Companhia de Saneamento de Minas Gerais ($CSMG3)

Good morning, ladies and gentlemen. Welcome to COPASA MG Earnings Conference Call for the First Quarter of 2026. This conference call is being recorded, and the replay can be accessed on the company's website, ri.copasa.com.br. The presentation is also available for download on the platform. [Operator Instructions] Before proceeding, I would like to take this opportunity to reinforce that forward-looking statements are based on the beliefs and assumptions of COPASA's management and on information currently available to the company. Such statements may involve risks and uncertainties as they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should take into account that events related to the macroeconomic environment, the industry and other factors may cause results to differ materially from those expressed in such forward-looking statements. Now I would like to hand the floor to the CEO, Marilia Carvalho de Melo, who will begin the presentation. Please, Mr. Melo, the floor is yours.

Thank you. Good morning, everyone. I would like to say good morning to our investors, analysts shareholders and everyone attending the conference call for the earnings of COPASA for the first quarter of 2026. In our last conference, I shared the view that COPASA was in a decisive phase of execution. In the first quarter of 2026 confirms the [ PAT ]. It was a period marked by important advancements that we consider important for the long-term pathway of the company investments. And in addition to the continuation of the transformation agenda conducted by our controlling shareholder. The main point that I would like to highlight is the execution of our investment plan. COPASA started the year with a strong CapEx rate especially targeting the expansion and modernization of water and sewage treatment systems, [ improvement ] qualities of services and water safety. For shareholders and investors, this is an important message because it shows the conversion of the strategic planning into concrete deliveries based on assets that sustain the regulated growth of the company. We have also advanced in operational efficiency with one more reduction in the losses freight of distribution. This is a special attention because it connects the operational quality, conservation of water resources, productivity and potential to generate value. The agenda to reduce losses will continue a priority of the management supported by technology modernization of networks, replacement of water meters and continuous improvement of operational processes. Another important advance in the quarter was the predictability of regulations. The third regulatory review brought important advances for the cycle [ 2629 ] including mechanisms that contribute to clarify the recognition of assets and in addition to the economic and financial sustainability of the business. A predictable regulatory environment is key to perform well in a more -- one of the most significant investment cycles of COPASA. The municipality of [ Meloni ], we renewed the concession up to [ 273 ], which is an important factor to reduce risks [ elution ] is a strategic concession and this advancement reinforces the company's capability to build institutional solutions and ensure continuation of investments in a key area for our operations. In addition to our -- I had also that we made efforts to negotiate with other cities. We conducted several meetings in addition to the articulation with the [ CT ] authorities that ended at the last week's agreement to include the municipalities in which the company does not operate in sewage treatment. We also advanced for water safety and sustainability, which are topics directly connected to the resilience of our business model. The situation of the main reservoirs remains favorable, but we remain prudent in treating in a long-term view the water condition, especially in a higher variability of climate conditions. I would like to reinforce that the destatization process is conducted by controlling shareholders. COPASA continues to contribute technically, observing the material facts disclosed to the market and maintaining absolute focus on the governance operational feasibility in compliance with its regulatory and contract obligations and execution and investment plan. The destatization plan continues according to the schedule defined by the shareholder -- the controlling shareholder as communicated to the market, we launched the previous step of qualification of reference investor. Naturally, the quarter also brought some points of attention on the short term that will be detailed as soon by the presentation by the CFO, Adriano Moura. I would like to reinforce right now is that we are keeping track of these topics with discipline and a focus on efficiency. We believe that the first quarter of 2026 should be understood as an execution quarter in which significant structural advances work hand in hand with the need for continuous attention to cost productivity and quality of revenues. The core message for shareholders and investors is that our strategy remains consistent. We continue to be focused on universalization, universal access to the sewage and water treatment, regulatory compliance, capital discipline, water safety and sustained generation of value. These are the factors that sustain our management as well as the construction of the next cycle of COPASA. I thank you all again for your attendance and the dedication of our team. And now I turn the floor to our CFO, Adriano Moura, who will present the main financial and operational results in the period. And then later on, I'll be back to answer the questions from the audience. Thank you. Moura, go ahead.

