage of debt. About 2/3 of that CapEx goes into sewage treatment, and one-third goes into water. That's just how much the split is. In terms of improvement of the network, we've been doing about 10% of that total CapEx, which is maintenance, network upgrades, and so on and so forth. The bulk of the CapEx really goes into expansion and expanding the network, and expanding the sewage treatment facility capacity so that we can plug more economies into that.

Our next question comes from Fillipe Andrade from Itaú BBA.

Hello. Good morning. Thanks for accepting the questions. If you could just please go through the increase on the allowance for doubtful accounts. What explains this increase from 1.4% in the past three quarters to the 2.5% figure on the second quarter of 2026? Also, if you could just please comment on the unitization phase expected for 2026, if the company sees any changes on what it was expecting before the reduction on CapEx deployment of the second quarter. Thank you.

Thanks, Fillipe. I will take the first one. In terms of allowance for doubtful accounts, I think it is worth rewinding a little bit further, the movie. When we came in, the run rate of the allowance for doubtful accounts was about 4% of revenues. Which meant that it created a very long backlog of collection that we could act on, and we have acted on that. We have been able to achieve the lowest historical number, which was 1.4 at the end of Q1 of this year, and even, I think, at the end of Q4 last year as well. We have reached the historical best, but that was also at the expense of collecting some of the backlog. Naturally, as you start working through that, this starts reducing. That opportunity starts reducing.

I think going forward, and then I will talk about Q2. But going forward, what we expect is something that we will eventually land at something that is similar to other utilities from our benchmark, is close to two. A little bit less, a little bit more, but that is what we expect will be eventually the recurring pattern of the company. As we upgrade to smart meters, that might present an opportunity for us to continue improving structurally. As they become a bigger part of our metering fleet, eventually this is going to be able to improve. That said, for Q2, historically Q2 is one of our highest allowance for doubtful accounts quarters, from a seasonality perspective.

Okay. That is in the end, a little bit of that. I would look at that more as a first half rather than Q1 and Q2. But that is where we see the numbers. In terms of unitization, we do not expect any change to what we have been communicating, where we think that about 2/3 of the CapEx of the year usually is able to commission in that year. And one-third goes to the work in progress. This is more or less what we continue to expect. We do not see major changes here.

Thank you.

Our next question comes from André Sampaio from Santander. Our next question comes from Carolina Carneiro from Safra.

Hi, everyone. Good morning. Thank you for the call and the opportunity. I wanted to go back to CapEx. If you can now update us a little bit on the overall CapEx plan, regards especially of the potential anticipation of the projects. They are aiming to enhance the water resilience and the security of supply here, in São Paulo. And also, how has been conversations or conversations going already with the regulatory agency here, in order to recognize that, support that, especially noting that we are going to have this year the application of the methodology to recognize the annual CapEx on tariff. If you can give us a hint on these specific points, would be great. Thank you.

Thank you, Carolina. Given, I think since August of last year, there is a specific protocol that has been enacted by the state government, which has today biweekly meetings. Previously, it was weekly meetings where all the strategy regarding water scarcity, involving all players, was decided in that group. That group decided together to anticipate a couple of investments, as I think we mentioned in the past. I think the major one that we have is a connection between Billings and our Alto Tietê watershed. We can take water from Billings to the water treatment plant at Taiaçupeba, which represents roughly 30% of the water potable water of the metropolitan region of São Paulo.

This construction is expected to be concluded by the third quarter of next year, and it is around BRL 1.4 billion. This has been aligned. Everybody knows. We still don't have clarity about the new methodology, as you mentioned, that had already a public hearing. We expect this to come out to the market probably, maybe until the end of the third quarter. But I think what I can tell you is everybody knows that we're doing the best we can to help avoid a tail event. Okay? There are two other smaller investments, but I think the major one is the one I just described.

Our strategy is to pull forward a couple investments, but nothing that we can do is going to solve the next two, three months, right? I think the knife pressure management is the lever that, as a community, we can pull together. But everything that we're doing is aligned, and we expect to be recognized in the tariff, in the regulatory asset base, independent of the methodology that's going to come forward, in the next couple of quarters.

Thank you.

Okay, our next question comes from Mr. André Sampaio from Santander. I will read it. I want to go back to OpEx, but focus more on the structural long-term view. How the company views the efficiency agenda moving forward.

Thank you, operator. Thank you, André. Look, the efficiency agenda continues to be one of the company's main strategic pillars, right? There are three strategic pillars. Deliver the universal access, deliver the efficiency to fund the universal access, and as we progress, eventually as we reach good customer satisfaction, good service levels, and so on and so forth, dream a little bit beyond our borders. That's basically our strategy in a nutshell, right? We already achieved very important milestones. We started with what I'll say maybe the low-hanging fruits and captured a lot of that. There's still some remaining opportunities on that front, but I think we've done a lot in that first wave. What I expect now is that we enter a different phase that comes from the top and from the bottom.

