Companhia de saneamento Basico Do Estado De Sao Paulo - Sabesp Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2026

Key Takeaways

  • Positive Sentiment: Adjusted revenue grew 9.4% year over year, supported by January’s tariff increase and customer expansion. Management said underlying revenue growth would have been approximately 10% excluding milder weather and temporary ERP-related effects.
  • Negative Sentiment: Adjusted EBITDA fell 2.3% to BRL 3.5 billion, with margin declining to 58.3%, as customer-service investments, inflation-driven chemical costs, and a favorable legal-provision reversal in Q2 2025 pressured results. Management expects about BRL 800 million of commercial spending and investment in 2026, although more than half may be recovered through future tariff cycles.
  • Positive Sentiment: CapEx reached BRL 7.5 billion year to date, up roughly 16%, while contracted backlog exceeded BRL 40 billion through 2029. Management maintained its ambition to invest approximately BRL 20 billion in 2026 and reported strong progress toward universalization targets, including 105% of the annual water target and 90% and 82% completion of sewage collection and treatment targets, respectively.
  • Neutral Sentiment: SABESP ended the quarter with BRL 34 billion of net debt, or 2.5 times EBITDA, and BRL 17.4 billion in cash covering more than four years of amortizations. The company expects to fund near-term investment largely with debt, with funding needs declining as cash flow improves from 2028 onward.
  • Positive Sentiment: Customer-service initiatives are beginning to show operational benefits, including a 31% quarter-over-quarter decline in complaints across critical channels and an 87% reduction in average call-handling time since December 2025. The company also expanded discounted-tariff access to nearly 2 million households, though the related social tariff mix reduced revenue growth in the quarter.
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Earnings Conference Call
Companhia de saneamento Basico Do Estado De Sao Paulo - Sabesp Q2 2026
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Operator

Good morning, and welcome to SABESP's Second Quarter of 2026 Earnings Presentation. With us here today are Carlos Piani, CEO, Daniel Szlak, 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 SABESP based on the reasonable expectations, beliefs, and assumptions of SABESP's 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's filings with the Brazilian Securities and Exchange Commission, CVM, B3, and on its investor relations website.

Operator

Investors should understand that changes in such factors may lead to outcomes that differ from current trends and are under reliance should 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.

Operator

I will now turn the floor over to Daniel Szlak, who will discuss the results. Daniel, you may proceed.

Daniel Szlak
CFO at SABESP

Thanks, operator. Good morning, everyone, and thank you for joining SABESP's second quarter 2026 earnings call. I'm Daniel Szlak, CFO, and I'll present our operational 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. In Q2 2026, total water production reached 779 million cubic meters, 4.3% 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 SP Águas operational rule of the night pressure management, implemented for approximately 10 hours per day to enhance the system resilience during Q2. Our active customer base remains stable, with 9.5 million water and 8.2 million sewage connections.

Daniel Szlak
CFO at SABESP

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 five. Before I begin, I would like to clarify that this quarter we started to consolidate EMAE's results into our operating figures. Therefore, the figures presented in this slide include EMAE's contribution. Adjusted net revenue grew by 9.4% year-on-year, mainly reflecting the tariff and the expansion of customers. Adjusted EBITDA was BRL 3.5 billion, down 2.3% compared to the same period of last year, with an EBITDA margin of 58.3%. This performance reflects investments associated with our customer service initiatives, as well as inflationary pressures, which I'll explore more in the next slides.

Daniel Szlak
CFO at SABESP

Adjusted net income totaled BRL 1.2 billion. The decrease versus the prior year reflects the higher net debt to fund our universal access program. Cash conversion and generation remained solid, with operating cash flow reaching nearly BRL 3 billion in the quarter and a solid conversion above 75%. Moving to slide six, before diving deeper into the quarter, I will 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 SABESP'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 SABESP does not record a margin for construction, EMAE still does. We also exclude BRL 68 million, mainly related to the Jaguari incident and EMAE's figures.

Daniel Szlak
CFO at SABESP

Given EMAE is much smaller than SABESP, 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 EMAE's performance in the appendix, in our filings at CVM, and on EMAE's own filings, given it is also a publicly traded company. Turning to slide seven and exploring our revenue drivers. Adjusted figures increased 6.7% year-on-year. The quarter was also affected by two additional factors. Milder weather conditions, with average temperatures about 1.1% lower year-on-year and our ERP implementation. Excluding these effects, underlying revenue would have grown by about 10%. Price contributed 8.7%, driven by January 2026 tariff cycle, partially offset by reforms, which will be subsequently adjusted in 2027's tariff review. Second, volume contributed 1.1%, explained by a 1.0% contribution from new units and 0.6% from metering upgrades.

