Maynilad Water Services, Inc. ($MYNLD)

Good afternoon, everyone. Thank you for joining us today for Maynilad Water Services Investor and Analyst Briefing, where we will be reporting on our first quarter 2026 financial and operational highlights. I am Josine Reyes, Head of Investor Relations. Before we begin, we confirm that the final results -- financial results and key information we will discuss today have already been disclosed the Philippine Stock Exchange and are available on PSE Edge. We confirm that no material nonpublic information will be shared during this briefing. After the meeting, the presentation materials will also be available on our website. Our presentation today may include forward-looking statements on management's current expectations. These statements are subject to known and unknown risks and uncertainties and do not constitute guarantees of future performance. [Operator Instructions] So joining us today are our President and Chief Executive Officer. Mr. Ramoncito Fernandez; also Chief Operating Officer; Mr. Christopher Jaime T. Lichauco; and our Chief Finance Officer, Mr. Ricardo De los Reyes. With that, let's turn our attention to our Chief Operating Mr. Christopher Lichauco, who will begin the management presentation with our operational highlights.

Thank you, Josine, and welcome, everyone, to today's Maynilad investor and analyst briefing. Allow me to present our operational highlights for the first quarter of 2026. We are off to a good start for 2026. All service obligation targets are improving, starting with service coverage we've seen an improvement of 94.7% to 94.9%, minimum 7 PSI water availability from 90.1% to 91.5%. On NRW, a topic which we are very excited about. We have reduced NRW by almost 6 percentage points this quarter compared to previous quarter. It's now down to an average of 32% with an end quarter of 30.7%. We think NRW is very important because for every 1% reduction in NRW translates to 20 or PHP 30 million in savings, which reduced a better EBITDA. On wastewater, sewerage coverage improved to 26% from 25%. Sanitation coverage improved from 55% to 58%. I'll now give an update on our CapEx disbursements. For the first quarter, 2026, we disbursed a total of PHP 5.4 billion or an improvement of 11% from previous quarter. Disbursements were made -- many of our flagship projects, such as our CAMANA wastewater treatment facility. Our [indiscernible] water with a capacity of 12 MOD our mean La Mesa lagoon reservoir, which will serve as a buffer supply, our Parada reservoir and our balance well pipe replacement project, where we aim to recover 21 MOD these disbursements are proof of project implementations. I will now turn over to Ricardo De los Reyes for financial highlights.

Hello. So we implemented a tariff increase equivalent to 2.85% at the start of this year. This is the smallest of the pre-approved tariff increases determined by the regulator during the last 3 to basic exercise undertaken in 2022. We have observed an increase in our billed volume of 2.3% versus the first quarter of 2025. You might recall that in 2025, we reported a slight decrease in our billed volume owing to government prohibitions on offshore gaming businesses and activities in our concession area. With a 2.3% increase in build volume, water utilization by our customers has recovered to 2024 levels. The combined effect of the increase in tariff as well as billed volume resulted in a revenue increase of 6.2%. We have customarily managed our discretionary spending during the earlier parts of the year. And we are intensifying this effort in the light of the Iran war and the significant fuel rate increases that result in. Our operating expenses grew by 2.4%, owing mostly to the introduction of new facilities into our infrastructure network, but mitigated by our continuing reduction of losses due to non-revenue order. The balance of our service concession assets grew by 3.4% as more CapEx projects were fully realized. This explains the increase in our depreciation and amortization expenses. Apart from its impact in the P&L, I remind you that the depreciation and amortization figures into the growth of the dividend base against which we are committed to paying 40% of adjusted net income or net income plus depreciation and amortization. Owing into our successful IPO late last year, our cash balance remains high at PHP 21.8 billion and certainly sufficient to fund our significant CapEx project projects this year. EBITDA margin actually maintained at around 70% to 71%. And our core net income margin also improved slightly. Now looking into the future, there are -- looking into the future, there are 4 cost items that are sensitive to the incremental increases in fuel prices. These are fuel, power, dislodging services that involve transportation of sludge as well as chemicals, which has an oil component to them. These accounts all together account for about 30% of our total cash OpEx budget, right? But only half of this is actually with variable or floating rate prices. So we are confident that we will be able deliver our expectations and commitments concerning our financial performance for notwithstanding the ongoing crisis. Our OCP has improved. You might recall or I just remind you that the OCP is the balance of unrequired investments against which we are able to earn an allowable rate of return. This balance has grown significantly since the end of the year in 2025 to around PHP 183 billion already, right? Moving to the next slide, please. All right. As you can see here, also our OCP remain substantially higher than our long-term debt balance, and we remain compliant with our loan covenants. The first of these is the maximum debt-to-equity ratio of 2.33x. Our actual debt-to-equity ratio is at 0.9x only. The other loan covenant is the minimum debt service coverage ratio of 1.2x our actual debt service coverage ratio is at 5.4x presently.