On the top, we have important initiatives, strategic initiatives like the integrated operation center, like the metering upgrade for smart meters, like the biogas projects, all the software upgrades that we're doing, that will allow us in the future to start using artificial intelligence even more to gain productivity. All of these things are top of the house initiatives that we push here from the center. Another thing that's important, as Piani started talking about earlier, is the culture. The culture of treating the company as your own, right? Making the right decisions on the day-to-day and really being frugal on the day-to-day of the company, so that these provide a cumulative effect on savings and a compounding effect.

I think what we'll see is from the top, very large initiatives with capital deployment and investment that has a J-curve nature. From the bottom, the cultural change and how this evolves on the day-to-day, and at the edge of the operation and in the day-to-day. That's more or less what I see for the future.

Thank you. Our next question comes from Mr. Henrique Simões from UBS BB.

Okay. Hi, everyone. Thanks for taking my questions. I had a follow-up first on Bruno's question regarding the timing effect on the revenues. I had in my mind that in the first quarter, you had two days of revenues that weren't billed due to the migration of the ERP, and I was expecting a reversal of that you should exclude two days of revenues from this quarter. But you had a positive effect again on the timing. I am just curious if those are separate effects and it would be fair to still make that adjustment to the revenues. The second one was on the costs, on the quality of service and communication. If that should be the new recurring level or is that temporary for this year, and then we should go back to normal levels next year? Thank you.

Thank you. Thank you, Henrique. Thinking about taking your first question first. On SAP, when we went live with SAP, you saw a lower volume, but we also did an accrual for unbilled revenues. From a revenue perspective, you do not see the impact in Q1 from the SAP go live. On Q2, you see more volume, but the reversal of that accrual for revenue, so for unbilled revenue. Net revenue did not change when you think about that by component from the SAP go live. What we are calling out as a positive carryover for Q3 from the SAP go live versus Q2 is linked to the invoice entry that was delayed because of some contracts that we were not able to bind correctly to that phase. As invoices come in Q3, we are naturally able to take more tax credits on the sales tax.

Whereas when we do the accruals to keep the cost in line with what we know the cost is, we are not able to take sales tax credits for that. That is the difference between Q2 and Q3 that we called now in Q2. Thinking about cost, I think overall our efficiency agenda continues, right? We will continue to pursue that. We saw very good results on the migration, for example, of power. We continue to carry over positive effects from the voluntary dismissal plans in terms of cost. All of that is still continuing, and we see that momentum. What we did is we selectively decided to invest in the commercial plan so that we want to explore more our value of putting the consumer first.

On the chemical side, we are fighting now to reduce those costs back to where they were before that oil increase. But that's it.

Our next question comes from Suchinta Chakraborty from Goldman Sachs. I will read it. "Provide an update on the company's founding strategy, including expected annual debt-raising requirements over the next few years.

Thank you, Suchinta, for your question. Thank you, operator, for reading. In terms of funding, we've anticipated our funding for the year of 2026. Between January and February, we raised about BRL 14 billion. By the end of Q3, we'll probably have met all our funding targets for the year. That will put us in a position where we'll probably have more than 60% of our debt with no financial covenants and with a longer maturity and a more structured pace. When we look at the next years, naturally, those funding needs, they will start declining as the cash flow of the company also starts picking up. Naturally, the year of 2025 and 2026 were the largest funding needs in our view. That's what we can say.

In terms of actual figures for debt-raising requirements, all the sell-side models, they're fairly well-designed, and they can provide some good clarity on that as we don't disclose guidance.

Our next question comes from Mr. Raul Cavendish from XP. [audio distortion] The Q&A session is now over. We wish to give the floor to Mr. Carlos Piani for the company's closing remarks.

I'd like to thank everyone for participating in the call today and for the continued support, and hope to see you all on the next call. Have you all a nice day. Thank you very much. Bye-bye.

SABESP earnings presentation is now closed. Thank you very much for your participation, and we wish you all a very good day.

Good morning, and welcome to SABESP's 1st quarter of 2026 earnings presentation. With us here today are Carlos Piani, CEO, Daniel Szlak, CFO, and Thiago Levy, Investor Relations. Before we begin, we clarify that the statements made during this presentation will not include projections or estimates of future events. They may contain forward-looking statements indicating potential trends related to SABESP based on reasonable expectations, beliefs, and assumptions of SABESP's management as of today. These statements involve risks and uncertainties and are based on assumptions and factors such as market, regulatory, and economic conditions, which may not materialize, in addition to the risk factors disclosed in SABESP's filings with the Brazilian Securities and Exchange Commissions, B3, and on its investor relations website.

Investors should understand that changes in such factors may lead to outcomes that differ from current trends and that undue reliance should not be placed on these statements. The full disclaimer will be presented next and must be read carefully by all participants. This presentation is being recorded and all participants will be in listen-only mode during the presentation. After that, we will begin the question and answer session for analysts and investors only. If you wish to ask a question, please raise your hand and submit it via the Zoom Q&A informing your name and company. I will now turn the floor over to Daniel Szlak, who will discuss the results. Daniel, you may proceed.

Thanks, operator. Good morning, everyone. Thank you for joining us for SABESP's 1st quarter 2026 earnings call. I'm Daniel Szlak, CFO. I'll present our operational and financial highlights for the quarter. After which, I'll handle the call over to our CEO, Carlos Piani, to update you on our progress. We will open the floor for the Q&A. Before I begin, I would also like to clarify that all the numbers in this presentation are SABESP only and do not include MI's figures. For this 1st quarter, we have only consolidated the balance sheet. In the 1st quarter of 2026, total water production reached 778 million cubic meters, 4.6% lower versus the year-ago.