Daniel Szlak
CFO at SABESP

These were partially offset by the negative weather impact on consumption. Finally, mix was a -3.1% effect, which is split into 2.3% from category mix, mainly reflecting the expansion of low-income tariffs versus the year ago, and a 0.6% impact from band mix driven by weather. On slide eight, 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 consumer to be flat versus where it was before the privatization. For SABESP shareholders, these discounts are contemplated within the regulatory framework and are expected to be addressed in future tariff reviews.

Daniel Szlak
CFO at SABESP

We also experienced a temporary slowdown in meter replacement activity due to import constraints, which affected the pace of upgrades in the quarter. Moving to EBITDA on slide nine, adjusted EBITDA declined 3.2% year-on-year to BRL 3.5 billion. Starting from the top, the positive contribution from net revenue was more than offset by a strong lap in cost versus a year ago. G&A saw an impact as Q2 2025 benefited from BRL 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.

Daniel Szlak
CFO at SABESP

We also saw inflationary pressures associated with the geopolitical environment for about BRL 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 gain 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. Deep diving into costs on slide 10, personnel expenses remain controlled, increasing 1% year-on-year despite a 4.4% wage adjustment behind inflation. This was largely offset by the workforce optimization initiatives implemented over the last quarters with the voluntary dismissal plans. Power costs increased 2.2%, mainly due to transmission and sector charges, including the new one from UNGA. However, migration to the free market helped mitigate part of these pressures, with 88% of total consumption now sourced through the free market.

Daniel Szlak
CFO at SABESP

Moving to the next slide, reported net income reached BRL 1.5 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 expenses also increased, reflecting the expansion of our asset base, which grew from approximately BRL 55 billion to BRL 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 will 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 issues.

Daniel Szlak
CFO at SABESP

CapEx totaled BRL 7.5 billion year-to-date, an increase of roughly 16% versus a year ago. We also ended the quarter with more than BRL 40 billion in contracted backlog through 2029, providing strong momentum for future execution. We would like to remind our investors of the historical seasonality of our CapEx, which is usually higher in the second half of the year. The sector 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 targets 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. We delivered two new sewage treatment plants, Caieiras and Água Vermelha, which together add 0.4 cubic meters per second of treatment capacity. 127,000 additional people now have access to treated sewage in their households.

Daniel Szlak
CFO at SABESP

In the countryside, phase I continues to advance, with 11 projects in execution representing BRL 5.1 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 totals BRL 52 billion, while net debt stood at BRL 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. Our average cost of debt remains close to CDI, with a 6.1 year weighted average maturity. In addition, 64% of our debt matures from 2031 onwards, reflecting the long-term profile of our financing structure.

Daniel Szlak
CFO at SABESP

We also ended the quarter with BRL 17.4 billion in cash, which covers more than four years of amortization and provides substantial liquidity and flexibility to continue executing our investment plan. Finally, on slide 15, our net debt closed at 2.5x EBITDA, a level we deem appropriate for a company executing one of the largest infrastructure investment programs in Brazil. Return metrics also showed 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.

Daniel Szlak
CFO at SABESP

With that, I will now hand over the call to our CEO, Carlos Piani, to discuss our priorities in greater detail.

Carlos Piani
CEO at SABESP

Thanks, Daniel. Good morning, everyone. Before going to the operational highlights, I'd like to revisit what we call SABESP's culture on a page. This is the framework that has guided our transformation over the past two years. It brings together our purpose, our long-term dream, the strategic paths we need to execute to get there, and importantly, our values, which define how we want to get there. As we've completed two years since privatization in July, I think it's useful to look at how far we have come, and equally important, where we still need to improve. We have made significant progress across several of our strategic paths. We have accelerated universalization and strengthened water and sewage security, resilience, and quality through both organic and inorganic investments. We have advanced innovation and digital transformation, made important progress in business efficiency, and continue investing in people development.

Carlos Piani
CEO at SABESP

But transformation of this scale is a journey, and there are areas where we still have significant work ahead of us, customer satisfaction being one of them. This quarter, I would like to focus on three of our corporate values that are particularly relevant to our equity story today: deliver results with purpose, be guided by ethics and safety, and put customer first. Let me start with delivering results with purpose. For us, this means delivering exceptional results while creating sustainable value for all our stakeholders. Sustainability is therefore not something separate from our strategy. It is embedded in the way we operate and allocate capital. This quarter, we received an upgrade in our MSCI ESG rating to BBB. Recognizing the progress we're making in integrating sustainability into our strategy and operations.