Okay. Thank you, Chris for your very insightful presentations. So the Q&A session will now commence with a presubmitted questions, then we will address the questions received online time permitting. Please indicate your name and organization prior to your questions. So we will now begin with questions that were presubmitted. The first question that we received was from Anthony [indiscernible] from Shareholders Association of the Philippines. And his question is as follows: how is Maynilad's operations impacted by this current crisis in our country?

Thank you for that question. Maynilad's priority continues to be service continuity. And at that point, our supply chain and our operations group have been ramping, their engagements, together with our suppliers, vendors as well as our contractors and our people continue to ramp up the coordination to ensure service continuity. Secondly is that our priority is also the timely implementation of our CapEx program. And it's -- so far, we see no interruption. And in fact, our engagement with our contractors have also been intensified. Maybe I can turn over to you our CFO, on the financial impact.

All right. With respect to the financial impact of the significant increases in fuel rates I talked about how it increases some of our operating costs with respect to fuel, power, chemicals as well as dislodging services. But again, only a portion of that is actually subject to inflation, given that service rates or supply rates were contracted previously. There is also an effect on our to the extent that some government agencies as well as private companies or private customers have adopted 4-day work weeks or 4-day work at the office and 1-day work from office policies, that has an effect of shifting utilization from commercial accounts to residential accounts. But nevertheless, by deferring some of our discretionary spending to next year, we will able to offset these effects and deliver our commitments respecting our financial performance.

Okay. Thank you, sir. So the second question that we received. It's from Klyne Resullar from Regis Partners. She actually has 3 questions. I'll ask them one at a time. So the first one is what's first quarter '26 CapEx, inclusive of concession fee payments and what's the year-on-year comparison?

CapEx, including concession income fee payments was at 6 -- a little over PHP 6 billion for this quarter compared to PHP 5.6 billion last quarter -- previous quarter. That's an 8% improvement.

Okay. Thank you, sir. So her second question is what's your CapEx guidance? And do you think you can still catch up for FY 2026?

Our CapEx guidance is between PHP 20 billion to PHP 30 billion and we believe we could catch up.

Okay. And her last question, do you need to scale back CapEx due to the Iran conflict?

No. Because majority of our CapEx is really to provide service reliability.

Okay. Thank you. So the next question we received from Kyle Garcia of First Metro Securities. And he asked you provide information on the existing water levels of Angat Dam, is the company prepared for an extreme El Nino scenario?

Current level, Angat is 184 meters. So you have read in the news and based on gas, they support a threat of strong to very strong El Nino which will affect us between July to September of this year and extending into the first quarter of next year. We have already started preparing. We reported earlier on our projects that will be coming on stream by the middle of this year and allow me to enumerate them again. For alternative water sources, we have the Pasay NEW WATER, which will provide 12 -- an additional 12 MLD of supply. Molino modular treatment plant, which will provide 6 MLD of, [indiscernible] 2 MLD, a new water lead. We intend also to operationalize -- operate RDs to the tune of 17 MLD. The greater part of our mitigating actions for El Nino will really come from our NRW reduction. And allow me to benchmark versus our previous El Nino experience in 2023. We're only 1 CMS reduction in allocation resulted interruptions. Between then and now, we have already recovered 300 MLD in NRW. So we are more resilient than ever today the strong to very strong El Nino. Aside from this, we will be doing network pressure adjustments as well as increasing our reservoir buffer. We are going live this year is our Parada reservoir as well as our La Mesa water.