Thank you, Marilia. Good morning, everyone. Thank you for your presence in the conference call of COPASA regarding the first quarter of 2026. Let's look at the main highlights of the quarter. The water volume, both in water and sewage remains stable compared to last year, 170 million cubic meters for water and then 118 million cubic meters for switch. A volume that's below what is expected considering that there was an increase in connections of water of 1.6 of [ 2.3% ] in sewage. But the low temperatures ended up reducing the expected usage of water. We also had a tariff readjustment of 6.56% effective as of January 2026. Net revenue reached BRL 1.9 billion, an average growth of 2.5%, also a little bit below what we expected because in addition to the volume, there was an unfavorable or less favorable mix, considering a higher increase of the social category that pays the lower price. Cost and expenses, BRL [ 1.06 ] billion, 4.7% higher, mainly due to the increase in PCLD and other judicial topics, which will be explained later. EBITDA margin close to 41% at BRL 787 million, followed by robust cash from operations amounting to BRL 675 million, net income of BRL 368 million, a reduction of 14% that in addition to the depreciation due to more investments was also impacted by the reduction in EBITDA and dividends in the First Q '26 amounted to BRL 278 million paid in May, in addition to remaining dividends of 2026 or '25 rather, that will be paid of approximately BRL 140 million. As Marilia mentioned, we highlight the high level of CapEx, 30% higher than 2025, [ BRL 695 ] million, which is a new record for the first quarter of the year, leverage of 2.4x on March 31, which grew because of higher investments compared to 1.8x on March 31, 2025. The other highlight mentioned by Marilia is the recognition of [ BH ] amendment that extends the term to 2073 that affected the balance sheet on intangible assets as well as obligations to the granting authority, and in addition to credit, I refer to the reduction of financial debt and adjustment of the debt to present value. And the last highlight mentioned by Marilia, is the recovery in reservoir levels of the [ Paraopeba ] system that operated 83.5% of its capacity, which provides safety for the [ system ]. Continuing the operational efficiency, as Marilia highlighted, is one of our strategic priorities, and we are advancing considerably in this agenda. We are reducing a structuring program focused on the centralization of the operating model, productivity and cost discipline, capturing permanent efficiency gains. In the latest months, just to give a few examples, we structured the new operations model with more centralization and with the complete review of processes will start shortly optimization investments. Since August last year, we have in operations, our shared services center with more than 150 services centralized with a lot of improvement opportunities identified. We are also using the zero-based budgeting model. As I mentioned in the last call, we have 100 initiatives mapped, [ many ] of them will be executed in 2026. And recently, we created a very important area with the strategic negotiation of procurement we have mapped 600 suppliers, and the goal is to improve efficiency and quality in contracts. Continuing with the next slide, we see the development of EBITDA. The positive area is the tariff increase implemented in January, but there was a decrease in mix which was an increase in social tariffs and volume below expected, considering the extra connections we made both in sweage and water. In personnel, regarding -- although the adjustment, there was a reduction of costs, which reflects its lower cost over time. And reduction of 170 employees. Third-party services, outsourced services have grown because we need more people for metering because we need to bigger coverage in -- for that, maintenance and operational logistics costs increased a bit. There were important reduction in other costs such as materials. In addition to the tariff adjustment, which affected the cost of electricity and also fees for electricity higher this quarter. In [ PDA ] is a very important item, and it was affected because there was an atypical reduction occurred in that quarter due to special renegotiations. We went back to a level that's considered normal regarding the amount of bills to [ Ford ] or accounts payable, but there is also an impact on the provision for doubtful accounts. Considering next slide, the net income ended the quarter at BRL 168 million, a reduction of BRL 368 million, a reduction of 14% compared to the last [ first ] quarter '25. The first effect rate came from financial results, appreciation, amortizations. In the financial results, there was a significant impact of mark-to-market of hedged and foreign exchange securities because we have debt in euro, and that reflected in the appreciation of real compared to [ area ] with impact on financial results. It's important to highlight that this is an effect that's mainly on the books of the company, it doesn't affect our strategy or operations. On the Texas side, we continue to have a very efficient tax rate [ out ] to 20%, reflecting also the any incentives and a maximum optimization of interest on equity to plan for Texas. The next slide, we see operating cash generation, which was strong and net generation amounted to BRL 675 million which is in line with the same period of last year despite the acceleration of CapEx, the growth of investment funds and the growth in operational efficiency. We ended the quarter with robust cash and we also raised funds of BRL 2 million -- BRL 2 billion, which will meet our demands for the next investment period. Speaking of investments on the next slide, we see the highlights of historical history of investments since 2021 with the important investments made in the last 2 years, we continue to prioritize sewage universalization, also reduction of losses, water security and retrofit of wastewater treatment plants. Talking about capital structure and indebtedness on the next slide, indebtedness has grown due to higher investments with grown by BRL 1.7 billion compared to the previous quarter. Despite that, our leverage is quite comfortable and we continue with the good capacity to invest and continue with the continuous improvement of our EBITDA. Closing the presentation, we highlight the consistent evolution of our main indicators. We continue to see a structural path of reduction of losses, given by modernization of our systems in addition to initiatives to reduce losses. In delinquency, this increase of [ 3.9 ] million is going back to regular levels in April. So we see a positive trend towards the next months. And finally, the indicator of employees per connection, which reached [ 1.16 ], which reflects a decrease in the number of employees, but also more efficiency. So this ends the presentation of the financial and operational results for the first quarter, we remain confident in the execution of the strategy of the company, expanding investments [ in ] we will maintain the financial discipline and continue with our capacity to generate sustainable growth in the long run. Let's now go to the Q&A session.