Carlos Piani
CEO at SABESP

This is particularly relevant for SABESP, because many of the most important ESG issues are also fundamental business issues for us. Managing water resources, increasing system resilience, adapting to climate change, expanding sanitation coverage, and providing reliable and affordable essential services. We see this upgrade as recognition of the progress already made, but also as an indication of where we can continue improving. Now, let me move to another value that is fundamental to our transformation, be guided by ethics and safety. The scale of our operations has changed dramatically over the past two years. Two years ago, SABESP had a workforce of approximately 30,000 people, including our own employees and third-party workers, and around 200 construction sites in execution.

Carlos Piani
CEO at SABESP

Today, our workforce is approximately 55,000 people, an increase of roughly 83%, and we have around 1,500 construction sites underway, 7.5x the level of two years ago. This extraordinary increase in activity is what allow us to accelerate universalization. But it also materially increases the complexity of our operations and our exposure to safety risks. Although our lost time injury frequency rate has declined year-over-year, recent incidents made it clear to us that we needed to go further. We therefore conducted a comprehensive review of our safety procedures and decided to raise our standards beyond Brazilian technical requirements. As you can see on the slide, we expanded the attention zone around underground infrastructure from 1 m-3 m, strengthened verification procedures from natural gas and other underground infrastructure, and made ground penetration radar mandatory throughout the attention zone.

Carlos Piani
CEO at SABESP

We have also tripled the number of field inspectors, reinforced supervision based on project risk and complexity, and established mandatory training, qualification, and certification requirements for both SABESP and third-party employees. At the same time, we are increasingly using technology, including cameras and artificial intelligence, to identify underground risks and strengthen field monitoring. And finally, we created an operational safety group reporting directly to me, reinforcing accountability and ensuring that safety has the appropriate visibility throughout the organization. The message here is straightforward. The acceleration of our investment program cannot come at the expense of safety. As our construction program grows, our safety standards, controls, and capabilities must grow with it. Let me now turn to the third value I want to highlight today, put customers first. Over the past two years, the transformation of SABESP has accelerated significantly across virtually every dimension of the company.

Carlos Piani
CEO at SABESP

But that transformation has also generated incremental demand across our customer channels. More construction, more connections, changes in our systems and processes, and a much greater pace of activity inevitably create more interactions with our customers. We recognized that our customer-facing infrastructure needed to evolve at the same speed as the rest of SABESP. In the second quarter, we decided to accelerate both OpEx and CapEx investments across our entire customer service platform. Our commercial plan is organized around three priorities. First, strengthening our customer service infrastructure and capabilities. We created a dedicated customer experience executive team, added approximately 200 FTEs, including internal and outsourced personnel, expanded our physical presence with 12 new stores, 34 stores retrofits, and 20 new Poupatempo service centers, and strengthened our call center with a new provider, enhanced capabilities, and 120 additional service positions.

Carlos Piani
CEO at SABESP

Second, redesigning the customer journey and improving every point of interaction with SABESP, with particular attention to our low-income customers. Since privatization, the number of customers with access to discounted tariffs has nearly doubled from approximately 1 million to almost 2 million households, with an average discount of approximately 66% compared with the standard residential tariff. For us, universalization is not only about connecting households to water and sewage infrastructure, it is also about making those services accessible, affordable, and easier to navigate. And third, significantly increasing communication with our customers. We're transforming SABESP at an unprecedented speed, but the benefits of that transformation need to be understood and experienced by our customers. That required us to communicate more frequently and more proactively about planned maintenance, construction, water conservation, service changes, and the improvements we're delivering.

Carlos Piani
CEO at SABESP

In the second quarter, our proactive customer communications were approximately 2.4x the level of the second quarter of 2025. These initiatives are already producing tangible improvements. Average handling time in June was 87% lower than in December 2025, and complaints across critical channels declined 31% quarter-over-quarter. All together, we expect approximately BRL 800 million of spending and investment in commercial initiatives in 2026. As the new operating model becomes fully implemented and reaches maturity, we expect part of the remaining cost base to normalize and the overall structure to become increasingly efficient. Ultimately, our objective is very clear. We want the customer experience to catch up with the transformation already taking place across the rest of SABESP.