This decline reflects a milder summer with average temperatures 3.3 degrees Celsius lower than last year, as well as the application of SP Águas' operational rule of the night pressure management implemented for approximately 10 hours per day to enhance the system resilience. Our active customer base remains stable with about 9.5 million water and 8.2 million sewage connections. The slight year-over-year reduction is primarily driven by increased revenue assurance actions and the verticalization of the cities in which we operate. Excluding the impact of such actions, water connection would have remained flat year-over-year, while sewage active connections would have increased by approximately 0.2%. We continue to prioritize service quality and operational reliability for the nearly 30 million customers, ensuring consistent water supply and sewage services, even amid varying weather conditions and operational challenges.

Turning to our financial performance, adjusted net revenue for the first quarter of 2026 was BRL 6 billion, an increase of 11% year-on-year. Adjusted EBITDA was BRL 3.8 billion, up 26% versus the year ago, reaching 62.9% margin, a significant expansion from where we were a year ago. This higher margin illustrates the impact of our continued efficiency efforts and disciplined cost control to free up resources for our CapEx plan. Adjusted net income was BRL 1.5 billion, growing 32% year-over-year, supported by improved operating results and lower spreads in our debt stack. Before we deep dive into the operating performance, let me briefly walk you through the reconciliation between reported and adjusted figures, same as we did in previous quarters.

As usual, we exclude construction revenues for which we don't book any margin and the financial assets, which are merely accounting requirements and do not reflect, in our view, the underlying operations of the business. In addition, during the quarter, we incurred in BRL 16 million of one-off M&A expenses. Adjusted net revenue grew 11% year-on-year in Q1, driven by 3 main factors. First, price contributed 12%. This reflects the last tariff increase implemented in January, with a 9.1% phase-in from last year's bills invoice in 2026. It also reflects an additional 2.8% gain from commercial initiatives, particularly the termination of large client contracts. Second, volume was up 2.4%. While the expansion of the customer base contributed 2.9%, this was partially offset by temperature effects that drove consumption per capita down 0.6%.

Finally, mix reduced revenue by 3.4%, reflecting the expansion of subsidized tariff programs year-over-year. These programs now benefit more than 2 million connections and remain a key mechanism to ensure access to basic sanitation services at affordable prices for underprivileged communities. While these affects revenue mix in the short term, it is fully aligned with our social mandate and is covered within the regulatory framework. On the next slide, we deep dive into some of the aspects supporting the revenue performance. The price index, excluding mixed effects, remains stable with a 9.1% increase driven by the January tariff adjustment. On the social front, the number of connections benefiting from subsidized tariffs surpassed 2 million. While this was virtually stable quarter-on-quarter, it represents a 23% increase year-over-year.

This expansion reinforces our best role in promoting social inclusion while continuing to broaden service coverage in a financially sustainable manner. Moving to EBITDA, adjusted figures grew 26% to BRL 3.8 billion. This was underpinned by higher revenue and cost efficiency across multiple areas. G&A saw a gain from a BRL 30 million past due settlement with one of our cities and generally tighter cost discipline. Power went down largely from an increasing mix, with the free market now representing 86% of total consumption. Personnel costs have declined as a reflex of our workforce restructuring. The average workforce in Q1 2026 reduced 13% compared to the year ago to 8,800 employees. With revenues up and costs well contained, our EBITDA margin expanded to 63%, freeing up resources for our ambitious CapEx plan.

Now, deep diving into personnel, we saw a reduction of 26% year-over-year, which reflects a combination of a 13% headcount reduction and a gain in workforce job and salary mix. These structural measures more than offset the 5.5% wage inflation applied during the period. Reported net income was BRL 1.7 billion for the quarter, up 18% from BRL 1.5 billion in the year ago. The substantial EBITDA growth more than offset an increase in net financial expenses, which rose as expected due to higher interest rates and our higher average debt to fund the CapEx program. These effects were partially offset by a lower income tax expense, aided by the deduction from interest on capital payments in the quarter. Our transformation is most visible in the acceleration of the investment program.

In the first quarter alone, CapEx reached BRL 3.7 billion, up 31% year-on-year. This strong start to the year puts us well on track to achieve our ambitious plan. We have already delivered a large portion of our multiyear universal access targets as of Q1. We have fulfilled 87% of our water connection goal, 77% of our sewage collection goal, and 71% of our sewage treatment target for the years of 2024 through 2026. Moving to the next slide, our major projects are advancing as planned. For example, under our Countryside Universal Access Program, phase 1 is underway with 11 projects involving BRL 5 billion of investments already in execution phase. Earlier this year, we launched the phase 2 tenders for additional 8 projects, totaling another BRL 5.4 billion in investments.