[Operator Instructions] The first question comes from [ Ricardo ] from Safra.

I have two questions. First, about delinquency. If you could talk about this increase we had in this quarter and highlight what's the quarter to expect in the next quarter? And what has been the most recurring profile regarding delinquency? And if you could give us some more color on the destatization or privatization process and about the discussions you've made with the municipalities. I don't know how much you can talk about that. But if you could give us some more color about the process and schedule.

Thank you. This is [ Giacomini ] speaking. I am the Officer, Sales and Commercial Officer of COPASA. Regarding delinquency, we're putting more pressure on the residential users. And that's putting -- there has been a lot of indebtedness in the families and that impacted our revenues. Some lower levels of delinquency already established for April, and we have some projects to reduce that by improving collection processes, which is signed a new agreement with [ Serasa ], Credit Bureau and also using -- [ what sop ] to talk to debtors, and that will improve the performance.

Continuing with your question, this is Marilia speaking. We have constantly talked to the cities -- city authorities since we started in the concession of agreements. As I said, we signed the agreement with [ Bel ] and recently, based on communication to the market, we started a renegotiation tool, which is the advances on the sanitation municipality fund. It's important to highlight the recent publication of the decree that regulates the regional water and sanitation units gives a term deadline for June 23 for the municipalities to adhere to to that. That's an important tool for the conversion of the contracts with municipalities. In addition, we're working with the [ Mines ] Association of municipalities. We had a meeting, a general meeting without the authorities of the municipalities where we could show advantages in the conversion of these contracts. So we continue with the negotiation to increase the number of municipalities that will convert their contracts to concession agreements. As I said, the destatization process is conducted by the controlling shareholders of the company. We follow all the bases are established in law and the court of accounts is analyzing it. There is no pending issuance regarding the data and the side of the company. According to the plan by the -- we entered the previous qualification phase for the reference investor and we'll then move on to the following steps in the process.