Carlos Piani
CEO at SABESP

Before we move to Q&A, let me leave you with one final thought. Two years into this transformation, SABESP is a very different company. We are investing and executing at an unprecedented scale, accelerating universalization, strengthening the resilience of our operations, and building the capabilities required for the next phase of our journey. But transformation is not only about doing more, it is about doing it better. That means delivering results with purpose, raising the bar on safety, putting our customer first, and continuously improving business efficiency to generate the resources needed to help fund this transformation.

Carlos Piani
CEO at SABESP

We have made significant progress, but we know there is still a lot to do. Our ambition remains unchanged: to build the global leader in water and sanitation while creating sustainable long-term value for our shareholders and for society.

Carlos Piani
CEO at SABESP

With that, we can move to the Q&A.

Operator

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 Amorim from Goldman Sachs.

Bruno Amorim
Bruno Amorim
Analyst at Goldman Sachs

Hi, good morning, everybody, and thank you for the opportunity to ask a question. How much of the higher costs in the second quarter are either transitory or subject to future tariff coverage, in your opinion? Just a follow-up to that, can you also better explain the nature of the components of the bridge in the bottom of slide nine, especially the revenue and timing components, which you exclude from the calculation of the underlying EBITDA? Thank you so much.

Daniel Szlak
CFO at SABESP

Hi, Bruno. Thank you for your question. This is Daniel. Good morning, everyone, once again. Maybe I'll start from the back. I think it helps explain the early part of your question. 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? 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. 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.

Daniel Szlak
CFO at SABESP

The second part, which is still on net revenue, about BRL 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 a higher fiscal fees or 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 tax credits from them. We had more accruals to reflect the actual cost of the quarter, and hence we expect that to transition down in Q3. 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. I'll expect half of that will be recovered over Q2.

Daniel Szlak
CFO at SABESP

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 dive a little bit more. We had this year, for one 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. 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.

Daniel Szlak
CFO at SABESP

Thinking about the commercial plan, as Piani highlighted in his speech, we expect to spend about BRL 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 didn't mention here, but we had BRL 50 million increase in reforms in this quarter, just rounding the numbers. We expect to see that continue. 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 towards a given connection. What we did was we anticipated the resolution time by being proactive in flagging that to the consumer and treating that. It increased a part of the cost also.

Daniel Szlak
CFO at SABESP

Comes from increasing the number of people that actually do that job, and to reduce the friction on the consumer front. That is about BRL 50 million in the quarter, and we have another BRL 150 million on the cost side that we flagged also on the bridge. That is mainly related to the communication outreach that Piani mentioned. About half of that is related to that. The other half is mainly linked to the expansion of customer service agencies such as Poupatempos, increasing to 100 people on the service agencies that actually provide a service to the population. Another 120 people call it on the call center, so that we can solve a backlog of tickets that we had that accumulated. As we grew, what we started noticing that we grew, and we started also being more on point on collection.

Daniel Szlak
CFO at SABESP

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. That is a little bit of the general picture. Of that general picture, what we expect based on the rules 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 we 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.

Daniel Szlak
CFO at SABESP

We have already placed a number inside that BRL 800 million, assuming that discounts live very soon, to be conservative. The rest of that, I would say that half of the half, so about 20%-25% of that we expect to stick, and the other half we expect to improve through productivity as we transition more to digital channels rather than physical channels. This is more or less what we expect going forward and how we see this transitioning. I do not know if I was able to answer everything, Bruno, but of what I remember you asked, I think I addressed it.

Bruno Amorim
Bruno Amorim
Analyst at Goldman Sachs

No, that is helpful. Thank you. I will let others ask. Thank you so much.

Operator

Thank you. Remember that to ask a question, submit it via the Zoom Q&A informing your name and company. Our next question comes from Mr. Arthur Pereira from J.P. Morgan.

Arthur Pereira
Arthur Pereira
Analyst at J.P. Morgan

Hi, good morning, guys. Still on these investments in commercial efforts. You mentioned that out of the BRL 800 million, you should consider OpEx and revenues just to make sure that nothing goes into CapEx. You mentioned the BRL 150 million in expenses in the second quarter, BRL 50 million in revenues. The reminder BRL 600 million, should we consider in the second half of this year, or was anything already disbursed in the first quarter? On the expenses, was this fully booked as third-party expenses, or also personnel? Because personnel expenses increased quarter-over-quarter. Maybe just wanted to recap a little bit what you see as underlying. You exclude the BRL 150 million in this quarter on the underlying figure that you presented. How much of this OpEx on the commercial efforts should we consider as recurring in the coming years, thinking about 2027 onwards?

