Companhia de Saneamento de Minas Gerais (CSMG3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to COPASA Energy's conference call to discuss the company's results for the second quarter of 2026. This conference call is being recorded, and a replay can be accessed on the company's website at ir.copasa.com.br. The presentation is also available for download on the platform. Please note that the presentation is being recorded and simultaneously interpreted. [Operator Instructions]. Before proceeding, I would like to remind you that forward-looking statements are based on COPASA's management and their beliefs and assumptions and also on information currently available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should bear in mind that events related to the macroeconomic environment, the industry and other factors may cause actual results to differ materially from those expressed in the respective forward-looking statements. I would now like to turn the call over to COPASA's CEO, Marilia de Melo. Please, you may proceed, Ms. Marilia de Melo.

Thank you very much. Good afternoon, everyone. Welcome to the web conference to discuss the results of COPASA related to the second quarter of 2026. I would like to thank all shareholders, investors, analysts and representatives of financial institutes and other participants that monitor the evolution of the company. In this presentation, we have the Financial Director and CFO, Adriano Moura, and the other executives. This was a quarter which was very important for COPASA history. After completing the share offer that marked the privatization, we effectively started another cycle for the company. It's a cycle where the focus is no longer the preparation to this transformation and is now ever more, the execution of the strategy, the capture of gains in efficiency and the sustainable generation of value for all our stakeholders. As we have mentioned previously, since the completion of the public bid of all the shares, the privatization has never been a purpose in itself. It rather represents an instrument to broaden our investment capacity, accelerate the universalization of sanitation, strengthen our governance and build the company ever more efficient, competitive and also prepared for the future. Throughout this quarter, we continued the implementation of this agenda. We made advances in the modernization of the company. We maintained a high level of investment, and we continue evolving in the updating of our contracting base with the municipalities of the state of Minas Gerais. Up to the moment, we celebrated 49 agreements related to the new regulatory model, which is responsible for about 37.6% of net revenue of 2025. In addition, the conversion of the new agreements to provide services of sewage services. As a consequence, we broadened significantly the average duration of the concessions of the company from approximately 13 years to about 29 years, strengthening our predictability of cash flow and also creating more solid basis for the execution of our investment plan in the long term. In relation to operating expectations, we make advances in indicators for the creation of value. We recorded a growth of net income of net revenue of almost 9% expansion of volumes that have been invoiced, reduction of loss to 35%, acceleration of CapEx and continuation of the strategy of modernization at the operational level. We also expanded the share of energy coming from the free market and from renewable sources. These are initiatives that constitute, at the same time, result of a better operating efficiency and also related to our ESG commitments. As we have shared in our release, part of the economic performance of the quarter was impacted by specific events, nonrecurring one-off events, including obligations related to the self-composition together with the Court of Accounts of the State of Minas Gerais and other extraordinary expenses recognized in the period. Moura, our CFO, will present the financial and operating results in detail, especially the main factors that would explain the variations that occurred along the period. Those effects influenced some of the metrics of our results, but they do not change the strategic foundations of the company nor our conviction of the potential of generating value coming from the new cycle we are just starting. And this is a reading that we have also observed after we disclosed the results. Even though the analysts have recognized that some indicators, operating indicators were below expectations in the short term, we have a constructive view of the company. The market consensus showing that the main variable for value creation will be the capacity of executing the agenda that started after the privatization, especially related to operational efficiency, contractual evolution, incorporation of the investments in the regulatory base and discipline in the way we allocate capital. This is also how we see it. We are conducting the new cycle with responsibility, financial discipline and absolute focus on its execution. We are going to continue working in order to transform investments in regulatory assets, broaden productivity, reduce losses, modernize processes, strengthen the quality of the services provided and generate sustainable values to our clients, employees, municipalities and shareholders. Our commitment remains the same: deliver a company ever more efficient, transparent and prepared to meet the universalization targets and capable to generate in a consistent manner all the values in the long term. I reiterate my thanks for the confidence and trust, and I turn the floor to my colleague, Adriano Moura, who will present the details of the financial results and also operating results for the quarter. Thank you.