Thank you, sir. The last question we received from [indiscernible] from Security Bank Corporation. And his question was what are our expectations for 2026 in terms of financial performance and are we projecting growth or a slowdown given geopolitical conflicts?

Well, as I have mentioned previously, our revenue is up by 6.2%. Our operating expenses, up by only 2.4% so far. We've implemented cost management initiatives in order to respond to the substantial increase in fuel rates. I think that we will certainly outperform our 2025 numbers. But of course, we're looking for -- we're pursuing opportunities for improving on that.

There was a follow-up question. What are we forecasting moving forward from 2027 onwards?

Not able to share forecast. Sorry.

Okay. All right. So that was the end of the presubmitted questions we received. Now we're going to move to our online questions. So the first one, we've received was from Karisa Magpayo from Macquarie. She had several questions. The first is, so how do you mitigate potential risk to water supply availability amid the threat of El Nino? We already -- I think we've already answered that. The second was how do you see volumes trending this year?

The volumes?

Yes.

So as I mentioned previously, up by 2.3% against last year's first quarter, we expect that trend to continue through the balance of this year.

Okay. Her third question was, has the penalty imposed by the regulator for the water service interruptions in March already been paid?

It will be sometime in May or before, it's not going to be paid out today. It's going to be refunded to the customers affected.

The next questions are from [ Greg Ela of BPI ]. He asked, can you give more details on the movement of ICP from 4Q, '25 to first quarter 2026?

So as you might imagine, first of all, the ICP is representative of our investments, both in the form of OpEx as well as CapEx expenditures over time but unrecovered via tariffs at this point in time, right? So because of our CapEx spending over the past 3 months, right, exceeding our collections of tariffs from our customers, we have been able to increase the opening cash position on what we call the interim cash position as it has not yet been validated by the regulator.

Okay. So the second question of Greg, I think was answered also is about plant supply augmentation for -- we've addressed that. He had another question, what's the total MLD demand of the West Zone and the allocated supply from Angat?

Can you repeat the question?

What is the total MLD demand of the West Zone and the allocated supply from Angat?

Volume today is around 1,559 MLD.

Okay. Thank you, sir. So now we will go back to Peter Garnet. His question, any guidance on billed volume for 2026.

Answered already.

Answered already. With the onset of El Nino, by how much do you see build volume to increase?

Well, let me add to what Vicki has already mentioned. We believe [indiscernible] need. And and our projections show that it will not be significantly affected -- affected by the prices. And if ever there would -- there might be a shift in terms of mix because of the work from home framework that has been implemented by government in the private sector.

So another question from him is that 24% year-on-year [Technical Difficulty] Okay. So let me say the question again. This one, there's the 24% year-on-year increase in utilities already started in the spike in oil prices since the Iran war broken out.

Can you repeat it?

Yes. Okay. Since oil remains elevated by how much does management expect utilities to rise?

Yes. The fuel rate increases manifest and mostly at the middle of March, right? We've subjected our balance of the year spending to a sensitivity analysis. If we assume a further 40% increase in fuel rates, right, the effect of us if these rates -- higher rates were to prevail over the next 9 months that it would add around PHP 500 million in operating expenditures for the balance of the year -- to our budget, actually, right? But as I mentioned previously, we have undertaken a number of cost management initiatives to offset that effect. In fact, if you know this our EBITDA margin and our core net income margins have remain consistent with last year.

Okay. So his third question is, will rising operational costs lead to higher water tariffs?

So the tariff adjustments scheduled for this year and we approved during the rate basing exercise in 2022 have already been implemented. There is no mechanism for raising tariff further during the year.