We made further advances in the Integra Tietê program with the expansion of the Barueri Sewage Treatment Plant, a BRL 5.7 billion project that will boost the plant's capacity by 41%, benefiting about 4 million people by 2029. Turning now to our balance sheet, our leverage ratios remain controlled even as we ramp up investments. At the end of March, net debt stood at BRL 32.5 billion. Our average cost of debt remains low at roughly the benchmark rate, and we have extended our average debt maturity to 6.3 years. It's worth highlighting that 64% of our debt now matures in 2031 or later, reflecting our proactive efforts to push out maturity, post universal access, and lock in long-term financing.

We also maintain a very strong liquidity position, BRL 19.2 billion in cash at quarter end, which is sufficient to cover over 5 years of debt service. Our solid capital structure and balance sheet provides ample flexibility to continue executing our investment plan while safeguarding our financial stability. Finally, looking at our key financial ratios, net debt to adjusted EBITDA was 2.4% at the end of the quarter. Still, at a very comfortable level, given our robust cash generation and long-term debt profile. Our profitability metrics remain strong and stable with a trailing ROIC of 11% and ROE about 17%, combining both growth with profitability. With that, I will now hand over the call to Mr. Carlos Piani, our CEO, to discuss our strategic priorities and recent developments.

Thanks, Daniel. Good morning, everyone, and thank you for joining the call. I will now provide an update on the strategic and operational progress achieved during the first quarter of 2026. Turning to slide 17, you can see a summary of the key accomplishments across the four strategic pillars we presented at our Investor Day last April: quality, profitability, growth, and society. Starting with growth and our universalization agenda, we maintained the strong investment pace established last year. CapEx reached BRL 3.8 billion in the first quarter, approximately 31% higher year-over-year, clearly demonstrating our execution capacity and ability to accelerate project delivery. Visibility also remains high with a CapEx backlog of BRL 39.8 billion from April 2026 through 2029, providing a solid foundation to sustain this investment cycle over the coming years.

Turning to profitability and operational efficiency, as discussed during our fourth quarter 2025 earnings call, we have substantially closed the historic gap related to discounts granted to large clients. At this stage, 80% of the related injunctions have been ruled in SABESP's favor, reinforcing both revenue quality and regulatory alignment. We also continue advancing our infrastructure modernization agenda with installation of 326,000 meters during the quarter, a 51% increase year-over-year. This initiative is expected to contribute to lower losses, greater billing accuracy, and improve operational efficiency over time. Collection performance also remained strong with a collection rate of 96.9% in the quarter, excluding court-ordered debt payments. In digital transformation, the quarter was marked by the successful go live of SAP S/4HANA, a major milestone for the company.

This implementation enhances agility, data quality, and operational integration, while also establishing an important foundation for the next phase of SABESP's transformation agenda. On quality and customer experience, we continue to expand and strengthen our digital customer journey. Today, 10.5 million customers use our digital payment channels. Our WhatsApp platform continues to scale, averaging 2.8 million interactions per month, while SABESP's app maintains a strong 4.6 rating with approximately 1.5 million monthly interactions. At the same time, we're adapting our call center branches and ombudsman operations to a new commercial and operational reality. This includes redesigning processes, standardizing workflows, and resizing teams to better match current demand volumes. Additional adjustments and improvements are planned for the coming quarters as we continue to enhance customer satisfaction and improve our Net Promoter Score.

On ESG, I would like to highlight two important achievements this quarter. Earlier this week, ISE B3 published its annual index composition, and SABESP remains a member for the second consecutive year, reinforcing the strength of our ESG positioning in the Brazilian market. In addition, in January, we received the B rating in the CDP Climate Assessment, representing an improvement versus last year and reflecting continued advances in climate governance and environmental management. Taken together, these results demonstrate the consistency of our execution across all strategic pillars and reinforces our ability to deliver sustainable growth with quality, efficiency, and positive social impact. Moving now to Slide 18, while we're making strong progress across priorities, it is equally important to remain transparent about the challenges ahead as we advance towards our 2029 commitments presented at Investor Day. Each year, this transformational journey brings a distinct set of priorities.

In 2026, one of our main challenges is the implementation of the new regulatory accounting principles, including the new RAB methodology, which we expect to conclude by year-end. This is a complex but fundamental step to ensure greater transparency, consistency, and alignment with the evolving regulatory framework. In this context, ARSESP, our regulatory agency, has launched a public consultation to discuss the new DRC methodology, and we intend to actively contribute to this process by submitting our recommendations by May 13th of this year. Successful delivery on this milestone will be critical not only from a compliance perspective, but also to support the next phases of our transformation agenda, including future tariff reviews, the advancement of universalization targets, and the integration of new assets into our operating and financial model. With that, I conclude this session of the presentation. We can now move on to the Q&A.

Thank you. We will now begin the Q&A session for investors and analysts. To ask a question, please submit it via the Zoom Q&A informing your name and company. Our first question comes from Mr. Guilherme Lima from Santander. Mr. Guilherme, the microphone is open. You may proceed.

Good morning, guys. I have here two questions. First, electricity and material expenses came in higher than we were expecting. Could you disclose to what extent these lines were impacted by the company's current hydrological situation, what could be normalized levels, and whether a portion of these incremental costs could be subject to future reimbursement? The other question is if you could share your expectations for the 2026 revenue loss stemming from social tariff benefits to be reimbursed in 2028 tariffs. That's it.