Thank you, Marilia. Marilia, thank you very much for attending this conference and this results call. Now let's move on to Slide 4. Here, we show the main financial indicators. Some of them have already been mentioned by Marilia, such as the case of the net operating revenue that increased 9% compared to the same period of last quarter. And the adjusted EBITDA of BRL 662 million had a growth of approximately 12% with a margin close to 40%. And this is equivalent to 100 bps in comparison to the same period of last year. net income of BRL 275 million, a reduction of 4.8% compared to the previous quarter, mainly impacted by the higher level of depreciation, obviously, as a result of the execution of our asset base and also as a result of the increase of our financial expenses, about which we are going to provide more detail. In relation to operating cash generation, it continues to be consistent, BRL 670 million along the quarter, a slight reduction when compared to the second quarter of 2025. Leverage is growing according to the expected parameters, basically as a result of higher investments but still within a capital structure, which can be considered to be reasonable. And we are continuing our investment plan according to the plan, according to the financial and physical schedule, BRL 833 million in the quarter, a 27% growth when compared to the second quarter of 2025. Now moving on to Slide 5. These are the key operational indicators. Water volume and sewage volumes continue growing, accompanying the expansion of our client base. However, this quarter was negatively affected by the temperatures, which are typically lower for the period. I would also draw your attention to the improvement in the evolution of losses, as already mentioned by Marilia, 35%, a significant reduction in the past 12 months. And we can see concrete operating results according to the plan defined for this topic. We installed more than 165,000 water meters, reducing the average age of the equipment to approximately 5 years. We continue advancing in replacing the networks and the delinquency rate is in controlled levels, even though the population has become ever more indebted, but we continue with efficient actions with this connection so that we can maintain this delinquency level at a reasonable level. Generally speaking, operating results has a consistent trajectory moving towards improvement. and we have work fronts focused on each of those indicators. So especially those who are part of the base incentive for the tariffs such as losses. Moving on to Slide 6, we provide details of the main impact on the adjusted EBITDA. When we compare quarter-on-quarter '25 and '26 year-on-year, there was a margin increase of 38% to 39%. And the main component, the positive component was the increase of the ROL of almost 9%, as we have already mentioned, driven by the tariff adjustment that [ 656 ] as a result of the improvement in the volume and in the mix. We'd like also to point out that the total of cost and expenses, excluding regulatory and lawsuits were below the inflation rate of the period in spite of the significant increases that we had with electricity that increased by 11% and also treatment materials that increased by more than 40%. Expenses with personnel followed what was in the collective bargaining decision. And even though we had higher expenses related to health, we had an impact of BRL 8 million in the second quarter. However, there was an offset of nearly 3% in the number of headcount in the past 12 months. Our number of employees is 9,733 people -- and we consider the reduction of 260 people when compared to last year, and we had a reduction of BRL 1.7 million related to extra hours. So we are really focused on this item, and we believe we are going to be able to reduce it even further. Some news as of January this year is that the cost with water resources are being recognized by regulatory costs in the second -- the third tariff review, but it has no impact on the results. But we can see a variation of BRL 6 million, but this is offset with revenue. It has no impact on the results, but it has impact when we compare the EBITDA year-on-year. And lastly, the main detractor for the quarter were the costs with lawsuits. As you can see in the graph, there was a negative impact of BRL 20 million of legal claims because there was an increase in the number of legal claims that are scattered. They have lawsuits related to extra hours, bonuses. dangerous work, hazardous activities and also demands for compensation. But I believe that the major impact was related to extra hours, especially. And because of this increase much higher than the average, we created a work front focused on finding the root cause of those demands, and that includes the strengthening of internal controls, corrective and preventive measures, among other actions. One of them has already been addressed in the beginning of this year by means of the extraordinary collective bargaining that instituted and formalized special regimes for continuous operations. So we believe that this front is going to lead to a significant reduction of those costs, but we are still working on what we had from the past. We are going to continue monitoring this topic very closely due to its relevance, and we are going to adopt all the measures necessary in order to mitigate those results in the future outcomes. On Slide 7, we have the main variation of net income when comparing quarters, just like we did with the prior slide. There was a reduction of BRL 40 million, 4.8% when compared to last quarter. And even though EBITDA was positive by BRL 80 million, there was an increase, which was expected in the depreciation and amortization as a result of the growth in investments and also a negative financial result, which was also expected because of the growth of our gross debt in approximately BRL 3 billion in the last 12 months. We are going to provide more detail about it along the presentation. Moving on to Slide 8. We have the moves in the quarter of the cash from BRL 2.43 billion and ending in June 30, with BRL 1.2 billion with a cash generation a bit below in the second quarter, as we mentioned. But still, the cash generation is robust for the quarter of BRL 673 million. So this is the slide between CapEx and interest. And moving on to Slide 9. We show details of our indebtedness and leverage. The growth of the debt, net debt, including leases increased. And this -- when compared to the gross debt and 2.8x is the leverage at a controlled level. The amortization schedule is close to 9 years. It's a bit better than what we saw in the second quarter of 2025, below close to 8.2% or 8.3%. So there was a slight improvement with commitment of payments within capital structure, which is very well controlled very similar to what we saw in the last 12 months. The debt indexes are very diversified, 42% in IPCA. And euro is also related to IPCA and the FX swap. Debt values nowadays in foreign currencies are backed by the IPCA plus. So we had a AAA classification by Moody's and also by Fitch. So the expectations are to remain stable. Moving on to the last slide of the presentation, Slide 10, we can see the evolution of investments that continue with a very strong growth trajectory aligned with the water safety strategies, reduction of losses, universalization of services and modernization of treatment systems. We had a growth of 27% as a consequence when we compare quarter-on-quarter, which was also 27% in comparison to the first quarter of 2025. So we still have BRL 2 billion to reach the target for 2026 and because this is what has been approved by the Board at the end of last year. So we're going to get close to BRL 3.5 billion and the highest level in the company history. And along the last year, it's important to mention that we expanded in a consistent manner the capacity of the company to make investments, not only from the viewpoint of capital structure, but especially by means of restructuring reviews of some operating processes. We included -- we improved the unitization of the process of construction as a result of the timely recognition of the regulatory base. And what's important to mention is that if we consider the period between April 2025 and June 2026, which is the base period for the tariff readjustment, the addition of accounting and additions reached BRL 3.2 billion, and that would include the construction that were completed in the period. And this was a record -- an absolute record for -- in comparison to the past years. And we also have the values that were assumed by BA agreement that would add BRL 1.5 billion to the present value, which is quite relevant. This shows the accounting view and would integrate the -- what will be submitted to our next week, and this bank will make the evaluation for regulatory purposes. With this, I end my part of the presentation, and we are available for the Q&A session now.