Daniel Szlak
CFO at SABESP

Thank you, Arthur. Thank you. Long question. I will try to remember everything. I wrote down most of what you said, but let me know if I missed something. Look, thinking about 2027 onwards, as I said, I think about 20%-25% of that is what I expect will stick, given to some extent we will recover a part. Sorry, let me put it in a different way. A part of that, which is a majority part of that, will stick. But half, more than half of that will come back, through the tariff cycles, which is the part that is linked to revenues and large clients discounts and mandatory communication as we go commission construction work. These are things that are mandatory by the regulation. Anything will get eventually reimbursed.

Daniel Szlak
CFO at SABESP

Another 20% are things that we are increasing costs, and that will stick. The remainder of that, we expect we will see in productivity, over the next years improving. We do not expect that to stick over 2027 and so on and so forth. From an NPV perspective, the only lagging part is going to be the 20% that will stick in terms of cost. I know that is where you are going. In terms of personnel, a small portion of that is in personnel. I do not expect to see a big part of that landing in personnel. I would not model that. My view is that the oscillation that you see in personnel is more linked to timing of benefits and things like that do not even deemed worth of calling out.

Daniel Szlak
CFO at SABESP

In terms of the timing of conversion, you are right. We have cycled through BRL 200 million, give or take, of the BRL 800 million that we mentioned. We will see the next BRL 600 million over the next quarters, between Q3 and Q4. That is where we expect we will land. Did I miss anything?

Carlos Piani
CEO at SABESP

No. I think, Daniel, you got everything, but just let me try to give a 10,000 feet overview. What we are doing, we are taking the customer by the hand. Instead of letting him complain, we are preempting any big variations on customer bills and bringing those customers to a conversation, see if there is any, according to the regulatory framework, any reforms that are available for that increase. What happened before was we were reactive, waiting for the client to complain. Now we proactively, we are using the rules of the game, the lower arms, and trying to give that benefit to the consumer.

Carlos Piani
CEO at SABESP

That is the piece of the commercial investment in broader sense that goes through revenues because it is a bill reform. Okay? This is basically an anticipation of something that we are going to be compensated through different tariff revisions moving forward. Just to be clear on that front.

Carlos Piani
CEO at SABESP

The second piece that I think is worthwhile, we invested a lot, much more than I think it is a recurring basis on communications. Besides everything that we are doing that we need to communicate, we are communicating all these changes to the consumer so he can appreciate and know what are his rights. Of course, this has a bump at the beginning, and then this has a reduction, and in general, independent if it has a regulatory recognition or not, and part of these communications are also regulatory compliance that can be compensated through the tariff cycles.

Carlos Piani
CEO at SABESP

To be very specific on one of the measures that Daniel made is that we created, as I mentioned on the opening of the call, we created an additional group that is small. I don't think it is relevant for you guys to model, but we have a dedicated team to improve the experience with the consumers. Yes, there is a pickup increase on personnel, but we don't believe that this is going to change the trajectory that we had before.

Arthur Pereira
Arthur Pereira
Analyst at J.P. Morgan

Very clear. Thank you.

Operator

Thank you. Our next question comes from Mr. Francisco Navarrete from Bradesco BBI.

Francisco Navarrete
Analyst at Bradesco BBI

Morning. Can you hear me well?

Carlos Piani
CEO at SABESP

Yes.

Francisco Navarrete
Analyst at Bradesco BBI

Okay. Thank you, Piani and Daniel, for the call. Just have two questions, if I may. One is, if you could comment about the CapEx level in 2Q 2026. I think maybe the pace at which the CapEx showed in 2Q was a little bit below expectations, and if you could talk about that and then tell us what your ambition for the CapEx for the full year 2026. That is one question. And then the second, I know you already explained part of it, but if you could provide more detail on the revenue gap that we are seeing. I think we are estimating something that seems to be a little bit higher than in the first quarter.

Francisco Navarrete
Analyst at Bradesco BBI

If you could help us understand that. I know in the press release you already mentioned BRL 177 million of mix, but what else should we consider there to close that gap? Thank you very much.

Carlos Piani
CEO at SABESP

Navarrete, thanks for the question. I will make a brief introduction, pass to Daniel, and maybe I will come back. But in terms of CapEx, usually the first quarter is the softest quarter of the year, because people are tired of pushing until the end of the fourth quarter, given all the incentives that we have, annual revisions of the regulatory asset base and so forth. There is a seasonality, there is a pacing, and it is back-ended. This is natural as expected. The second comment I think it is worthwhile, the works that we were pursuing at the beginning of this journey, we are less than two years in, were the projects that were closest to us, basically here in the north region of the metropolitan area of São Paulo, they were known and so forth.