Thank you, Guilherme. Good morning. Daniel here. Thank you for your questions. Look, starting from electricity materials, we don't see necessarily major shifts, electricity with regards to hydrological situation versus what we had, for example, in the 2nd half of last year. What we see 1st is a decline year-on-year on power expenses. We're actually consuming less versus the 1st quarter of last year, as we have a lower production given by the fact that we're doing the night pressure management in connection with SP Águas operating rule, which is good.

What we see naturally, and we try to signal that in the investor day, is higher costs per kilowatt with regards to the captive market, given the price increases that have been already passed in the places where we operate. This is one of the things. Looking to materials, I would attribute that mostly through phasing than anything else. There was no specific major item on materials in the quarter that would lead me to believe that we're on a different path. With regards to revenue loss from the social tariff, right, which is a timing effect, naturally. What we see, today we have virtually stabilized the number of economies that actually access the benefit with about 2 million.

If we look at year-on-year, this is a big impact, growing almost 50% year-on-year quarter. When we look at Q4 versus Q1, the number is relatively stable. I don't see major spikes from one quarter to the other. What I do see, and one thing that you have to keep in mind, is every time that we grow, we're growing more and more to underprivileged communities. As we grow, an important part of that growth is gonna be eligible to the Tarifa Paulista or to the CadÚnico, depending on each level of eligibility. This is gonna add to that number. Is it gonna be one for one for each economy that we grow, this is gonna go there?

I don't think so, but this is gonna be less something that's less predictable from a day-to-day perspective. You'll see some growth, but this is gonna be much more organic now, and it's gonna be less stochastic. Sorry, less discrete. Sorry.

Thank you, Daniel.

Thank you. Remember that to ask a question, submit it via the Zoom Q&A informing your name and company. Our next question comes from Mrs. Maria Carolina from Safra.

Hi, everyone. Good morning. Thanks for the call, and also for taking my questions. I have two, one on regulatory front and the other on growth opportunities. Starting with regulation, can you comment on the recent normative that ARSESP published presenting the guidelines for the discount policies for large users? What's your thoughts on these guidelines, expectations surrounding this definition, and how can this help you guys in future negotiations with big clients? Secondly, the government announced the public hearing, as you guys mentioned on the investor day, for the Universaliza São Paulo program. Looking at the documents released, what's your first thoughts on that, the expectations for the blocks per se, if it's gonna be more than one block, and potential size of blocks here, in case you have any views on that.

Of course, expectations on possible differences between this model, new model, versus the first version, and maybe the timeline for that. Thank you.

Thank you, Maria Carolina. A few thoughts, not definitive yet because I think we're still early days in some of these initiatives. First, regarding the commercial discount policy, not policy or ruling that SABESP did. I think the next step is for SABESP to submit a policy in how this deliberation would work. Our expectation is to do this in the next couple of weeks, to be honest. This has been long overdue. This segment of the market is expecting this since the privatization. Our expectation is that SABESP will approve with any adjustments the policy that we submit, I think by the end of this quarter. This would be in, I think, valid for consumers on the second half of the year.

The consequence would be, I think, consumers to adopt these new tariffs. We would probably, this would have impact on our second quarter, second half of the year results, as this rolls out, and we would be compensated 2 years down the road because of the volume, how the regulation works. I think this would mitigate a lot of the pressure, a lot of the demands that some large clients, industrial and commercial clients have. All in all, I think that we'll have a clear view of definition of the policy that we're gonna propose and if it's gonna be approved by the end of that first half, and this would be applicable and valid for the second half of the year, flowing through our numbers.

Regarding Universalization, I think it was good to hear that this process is moving forward. I think the big unknown still is how many municipalities are gonna be there for the formal process. This is still not set in stone. I think that's the big, I think, uncertainty. We don't have a clear view of how many blocks. I think it depends, at the end of the day, how many municipalities will be in the process when the process formally starts. I think the new news, I think, is the drainage. It's small, but there's a piece of drainage in the process. This is different from what we had at SABESP. All the rest, I think, is most of the same.

That's good news because there's no surprise. There's also provision of DRC. What's going to be approved for SABESP is going to be rolled out for Universaliza São Paulo. This is, I think, the unknown that may affect us and the Universalization. Okay, this is our takeaway for now. And glad that see both of these initiatives moving forward during this year.

Okay, amazing. If I may add.

Sure

One additional one here. We noted this quarter that the unitization curve seemed a little bit slower compared to the previous quarter. Of course, we're talking about tough comps, right, given you guys did a great job last year. Just to understand, if there was any kind of events this quarter that changed a little bit the rhythm here, or nothing to be noted on that. Thank you.

I can take it. Daniel can also comment if you want, but I think there's small seasonality. At the end of the day, there's a big push, given how regulation works, to have everything ready for the regulatory discussion by end of the year. The fourth quarter is our peak, and usually the first quarter is where from a seasonality standpoint, a little bit lower. I think nothing that concerns us. This has basically two things: the comp of the fourth quarter, and I think the way that the construction works evolve through the year. I think the first quarter, usually it's a little bit slower from a unitization standpoint.

