Companhia De Saneamento Q2 2026 Earnings Call: Complete Transcript

On Thursday, Companhia De Saneamento (NYSE: SBS ) discussed second-quarter financial results during its earnings call. The full transcript is provided below. APIs provide real-time access to earnings call transcripts and financial data. Visit to learn more.

3% due to customer service investments and inflationary pressures. 3% decline in water production. Strategic initiatives included enhancing customer service infrastructure, advancing digital transformation, and maintaining a strong focus on sustainability, as evidenced by an upgrade in their MSCI ESG rating. Future outlook includes continued investment in infrastructure and customer service improvements, with a focus on safety and operational efficiency, aiming for a CapEx of 20 billion reais by year-end.

Management emphasized the importance of delivering results with purpose, guided by ethics and safety, and putting customers first, while aiming to maintain a strong balance sheet and funding strategy. Full Transcript Thiago Levy, Investor Relations Good morning, and welcome to Companhia De Saneamento's second quarter of 2026 earnings presentation. With us here today are Carlos Piani, CEO; Daniel Islaki, 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 Companhia De Saneamento based on the reasonable expectations, beliefs, and assumptions of 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 the company's filings with the Brazilian Securities and Exchange Commission (CVM) and on its investor relations website.

Investors should understand that changes in such factors may lead to outcomes that differ from current trends and 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 Zoom Q&A, informing your name and company. I will now turn the floor over to Daniel Islaki, who will discuss the results. Daniel, you may proceed. Daniel Islaki, CFO Thanks, operator.

Good morning, everyone, and thank you for joining Companhia De Saneamento's second quarter 2026 earnings call. I'm Daniel Islaki, CFO, and I'll present our operational and 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. 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 ECP ÁGUA's operational rule of the night pressure management implemented for approximately 10 hours per day to enhance the system resilience. 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 the MI results into our operating figures. Therefore, the figures presented in this slide include the MI contribution. 4% year on year, mainly reflecting the tariff and the expansion of customers. 3% down.

This performance reflects investments associated with our customer service initiatives as well as inflationary pressures, which I'll explore more in the next slides. 2 billion. The decrease versus the prior year reflects the higher net debt to fund our Universal Access Program. Cash conversion and generation remain solid, with operating cash flow reaching nearly $3 billion in the quarter and a solid conversion above 75%.

Moving to Slide 6 and before diving deeper into the quarter, I'll 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 Companhia De Saneamento'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 Companhia De Saneamento does not record a margin for construction and MI still does, we also exclude 68 million mainly related to the Jaguar incident and MI's figures.

Given MI is much smaller than Companhia De Saneamento, 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 MI's performance in the appendix, in our filings at CVM, and on MI's own filings given it is also a publicly traded company. 7% year on year. 1% lower year on year and our ERP implementation.

Excluding these effects, underlying revenue would have grown by about 10%. 7% driven by the January 2026 tariff cycle, partially offset by reforms which will be subsequently adjusted in 2027's tariff variance review. 6% from metering upgrades. These were partially offset by the negative weather impact on consumption.

6% impact from band mix driven by weather. On Slide 8, 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 consumers to be flat versus where it was before the privatization for Companhia De Saneamento 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. 5 billion.

Starting from the positive contribution from net revenue was more than offset by a strong lapping in cost versus a year ago. G&A saw an impact as Q2 25 benefited from $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 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 gains 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. 4% wage adjustment behind inflation.

This was largely offset by the workforce optimization initiatives implemented over the last quarters with the voluntary dismissal funds. 2% mainly due to transmission and sector charges, including the new one from Unger. However, migration to the free market helped mitigate part of these pressures, with 88% of total consumption now sourced through the free market. 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 also increased, reflecting the expansion of our asset base, which grew from approximately $55 billion to $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'll 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 challenges. 5 billion year to date, an increase of roughly 16% versus a year ago. We also ended the quarter with more than $40 billion in contracted backlog through 2029, providing strong momentum for future execution.

We would like to remind our investors of the historical seasonality for CapEx, which is usually higher in the second half of the year. New factor 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 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.

4 cubic meters per second of treatment capacity. 127,000 additional people now have access to treated sewage in their households in the countryside. 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 totaled $52 billion while net debt stood at $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. 1-year weighted average maturity.

In addition, 64% of our debt matures from 2031 onwards, reflecting the long-term profile of our financing structure. 4 billion in cash, which covers more than four years of amortization and provides substantial liquidity and flexibility to continue executing our investment plan. 5 times EBITDA, a level we deem appropriate for a company executing one of the largest infrastructure investment programs in Brazil. Return metrics also show 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. Thiago Levy, Investor Relations 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 Morin from Goldman Sachs. Bruno Morin, Analyst at Goldman Sachs Hi, good morning everybody, and thank you for the opportunity to ask a question.

You know, how much of the higher costs in the second quarter are either transitory or subject to future tariff coverage, in your opinion? And just a follow-up to that, can you also better explain the nature of the components of the bridge in the bottom of slide 9? Especially the revenue and timing components which you exclude from the calculation of the underlying EBITDA? Thank you so much.

Daniel Islaki, CFO Thank you for your question. This is Daniel. Good morning everyone. Once again, thinking about...

Maybe I'll start from the back. I think it helps explain the early part of your question. Right. So 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.

So 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. So 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 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 higher fiscal fees, a 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 credits, tax credits from them. So we had more accruals to reflect the actual cost of the quarter, and hence we expect that to transition down in Q3. So 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.

So I'll expect half of that would 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 deep dive a little bit more. But we had this year for a 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.

So 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 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 mention here: we had 50 million reais increase in reforms in this quarter. Just rounding the numbers, we expect to see that continued. 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 for a given connection.

And what we did was we anticipated the resolution time by being proactive in flagging that to the consumer and treating that increase. 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. So that's about 50 million in the quarter and we have another 150 million on the cost side that we flagged. Also on the bridge, that's mainly related to the communication outreach that Piani mentioned.

About half of that is related to that, and the other half is mainly linked to the expansion of customer service agencies such as Poupatempo, increasing 200 people on the service agency that actually provide a service to the population, and another 120 people on the call center so that we can solve a backlog of tickets that we had accumulated. As we grew, what we started noticing is that we grew and we started also being more on point on collection. And 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.

So that's a little bit of the general picture of that. What we expect, based on Rule 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 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.