Carlos Piani
CEO at SABESP

The change, why are we confident that we are going to pick up and we are going to pick up strongly the pace? Because as I think we highlighted in the presentation, Daniel can give a little bit more color. We are concluding the hiring of four phases. We highlighted two, but there is four phases of the universalization program for the countryside of São Paulo. That is where we are going to be measured next year. We need to pace that. We need to pick up in 100% of the municipalities of Dourado. There is a lot of volume of works that are being hired, and this gives us conviction that we are going to aim towards the BRL 20 billion at year-end.

Carlos Piani
CEO at SABESP

Of course, there is a challenge. As always, it is not a piece of cake. I think what I can tell you guys is that we have an action plan to get there, and we know how to get there, right? Of course, we need to prove this on a daily basis, but we have the contracts now signed, and we have a plan to get there backended into the fourth quarter of this year.

Daniel Szlak
CFO at SABESP

All right. Just to complement here, going to the CapEx. We have about BRL 40 billion of backlog. Last quarter, we also had BRL 40 billion of backlog, so we executed almost BRL 4 billion and continued with BRL 40 billion, which means that we contracted BRL 4 billion through the quarter. We are now in the final stages of contract. Final, no, but I will say over the next nine months or so, we will be contracting another BRL 20 billion, give or take. So, that will allow us to continue ramping up the CapEx. As it stands today, we have about 1,500 different CapEx fronts active.

Daniel Szlak
CFO at SABESP

We expect to reach at the end of next year, at some point close to that, which is going to be our peak, about 4,000 simultaneous work sites. That is definitely a big increase. As Piani alluded to, we have a lot of people working around internally and on the contractors front, these numbers are going to almost double by the end of next year. We are very well advanced into U-Factor targets for this year. As you can see from the presentation. Now we are turning our attention a lot to the U-Factor targets for next year. That is where we are, more or less, with regards to that matter.

Daniel Szlak
CFO at SABESP

In terms of the revenue gap versus the regulatory fronts, we have basically three items that are relevant. The first one is, as you mentioned, is the mix, about BRL 177 million from social tariffs and from consumption band mix because of the lower temperatures. The second part of that is the reforms that I mentioned, and as you correctly pointed out, about BRL 50 million in the quarter.

Daniel Szlak
CFO at SABESP

Then when you look at the remaining BRL 50 million that in our view that continues to exist, this is mostly related to large clients. Basically it has a BRL 50 million impact on the quarter that is mostly linked to very few clients that still have active contracts of discounts in half of that BRL 50 million. The other half is another gap that is driven by the injunctions that are still active. Every quarter, we have been reducing that number, but we still have some injunctions that are active that prevent us from charging the full price to some clients. Okay? So that is give or take where we see the regulatory gap today.

Francisco Navarrete
Analyst at Bradesco BBI

Thank you very much, Daniel.

Operator

Thank you. Our next question comes from Mrs. Sofía Grand from Moneda.

Thiago Levy
Head of Investor Relations at SABESP

If it's not the case that she doesn't have her mic on, I can read her question here. I think it's directly to Daniel. What percentage of universal coverage have you reached so far, and how many connections remain to be achieved? There's some other questions. How do you plan to finance the CapEx for universal coverage, and what percentage of the total CapEx is expected to be deployed for sewage, and for water? How much CapEx is going to be used to improve the network?

Daniel Szlak
CFO at SABESP

Thanks. Thank you, Sofía, for your question. When we think about our percentage coverage, this is something that we don't have. I cannot give you a final number yet because we're still doing the census, right? This is going to be what's going to be used to calculate what is the percentage coverage. This is going to happen until the end of this year.

Daniel Szlak
CFO at SABESP

What I can say today is that from our target that needs to be met by adding a net new number of economies, we've met 105% of the three-year target for water, 90% of the sewage collection, and 82% of the sewage treatment. Which means that we're very advanced, as we think that we still have six months to deliver it. Like I said, our attention is focused right now in contracting what is 2027. As we progress and as we have the result of the census, we'll be able to update everyone as to what's the percent coverage compared to the 99% that we need to reach by 2029.

Daniel Szlak
CFO at SABESP

Okay. How are we going to finance the CapEx? We've been funding that mostly through debt, and we'll probably continue to do that over the next year, and expected by 2028 to start generating enough cash flow to be able to continue funding that with less percentage of debt. About 2/3 of that CapEx goes into sewage treatment, and one-third goes into water. That's just how much the split is. In terms of improvement of the network, we've been doing about 10% of that total CapEx, which is maintenance, network upgrades, and so on and so forth. The bulk of the CapEx really goes into expansion and expanding the network, and expanding the sewage treatment facility capacity so that we can plug more economies into that.