I just wanted to add something here, Carol, to Piani. We also had the cut over for SAP. We had to cut the month a little bit earlier in March, so we didn't have the typical days that we take in at the end of every month to go through the unitization process. This is gonna be picked up in Q2. Okay.

Okay. Thank you, guys.

We lost 2, probably 2 of the 90s plus.

Okay, thanks.

Our next question comes from Bruno Amorim from Goldman Sachs.

Hi, good morning, everybody. Thanks for taking my questions. I have two here. The first one, you know, could you comment or remind us where you are in the journey to improve operational efficiency of the company? Just so we understand, you know, how much more room you still see for further cost and revenue efficiencies going forward. The second question, you know, on the Copasa privatization. If Sabesp decides to participate, is it decided that that would be together with Equatorial, given none of those companies are, have exposure to Minas Gerais yet, or not necessarily? Thank you very much.

Daniel, you take the first one. I can take the second.

Okay. On the cost side, look, we have a lot of things that we did last year and thinking through why we're doing this. We've invested already BRL 22 billion. We've invested another BRL 3 billion plus this quarter. We're investing a lot, and this is one of the ways that we free up resources for that investment. Interest rates that are at 14.5%. This is one of the things that why we do this. Thinking through this, we did a lot last year. There's a lot of carryover from last year. Naturally, we're doing other things this year. And one of the things that we have that's big and it's gonna come up is the auto production on power.

We have some of that coming live now in Q2, some of that coming now live in the Q3. We'll also see a carry forward benefit for that for next year. This is one of the large things that we're doing. Otherwise, one of the things that we are looking also is through the structural things like the SAP Go Live. We are also revisiting all our commercial efforts and our commercial processes also to improve the quality of the service and so on and so forth. We try to avoid giving too much guidance on that front, as you are well aware. This is what we can comment for now.

Regarding M&A opportunity, the one you mentioned, I think given everything that's happening with us, because we're doing a transformation while being a public company and so forth, I think the partnership is welcome at this phase. For any major opportunity, I cannot tell, confirm partnership, but I think that partnership is something that we want to seek, and Equatorial is a partner of choice if we decide to move forward. I think we're ready for the process and the partnership is something that it's something that we think it's good for us at this moment in time, and Equatorial would be a good partner. In the right time, when we publicly make the decision in the process, this decision is gonna become public.

That's what I can say for now.

Thank you. Have a good day.

Our next question comes from Felipe from Itaú.

Good morning, everyone. Thanks for taking my questions. Quick follow-up on a previous question here. At its investor day, SABESP presented a CapEx estimate of roughly BRL 20 billion for 2026. Could you please share your expectations on the disbursement curve in the coming quarters, as well as the expected normalized unitization rate? Also, if you could comment on the discussions with the regulatory agency regarding the CapEx plan for 2024-2029. Do you have any insights on the timing or the outcome of these discussions? Thank you.

Okay. Thank you. Thank you. Thank you for the question, Felipe. Let me maybe start with the first part on the internal side, and then, Piani, talk a little bit more on the external side. On the internal front, right, CapEx typically starts slower off the gate in Q1 and then ramps up throughout the year. Every place that I've worked in my life, this happen. It's no different here in SABESP. When we look at last year, a part of the slope of the curve, of the acceleration was indeed because of how we were changing the processes. There will always be a compounding curve throughout the year in terms of CapEx.

A part of that comes from the fact that we have started the Countryside Universal Access Program now. We have split the Countryside Universal Access Program into 2 pieces. The first batch of those programs have started already. The second batch, we're getting proposals now. We'll start at some point still this year. We are also contracting the expansion of the major sewage treatment plants that will also increase the CapEx throughout the year. Okay. Mechanically, this is how it will work. In terms of unitization also has to do with the good being put into use, right? It needs to be commissioned, right? There needs to be water or sewage passing through that. Usually, some of these things, they happen throughout the year, so the unitization curve also grows throughout the year.

As we've been voicing, do not expect that one for one will be unitizing the first 2 or 3 years. We expect that there will be more or less two-thirds, one-third, being left over. One third, and unitizing about two-thirds of the CapEx, a little bit less than two-thirds of the CapEx every year. Reversing that trend in the last 2 years of the cycle. This is more or less what we expect. What we are planning and seeing already in the day-to-day. Okay. Talking about the regulatory front, I'll defer to Piani. He can provide better insight.

Felipe, there's no timeline from the regulatory standpoint for us to have a formal position on our CapEx projection. We expect at least this discussion to have some definition about the future and the beginning of the second half of this year, because we need to start planning on what we're gonna do next year, right? The years forward. We already have a lot of the CapEx contracted, given how things work here, but there's still some degrees of freedom how much money we're gonna deploy next year and in the following years. From our perspective, I think we need to have some visibility of this alignment by the beginning of the third quarter of the year.

We'll try to pursue, if possible, this definition with the regulatory agents. Just to be clear, there's no time, formal timeframe, no obligation from the regulatory agency to provide that in that timeframe. Okay?

Thank you very much.

Thank you. Remember that to ask a question, submit it via the Zoom Q&A, informing your name and company. Our next question comes from Matheus Amorim from NAVI Capital.

