Companhia de Saneamento Básico do Estado de São Paulo - SABESP

Good morning and welcome to SABESP third quarter of 2025 earnings presentation. With us here today are Carlos Piani, CEO, Daniel Slak, CFO, and Thiago Levi, Investor Relations. Before we begin, we clarified 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 related to SABESP based on the reasonable expectations, beliefs, and assumptions of SABESP 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 filings with the Brazilian Securities and Exchange Commission, 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 a 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 Zlack, who will discuss the results. Daniel, you may proceed.

Thanks, operator. Good morning, everyone. Thank you for joining us for Sabesp's third quarter 2025 earnings call. I'm Daniel Zlak, CFO of the company. Today, I'll present our financial and operational highlights, then pass the mic to our CEO, Carlos Piani, where he'll discuss the strategic transformation underway, and then we'll open the floor for Q&A. On the operational highlights, this quarter marks another step in Sabesp's transformation journey. water production reached 809 million cubic meters, up 4.4% year over year, and active connections grew 0.6% in the quarter. Sewage connections rose 1.1%, reflecting the investment focus on the sewage front. These operational gains reflect our ongoing commitment to reaching universal access and improving service delivery, building on the momentum established post-privatization. Now moving to the financial highlights. Our results continue to demonstrate the impact of our efficiency initiatives. Adjusted net revenue was 5.5 billion, stable year over year, while adjusted EBITDA grew 15% to 3.2 billion reais, reaching a 59% margin. Adjusted net income reached $1.2 billion, a 9.5% growth versus prior year, and cash flow from operations increased 22% to $1.7 billion, with EBITDA to cash conversion reaching 54% in the quarter, underscoring disciplined execution and resource optimization. To start, we'll bridge from reported to adjusted figures in the quarter. You can also find more detailed info on this topic in the appendix. As usual, we exclude construction and the financial asset bifurcation, but this quarter we also had a few non-recurring events. Namely, as published in a notice to the market in September, we have received communication from the regulator that the FAUSP rate is at 3.78%, rather than the 3.28% that we had been accruing since July 24th. Hence, we had to book a catch-up adjustment for July 24 through June 25 that we are removing from the adjusted results and impacts both revenue and EBITDA. Moving to EBITDA and net profit-only adjustments, Additionally, we executed voluntary dismissal plans in the quarter under the Sabesp-Gente program, where we accrued $478 million for severance and incentives. Under the program, we have about 1,800 employees departing until year-end. We also restructured our warehouse and logistics operations to improve fulfillment and inventory levels that had a one-time cost of 74 million reais and also wrote off water pipeline infrastructure that we no longer expect to use for 61 million reais, where we will make a larger investment in its place for a more long-lasting solution in that region. In Q3 last year, we also had one-time costs from the privatization of the company, and in this quarter, we got a reimbursement for some of these costs for 14 million. To maintain coherence, we're calling this reimbursement a one-off gain. Last but not least, we booked in Q3 a one-time gain from court-ordered payments, precatorios, with the City of São Paulo, as the uncertainty of the amounts has been significantly reduced. They total $1.9 billion, of which $430 million are heating in EBITDA and the remaining financial results. Of the $1.9 billion, we have collected to date about $1.1 billion and expect to collect the remaining amount over the next few months. With that, we believe we can see as a result the underlying performance in our business and we'll focus on the adjusted numbers in the next pages. Moving on and looking at adjusted revenue growth, we have four core drivers. FAUSP increased year-on-year from the 3.78 versus 3.28 rate I just mentioned, and an increase driven by higher revenues. Discount removal for larger clients, a key initiative that started in late 24, now delivering tangible gains. On the volume front, the gains came from new connections for 1.5%, and also 1% gain from consumption and metering upgrades. And now, last but not least, we have mix, where about 1.8 million units now benefit from subsidized rates. The mix impacts from 2H25 are expected to be adjusted in 2027 rate cycle, as per the concession contract amendment signed in 3Q25. Deep diving into revenue, we see flat overall price indexed to 100 compared to 3Q24, as expected. and also a continuous pickup from large clients' prices as we continue to eliminate discounts from that group. Last but not least, we have reached 1.8 million units with access to subsidized rates, keeping a relatively stable cohort versus the second quarter of 25. Now, looking at EBITDA, efficiency gains are evident in our cost structure. G&A brought gains behind lower municipal funds versus the anticipation we did in the third quarter of 24. Additionally, we also improved our collection rate, reaching 101% in the quarter, among the highest historically. Last but not least, in G&A, we also continued to improve on the legal front and have executed settlements in the quarter that brought a R$50 million gain. Moving to power, we improved despite higher power prices and that was largely driven by the migration from captive to free market, where about 66% of our spend is on the free market and 80% of our consumption is also there. On the services front, we increased our spend in IT and some specific consulting works in the quarter. On the next page, we will deep dive in personnel. But all in all, we've standardized procurement, optimized supply chain management, and leveraged technology to drive further savings, initiatives that began in the third quarter of 24 and accelerated in 2025. Moving into personnel, expenses fell 6.6% year over year, despite a 5% increase from collective bargaining, driven by a headcount reduction of 13% that offset that to voluntary dismissal plans. Zooming in on reported net income for the third quarter of 2025, we left the construction margin and financial asset bifurcation from the third quarter of last year, where we no longer record construction margin as of 2025 and have only the update of the financial asset for 90 million reais in net profit in the third quarter of 2025. On the positive front, we also recognize the $1.4 billion gain in financial results from the court-ordered debt payment, in addition to the $430 million that I already mentioned in EBITDA. Our balance sheet remains robust, with leverage and control, and no effective exposure to currency risk. Strategic transformation is most visible in our investment program. CapEx accelerated to 4 billion in the quarter, growing 175% versus prior year and 10% versus the second quarter of 2025. This performance is helping SABESP achieve solid compliance to our first milestone on new factor targets. We're only 3% away from meeting the minimum 95% threshold on sewage treatment. On the next page, looking at the major projects, Integra Tietê, Coastal and Metropolitan Region Works, upgrades to Barueri, ABC, Parque Novo Mundo, and São Miguel sewer treatment plants. Specifically, in Parque Novo Mundo, we are piloting our first treatment plant using NEREDA technology, and will be one of the largest applications of such technology globally. It helps reduce treatment area, in particular space-constrained stations, and will help multiply our capacity by 2.5 times, serving almost 3 million people in that specific site. We've shifted from public procurement to a private model, fragmenting large projects to attract more suppliers and minimize execution risks, a key change since the privatization. Our financial transformation also includes a proactive approach to capital structure, $4.9 billion in new debt was issued in the third quarter, with maturities for 5, 7, and 10 years. With that, 59% of our debt now matures from 2030 onwards, improving our long-term profile. And we also hold $11.6 billion in cash, covering more than four years of amortizations. Our efficiency agenda can be seen in our key ratios, where net debt to EBITDA remains stable in the quarter, and ROIC and ROE have reached 10% and 14% respectively. In summary, Sabesp's third quarter results highlight the success of our strategic transformation and efficiency gains. We're scaling infrastructure, improving service quality, enhancing customer experience, and strengthening our financial position. Our commitment to universal access, operational excellence, and sustainable growth remains unwavering. Thank you for our attention. I will now pass the ball to our CEO, Carlos Piani. The floor is yours.