Okay. Thank you. So this next question is from Regis Partners. So are there plans to revise the dividend policy by aligning it more closely with cash flow in order to better reflect the regulatory framework?

No. There is none. One of the reasons we have used net income and adjusted net income as the basis for calculating the dividend payout is that it is well understood by our investors and analyst and can be more easily projected over time, right? But otherwise, yes, the dividend has some relationship with the growth of the opening cash position.

Okay. So on to our next question again from Regis Partners. In the event that EBITDA and earnings weakened materially due to the ongoing oil crisis and the El Nino threat. How much flexibility would you have to increase payout ratios?

We have a lot of flexibility, if you recall, in our dividend policy in our meetings with the investors and analysts, this is precisely the reason why we have an alternative basis for determining the dividend payout. By including depreciation and amortization here, which inevitably grows from year-to-year as we introduce new CapEx projects and realize them in the form of new facilities to be depreciated. It virtually guarantees the growth of our dividend payout.

Okay. So now Morgan Stanley has a question. This is from Mayank. Can you give us a bit more detail on how you are preparing for higher energy cost and El Nino?

El Nino was answered.

El Nino was answered already.

Energy cost.

We've talked about how higher energy rates would impact our 4 basic cost items mostly production factors. These are fuel, energy, chemicals as well as the dislodging again, altogether, they only account for 30% of our total cash OpEx. And half of them have already been set at fixed rates through contract. And so we're not especially concerned about the impact of further increases in fuel prices. We can say that can mitigate that impact over the year.

Maybe to add to that, Mayank, the mitigating actions or programs that are started to bear fruit, postponement or suspension or cancellation of expenses or programs that are budgeted that are not serviced obligation effective. So these are the examples of what we have implemented a suspension or cancellation or deferment.

Okay. So for our next question, it's still from Peter. It says, it was reported that Maynilad plans to enter into a concession agreement to operate water distribution in New Clark city. Does the company have a time line for this. Are there any other areas the company is looking to expand into?

Yes. In fact, not today, we received a notice of commencement and the start of negotiations with BCA for operating New Clark city. We expect to receive OPS status by around maybe around 30 days. So we're looking forward to it. Optimistic.

Okay. Are there -- this is from Robert Valia. Are there scheduled rate increases within the year? If yes, how will this impact your income projections for balance -- for balance year.

There are no tariff increase -- further tariff increase scheduled for the year. The tariff increase for this year was implemented in January.

Okay. So the next question is, what is the target of the NRW for year 2026?

For year 2026, our target is 29%. So we reach the 30% mark. Our target year-end is 27%.

Okay. Thank you. Does Maynilad have a forecast -- this is from [indiscernible] does Maynilad have a forecast of ICP in 2026?

I cannot share in the forecast. But it will certainly increase over this at the end of the first quarter of this year.

Okay. And this is the last question. How has the Angat Dam water levels -- how is the Angat Dam water levelslevel tracking versus 2024 level in April?

Lower. It's lower. Angat Dam level, April this year is lower than April of 2024. And for the reason, including the warnings and El Nino, we have been taking this warning seriously, this is why we are mitigating programs and projects, as mentioned already, as enumerated by Chris Lichauco, especially including an NRW reduction. Further reduction of NRW.

Okay. So thank you for all your questions. If further questions, please do not hesitate to reach out to my team, Investor Relations. So since there is no further questions, I would like to now call on our President and Chief Executive Officer, Mr. Ramoncito S. Fernandez for his closing remarks.

Friends, thank you very much for your questions and for the discussion this afternoon. Our first quarter results reflect steady progress in improving service reliability while continuing to invest in strengthening our system. These efforts are part of our long-term commitment to deliver more consistent and dependable water service while expanding our waste water and sanitation capabilities. As we move through the year, we remain focused on sustaining these improvements and ensuring that our investments translate into better outcomes for the communities that we serve. [Foreign Language] Thank you very for your attention.