Hello. Thank you for taking the question. Congratulations on the excellent result. I would like to understand a little bit more, what are your actions through the remainder of this year regarding revenue assurance and how you're seeing this thing evolving throughout this year and maybe next year. Thank you very much.

Thank you, Matheus. This is a very important pillar for us. I think that all the commercial efforts where revenue assurance resides are one of the major pillars of any transformation from a state-owned company to a privately held enterprise. We have been moving fast and furious on that front. Many fronts like meters, substitution, collection, workflow adjustments, putting a negative mark on consumers that don't pay on time, and so forth. This has generated a lot of volume on our customer service channels across the board that are at the same time being redesigned. As we described on the opening presentation, we're constantly discussing this balance between how much volume we put in the system and how much structure do we have to support this.

We know, we're all customers as well from other utilities, that usually customer service is a little bit difficult. So we expect through this quarter that we're living, right, the second quarter already, to the end of the year, to make potential adjustments so we can help the consumer navigate this change of different commercial policies following the regulatory framework that it's a little bit tighter than it was in the past. We have more flexibility with in partial installments for adjustments in volumes that are higher because of the meters that were obsolete. All in all, Matheus, I think we're gonna adjust. I think we're focusing on the long term.

If it's required, we may reduce a little bit of the volume or invest a little bit more in the structure so we can continue to evolve, but with a good customer service level. This is our challenge. We're looking the long term and help the our consumer in this transition to pay on time, even if the bill's a little bit higher, that we'll do so in the next quarters to come by year-end.

Thank you very much.

Thank you. Remember that to ask a question, submit it via the Zoom Q&A informing your name and company. Our next question comes from Giuliano Ajeje from UBS.

Hello, Piani, Daniel, and good morning. I have two, three questions. Let me start about the tariff, about the mixed tariff. You reported a growth in terms of households with the tariffs, with subsidies. I have two questions here. The first one, if the company's projects, this growth pace of the tariffs with subsidies will continue through 2027, 2028. If not, what should be the level? My second one is regarding the status with the regulatory work with ARSESP to recompose this. Another question is about Copasa. It's a simple one, if you already registered for the process. Finally, another question about the CapEx.

The slide 13, you showed the CapEx expected for 2000, 2024 to 2029, and this is considering the anticipation of the second cycle. Assuming that ARSESP will not consider to anticipate, what should be the CapEx? My question is, the initial BRL 70 billion, how much should be adjusted by inflations and also by REM? Also second, how much should be the anticipation of the second cycle? Okay, three topics here.

All right. Maybe I'll take the first one now, and I'll take turns with Piani here. On the first one, Agege, thank you for the questions. Very helpful. On the first one, we started this adding new tiers, right? First we had a methodology that was SABESP, and then the contract dictated us to move from that methodology to the Cadastro Único, which is the federal Social Security scheme. We moved to that throughout the last quarter of 2024. We realized that some people lost the benefits that, but they still needed the benefits, so we maintained those benefits for a while to allow them to register into Cadastro Único, and so on and so forth.

Throughout that period, the concession approved another program called Tarifa Paulista. Throughout all this period, I think until the end, almost, of 2025, we had changing rules, of who was entitled, what type of benefit, and so on and so forth. This stabilized at the end of last year.

Now I don't expect, and one of the things that we'll also start seeing is some of these people getting into the transition tariffs, right? People that had the benefit for 18 months, then they transition to a different class, and so on and so forth. Given that, and assuming that there are no changes going forward, I think the adjustments here, they're going to be only organic. What I mean by that is mostly driven by growth. If we grow to underprivileged communities, some people will be more eligible. Even when we grow into more formal areas, we also have people that are eligible for social or Tarifa Paulista, and so on and so forth. I don't expect to see the same amount of bumps up and down that we saw throughout last year going forward.

I expect to see organic, minor changes to those numbers, going forward, unless there are regulatory changes. Okay?

Okay.

That's the answer to your first question.

Thank you.

To the second, talking about Copasa then.

Copasa, yes, we're gonna register. We're gonna participate. I think simple as that, the process will, depending how it evolves, we can share our views with the market. Yes, we're gonna participate. I think the last one regarding the total CapEx, I think we need to wait for the regulator. Giuliano Ajeje, and I know this is a tough one because.

We need to be aligned, but at the end of the day, there's a little bit of everything, right? That Daniel can explore, but there's a little bit of inflation on top of the BRL 70 billion. There was a little bit changes of scope. Basically, when we did all the georeference of all the consumers that needed to be connected, some of these works, I think, would be not prudent to be made. We discussed how to do this with the government and with the agency, sorry, and they're discussing maybe there's other alternative ways to provide service like we are gonna do to rural.

There are some formal areas with rural characteristics, and may we can offer service with the same out of the rural, but to some of the formal areas. This would reduce, I think in a material way, a sample of the connections that we need to make. All in all, I think I would like to wait a little bit more to give you this visibility. I think what certain is what we're gonna invest this year, I think we have been crystal clear. I think Daniel can give a little bit more detail. I think that there's three components. There's inflation on the BRL 70 billion. There's a little bit more complex connections that increases the average cost per consumer that we're negotiating.