Operator

Our next question comes from Fillipe Andrade from Itaú BBA.

Fillipe Andrade
Analyst at Itaú BBA

Hello. Good morning. Thanks for accepting the questions. If you could just please go through the increase on the allowance for doubtful accounts. What explains this increase from 1.4% in the past three quarters to the 2.5% figure on the second quarter of 2026? Also, if you could just please comment on the unitization phase expected for 2026, if the company sees any changes on what it was expecting before the reduction on CapEx deployment of the second quarter. Thank you.

Daniel Szlak
CFO at SABESP

Thanks, Fillipe. I will take the first one. In terms of allowance for doubtful accounts, I think it is worth rewinding a little bit further, the movie. When we came in, the run rate of the allowance for doubtful accounts was about 4% of revenues. Which meant that it created a very long backlog of collection that we could act on, and we have acted on that. We have been able to achieve the lowest historical number, which was 1.4 at the end of Q1 of this year, and even, I think, at the end of Q4 last year as well. We have reached the historical best, but that was also at the expense of collecting some of the backlog. Naturally, as you start working through that, this starts reducing. That opportunity starts reducing.

Daniel Szlak
CFO at SABESP

I think going forward, and then I will talk about Q2. But going forward, what we expect is something that we will eventually land at something that is similar to other utilities from our benchmark, is close to two. A little bit less, a little bit more, but that is what we expect will be eventually the recurring pattern of the company. As we upgrade to smart meters, that might present an opportunity for us to continue improving structurally. As they become a bigger part of our metering fleet, eventually this is going to be able to improve. That said, for Q2, historically Q2 is one of our highest allowance for doubtful accounts quarters, from a seasonality perspective.

Daniel Szlak
CFO at SABESP

Okay. That is in the end, a little bit of that. I would look at that more as a first half rather than Q1 and Q2. But that is where we see the numbers. In terms of unitization, we do not expect any change to what we have been communicating, where we think that about 2/3 of the CapEx of the year usually is able to commission in that year. And one-third goes to the work in progress. This is more or less what we continue to expect. We do not see major changes here.

Fillipe Andrade
Analyst at Itaú BBA

Thank you.

Operator

Our next question comes from André Sampaio from Santander. Our next question comes from Carolina Carneiro from Safra.

Carolina Carneiro
Analyst at Safra

Hi, everyone. Good morning. Thank you for the call and the opportunity. I wanted to go back to CapEx. If you can now update us a little bit on the overall CapEx plan, regards especially of the potential anticipation of the projects. They are aiming to enhance the water resilience and the security of supply here, in São Paulo. And also, how has been conversations or conversations going already with the regulatory agency here, in order to recognize that, support that, especially noting that we are going to have this year the application of the methodology to recognize the annual CapEx on tariff. If you can give us a hint on these specific points, would be great. Thank you.

Carlos Piani
CEO at SABESP

Thank you, Carolina. Given, I think since August of last year, there is a specific protocol that has been enacted by the state government, which has today biweekly meetings. Previously, it was weekly meetings where all the strategy regarding water scarcity, involving all players, was decided in that group. That group decided together to anticipate a couple of investments, as I think we mentioned in the past. I think the major one that we have is a connection between Billings and our Alto Tietê watershed. We can take water from Billings to the water treatment plant at Taiaçupeba, which represents roughly 30% of the water potable water of the metropolitan region of São Paulo.

Carlos Piani
CEO at SABESP

This construction is expected to be concluded by the third quarter of next year, and it is around BRL 1.4 billion. This has been aligned. Everybody knows. We still don't have clarity about the new methodology, as you mentioned, that had already a public hearing. We expect this to come out to the market probably, maybe until the end of the third quarter. But I think what I can tell you is everybody knows that we're doing the best we can to help avoid a tail event. Okay? There are two other smaller investments, but I think the major one is the one I just described.

Carlos Piani
CEO at SABESP

Our strategy is to pull forward a couple investments, but nothing that we can do is going to solve the next two, three months, right? I think the knife pressure management is the lever that, as a community, we can pull together. But everything that we're doing is aligned, and we expect to be recognized in the tariff, in the regulatory asset base, independent of the methodology that's going to come forward, in the next couple of quarters.

Carolina Carneiro
Analyst at Safra

Thank you.

Operator

Okay, our next question comes from Mr. André Sampaio from Santander. I will read it. I want to go back to OpEx, but focus more on the structural long-term view. How the company views the efficiency agenda moving forward.