[Operator Instructions] There is a question from Maria Carolina Carneiro and she asks something that's similar to Ricardo's question. So I believe that, that question was answered. [Operator Instructions] There's a question about the level of unitization of assets in 2026.

We are accelerating this conversion to the greatest extent possible. So as of 2027, we have the highest level of investments. We are progressing well. Last year, in the first quarter of '25, we were able to attain a record high in that regard that was included in the asset base of 2026. And the same is made being made now for 2027. Everything that we invest, and we are able to include in the basis until June of this year, will have the impact on tariff starting on January 1, 2027. So we're working for that conversion to be as high as possible, and the process is going well. I don't know if you want to make any comments, but feel free if you want to.

The mode, if you want to make?

Well, the investment rate has been growing 30% to 35% a year. And likewise, we've tried to optimize and accelerate the process and the conversion rate and the unitization is at the same level. Since we're -- the investments are growing, the trend is to grow at closing the cycle until the first half of this year.

[Operator Instructions] There was a question sent by Itau Bank. I'm not mistaken. Marilia would like to ask to add anything to that?

No is [ it ]? The step has been completed on Friday, we still don't have that information. As soon as we have it, it will be disclosed to the market.

[Operator Instructions]

About the question about the situation of municipalities in the integrated system, it's important to highlight that the adherence to the conversion of the agreement is a decision that's up to the municipality to make. So as I said, we are negotiating and explaining to all the city authorities of the that are part of the Metropolitan integrated region as well as the state of Minas Gerais that are within the concession area of the company.

[Operator Instructions] There's a question from [ Pais ], data, whether there is an estimate of additional CapEx in the event of municipalities that only are served with water adhere to the sewage service.

We have some data based on secondary data because we don't operate in those municipalities. But as soon as they adhere our [ SA ] agreement, we'll make a diagnosis to our municipalities to understand what is the need for additional CapEx.

[Operator Instructions] There is a question from [ Flavio Cono ]. Is there a chance of tariff deferment considering the large amount of investments?

Flavio, we do not control the price the tariffs are defined by [ RCI ] this an independent regulatory agency. So we do not have that information. And the second question you asked, I'll turn the floor over to Marilia to answer. Are you considering the possibility of contract unification after municipalities adhere to [ you ] are AED.

Okay. Thank you, Flavio, yes, this is a possibility. We are studying it as the municipalities adhere to the proposal until the end of June.

[Operator Instructions] There are two questions that I'll ask Michelle, the Regulatory Officer to answer. Just a second, please. From [ Gabriel Francisco ]. If the company starts rendering sewage treatment services in towns where it only provides water services, what will be the process with [ ASI ] to update the OpEx budget.

Well, as Moura mentioned, these topics are to be defined by [ our sign ] mainly, but we understand that we'll be automatically taken into account in the tariffs, considering that we if they -- all the municipalities start at the same time, we don't know their situation. We don't know if we would start a sewage collection. So I believe it will be a regular process considering the regulatory processes. And continuing to answer the question that's also related about this one related to investments. Going back to what Moura said, the agency is independent and defines that, but it will analyze the payment capacity of users. So there's no expected amount regarding that, that we can say on our side.

The Q&A session has ended. We now turn the floor back to the CEO, Marilia Carvalho de Melo for her final remarks.

Thank you. Thank you all. for attending this conference call. And I would like to thank again the participation of all shareholders, investors, who are here with us in this earnings conference call. COPASA remains committed to transparent, timely and accessible communication to the market. We know how important it is to maintain a permanent dialogue with stakeholders especially in important moments for the company. We continue to advance with our investment agenda, operational efficiency and preparation for the next growth cycle. We would like to thank the work of our team, [ Wu ] remains committed to executing the company's strategy, providing quality services to the population and sustained generation of value for shareholders. Our Investor Relations team is fully available to answer any additional request for information, clarifications or request meetings with shareholders our investors. We thank you for your attention and continuous interest in COPASA. I wish you a good day.

The conference call of COPASA has now ended. We thank you all for attending. Have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]