There's good visibility that this will decline given our conversations up to this moment with the agency. There's some timing between cycles that at the end of the day is a cost of capital decision, right? Because the net present value may change a little bit more, but it's not different, right? I think the final number, we need to wait for the regulator.

Okay. Agree. Rony, can I have one more question here?

Yeah, sure.

The company reported a delinquency close to BRL 50 million, 54 million this year. My question is if the smart meters modernizations and also the digital channels improvement could change this for another level.

I think I'm gonna join, and I'm gonna start, and then Daniel can pick it up later. I think, we reduce our provisions for bad debt provision, right?

Basically, the reduction was because the provision was made based on the behavior of the collection in the past. Given that we changed a lot of the policies and procedures, we're improving the collection rate as we move on. Because of that, the accounting provisions, they decrease. That's why they're declining. It's simple, right? So we don't The policy has not changed. The bad debt provision is based on the collection history, and given that the history is improving, so the anticipated provision declines. If the behavior changes, the provision will increase. It's simple as that. We're aligned. Regarding the smart meters, I think they where they can help. Smart meters is not new in the world.

I think we're laggards regarding smart meters to the Europe, U.S., Asia, and so forth. In one area that we, that I think we're leading is that we implemented Evolve on these smart meters. This will facilitate disconnections and connections according to the rules of ARSESP, right? I think this will help, I think, to be more efficient. This will help the smart meters, as always, will help the consumer have a daily reading of the consumption.

There's gonna be less surprises when they have a leak, or they increase because they have visitors, and they will discuss less. There's gonna be less dispute, in my opinion, in aggregate of the final bills that they have, and we'll be able to collect more efficiency given that my first comment. I think on the margin there are some benefits, but this will take time. I think the smart meters that we have this daily consumption information to be relevant, this will take, I think, two years to have a relevant sample to make a dent in our numbers given our size.

Agreed.

Just to add one thing, Rj, specifically for this quarter. We had a settlement with one of the cities that we serve that was a BRL 30 million recovery. This was also influencing the number for the quarter in a probably bit bigger form than just like an aggregate number of the collection.

Okay. Thank you, Rj.

Thank you. Our last question comes from João Pimentel from Citi.

Okay. Hi, guys. Good morning. I have a more broader question. I wanted to discuss, you know, how do you perceive SABESP, you know, acting, allocating capital, in eventually different markets. I'm meaning, like outside Brazil or eventually into different segments because, you know, SABESP is already BRL 100 billion-plus market cap company. Of course, we have Copasa, we have Universaliza. Copasa, if you go in a consortium, comparing to the size of the company, it's not that much of a big check, right?

Just trying to understand, you know, how do you perceive or how you think you are prepared in your journey of universalization in a sense that, okay, now we're more in the run rate, we know how things operate, you know, we are past the initial challenges of running, you know, of this migration from an SOE to a private company. You know, we're just too big eventually for where we currently operate. How do you feel about investing in different segments or looking to other geographies? Of course, take into consideration different regulatory risks and FX exposure. Just trying to get your sense on that. Thank you.

Thanks for the question. I think this is in all the options of non-organic growth, these are the most risky, right? Probably there's less alignment between shareholders and stakeholders and so forth. Given the nature and our nature that you mentioned that the size, we have the fiduciary duty to look at all opportunities to generate alpha, right? I would say that I think we need to learn and do our homework. I think this is, we're still in early days of our journey, only less than 2 years. I think we're 19, 20 months in. I would say this is something that we're gonna look at.

Initially, if this makes sense, it needs to be almost like an option type of structure, right? It's easier that way. If we have a very small opportunity outside in our industry, this would be a risk-reward relationship, easier to test the waters. I would say there's nothing critical. I think there's, just to be clear to the market, we're not looking to do a deal outside our geography or outside the industry that's major that's going to change the risk profile of SABESP. Okay? Given the nature and how regulation works and how probably the market cap will follow the increase or the recognition of the investments, the market cap will evolve and will be very large to the Brazilian market, water and sewage market.

We, I think we have the obligation to look at this vis-à-vis to the, to the decisions to just distribute cash. We have time for this. Just to be, I just want to be clear on the message. We are not gonna try to be a holding company, invest a lot of things, but we're gonna look at other opportunities to see how we can leverage our skill set, our knowledge, the people knowledge of the people that are here in different ways. If that's, if we believe that there's a risk-reward relationship that makes sense, that we're convinced internally, that we can convince our board, we're gonna try to convince the market.

If we believe that the opportunity is not there, we're just gonna stick here to São Paulo, do our homework, try to provide a better service to everyone, and move on and distribute the cash. I'm just passing you the framework. There's no nothing set in stone, but I think we have the skill set. If the opportunity arises in outside a little bit our backyard, I think we can do it, but we're not there yet.

All right. Thank you. Super clear. Thank you, Piani.

The Q&A session is now over. We wish to give the floor to Mr. Carlos Piani for the company's closing remarks.

Again, I just want to thank everyone for the questions and for the continuing interest in SABESP. We appreciate everyone joining on a quarterly basis on our calls. Looking forward to keep you guys all updated on our progress on the quarters ahead. Have all a great day, and see you next quarter. Bye-bye.