Thanks, Daniel. Let's move now to the second part of today's presentation, our strategic focus areas and the progress we made this quarter. As we've discussed before, our strategy continues to rest on three clear priorities. First, delivering on the commitments of the new concession agreement, accelerating universalization, and closing regulatory gaps. Second, driving a step change in operating and commercial efficiency, improving quality, reliability, and revenue assurance. And lastly, strengthening financial efficiency, optimizing costs, and reinforcing our capital structure. In the third quarter, we delivered measurable progress across all three fronts. Let's turn to slide 18. Execution remains strong and disciplined. In the quarter, CapEx reached 4 billion reais, totaling 13.2 billion reais over the last 12 months, while our backlog increased to 39 billion reais in contracted projects through 2029. and that considers only future investments. On the regulatory front, we made tangible progress resolving legacy discount disputes. 71% of injunctions from large clients have already been rolled in our favor, strengthening the foundation of our revenue base. We also launched SubSB's first full zero-based budgeting cycle. with a redesigned chart of accounts and cost center structure, a major step toward lasting cost discipline. We're also advancing in commercial and financial efficiency. Collection efficiency, excluding court order debt, reached 101%, our best performance since privatization. We installed over 1 million meters so far this year, which I'll detail on the next page. And on the customer experience front, our WhatsApp channel handled more than 8 million interactions and 1.2 million payments since launch, improving convenience and engagement. Finally, we announced clear carbon reduction targets for 2035, covering scope 1, 2, and 3, which we'll detail shortly. Moving to the next slide. We're rolling out the world's largest smart metering program in the water sector. 4.4 million IoT-enabled smart meters will be installed through 2029, with 3.8 billion highs in contracted investments. Rollout begins in December, enabling real-time consumption data for consumers. reducing leakages, lowering operational costs, and further strengthening revenue assurance. In the quarter, we installed around 500,000 meters, more than doubling the speed from last quarter, reaching nearly 1 million replacements in the first nine months. By prioritizing older and depreciated meters, we're improving billing accuracy, reducing losses, and directly supporting revenue growth. Now turning to slide 20. We continue to strengthen Sao Paulo's integrated water system, building structural resilience to climate variability. Over the past years, we've expanded reservoir capacity and increased transfer capabilities between systems, materially improving our ability to absorb extreme events. Looking ahead, we'll add indirect water reuse and incremental production and transfer capacity totaling 22 cubic meters per second by 2030 through seven retrofits and expansion projects, three indirect reuse projects, the reactivation of the Billings-Taiso-Pepa interconnection, and the Paraíba do Sul-Alto Tietê transfer. The estimated capex for these projects is around 6.3 billion reais brought forward from the second tariff cycle of 2030-2034. These initiatives will make Sebeste be less dependent on rainfall cycles and better equipped to serve a growing population with greater reliability. Our purpose remains to connect people to a better future, delivering essential services with excellence and an unwavering commitment to the environment. In the first nine months, 13 billion Hais were reinvested in construction, goods, and services, supporting over 40,000 direct and indirect jobs, with around 1 billion Hais allocated to fellow speakers. Today, 1.8 million people benefit from social tariffs, a 40% increase in one year, demonstrating that this transformation is already delivering tangible and inclusive results. Moving ahead to the next slide. We also formalized our 2035 decarbonization roadmap with clear, measurable targets. Sylvester will reduce total combined emissions, scope 1, 2, and 3, by 15%, cut emission intensity by 41%, and lower scope 2 emissions by 43% through the generation and purchase of clean energy. What's most notable is that these targets are achieved while we expand sewage treatment, serving more people and emitting less per cubic meter treated. In other words, we'll grow, universalize, and decarbonize at the same time, combining sustainability, investment, and long-term value creation. Lastly, a brief update on the MI acquisition. Following the signing, all regulatory documentation was filed with CAGI and ANEL in early October. We now move into the approval phase, consistent with transactions of this nature and scale. Subject to regulatory approvals, closing is expected between late Q4 and early Q1 of next year, with payment occurring only upon completion. This transaction reinforces long-term water security and energy efficiency, further integrating SubSB's strategic infrastructure. With that, I conclude my remarks. We can now move on to the Q&A session. Thank you.