[Operator Instructions] Our first question comes from Mr. Lucas Guimarães with Itaú BBA.

Congratulations on your results. Could you please provide more detail on the nonrecurring event of the labor claims that you had in the quarter? And could you provide more color on the prospect of sewage coverage for 2026, considering that in the last quarters, it was very flat. And what can we expect for the celebration of contracts with municipalities for this year?

I'm going to start talking specifically about the labor claim costs, and then I'm going to share the other answers. As I said, Lucas, unfortunately, we had a significant increase in the volume of labor claims. And this may be connected to the privatization process. We saw that there were very specific movements and some employees answered with labor claims. In the same period last year, all the labor claims were related to third parties. 70%, 80% were related to third parties. And for this quarter, we had the opposite. More than 80% of all the labor claims have been generated by employees. We have been trying to solve the problem at the root cause. And the problem that was generating those claims were extra hours. So we made an agreement with the union at the beginning of the year, and that was fundamental for us to move forward to find a definite solution to this point. We are already making final adjustments in the working hours that would involve those critical issues. And I believe we can solve this for the future, but there are pending issues from the past that we have to control. So we have a front which is very focused on this. We are going to try to mitigate all the consequences, and there are many negotiations that we are making. We had some restrictions in the past, but now we have more freedom in order to negotiate before it becomes very burdensome and without any possibility to be reverted. I think this front is very well addressed. I do not know if it's going to -- how long it's going to last because as I said, these are issues that come from the past, but this have all is already being addressed. I'll turn the floor to Pablo now.

Good afternoon. In relation to the advance of the treatment, our projections would indicate the universalization is going to be reached according to the sanitation framework -- and at present, we are in line with our investment plan as we have shown in the growth of our investment plan and the growth grows at 1.5% a year, and that would lead to the 90% until 2033. We are referring to something in the level of 82%, 82.2% up to the end of the year. So we estimate that we are going to incorporate something around 120 new economies or properties, and this is according to the coverage indicator, which is our regulatory indicator and surpassing the target of the regulatory indicator. Lucas, in relation to the topic of negotiation and conversions of the agreement. As I mentioned, we have already converted 49 agreements. And out of those 23, including sewage treatment, which is 37.6% of our revenue. We continue with the strategy of converting the agreements in the process of negotiation with municipalities. And in addition to that, the state has been working on the implementation of the regional units and adhesion of the municipalities. So our expectation as the results have shown so far, we duplicated the number of municipalities that have been converted after the, desestatização, privatization process. We are moving forward to have the conventions and the agreements completed as soon as possible. Thank you very much.