Daniel Szlak
CFO at SABESP

Thank you, operator. Thank you, André. Look, the efficiency agenda continues to be one of the company's main strategic pillars, right? There are three strategic pillars. Deliver the universal access, deliver the efficiency to fund the universal access, and as we progress, eventually as we reach good customer satisfaction, good service levels, and so on and so forth, dream a little bit beyond our borders. That's basically our strategy in a nutshell, right? We already achieved very important milestones. We started with what I'll say maybe the low-hanging fruits and captured a lot of that. There's still some remaining opportunities on that front, but I think we've done a lot in that first wave. What I expect now is that we enter a different phase that comes from the top and from the bottom.

Daniel Szlak
CFO at SABESP

On the top, we have important initiatives, strategic initiatives like the integrated operation center, like the metering upgrade for smart meters, like the biogas projects, all the software upgrades that we're doing, that will allow us in the future to start using artificial intelligence even more to gain productivity. All of these things are top of the house initiatives that we push here from the center. Another thing that's important, as Piani started talking about earlier, is the culture. The culture of treating the company as your own, right? Making the right decisions on the day-to-day and really being frugal on the day-to-day of the company, so that these provide a cumulative effect on savings and a compounding effect.

Daniel Szlak
CFO at SABESP

I think what we'll see is from the top, very large initiatives with capital deployment and investment that has a J-curve nature. From the bottom, the cultural change and how this evolves on the day-to-day, and at the edge of the operation and in the day-to-day. That's more or less what I see for the future.

Operator

Thank you. Our next question comes from Mr. Henrique Simões from UBS BB.

Henrique Simões
Analyst at UBS BB

Okay. Hi, everyone. Thanks for taking my questions. I had a follow-up first on Bruno's question regarding the timing effect on the revenues. I had in my mind that in the first quarter, you had two days of revenues that weren't billed due to the migration of the ERP, and I was expecting a reversal of that you should exclude two days of revenues from this quarter. But you had a positive effect again on the timing. I am just curious if those are separate effects and it would be fair to still make that adjustment to the revenues. The second one was on the costs, on the quality of service and communication. If that should be the new recurring level or is that temporary for this year, and then we should go back to normal levels next year? Thank you.

Daniel Szlak
CFO at SABESP

Thank you. Thank you, Henrique. Thinking about taking your first question first. On SAP, when we went live with SAP, you saw a lower volume, but we also did an accrual for unbilled revenues. From a revenue perspective, you do not see the impact in Q1 from the SAP go live. On Q2, you see more volume, but the reversal of that accrual for revenue, so for unbilled revenue. Net revenue did not change when you think about that by component from the SAP go live. What we are calling out as a positive carryover for Q3 from the SAP go live versus Q2 is linked to the invoice entry that was delayed because of some contracts that we were not able to bind correctly to that phase. As invoices come in Q3, we are naturally able to take more tax credits on the sales tax.

Daniel Szlak
CFO at SABESP

Whereas when we do the accruals to keep the cost in line with what we know the cost is, we are not able to take sales tax credits for that. That is the difference between Q2 and Q3 that we called now in Q2. Thinking about cost, I think overall our efficiency agenda continues, right? We will continue to pursue that. We saw very good results on the migration, for example, of power. We continue to carry over positive effects from the voluntary dismissal plans in terms of cost. All of that is still continuing, and we see that momentum. What we did is we selectively decided to invest in the commercial plan so that we want to explore more our value of putting the consumer first.

Daniel Szlak
CFO at SABESP

On the chemical side, we are fighting now to reduce those costs back to where they were before that oil increase. But that's it.

Operator

Our next question comes from Suchinta Chakraborty from Goldman Sachs. I will read it. "Provide an update on the company's founding strategy, including expected annual debt-raising requirements over the next few years.

Daniel Szlak
CFO at SABESP

Thank you, Suchinta, for your question. Thank you, operator, for reading. In terms of funding, we've anticipated our funding for the year of 2026. Between January and February, we raised about BRL 14 billion. By the end of Q3, we'll probably have met all our funding targets for the year. That will put us in a position where we'll probably have more than 60% of our debt with no financial covenants and with a longer maturity and a more structured pace. When we look at the next years, naturally, those funding needs, they will start declining as the cash flow of the company also starts picking up. Naturally, the year of 2025 and 2026 were the largest funding needs in our view. That's what we can say.

Daniel Szlak
CFO at SABESP

In terms of actual figures for debt-raising requirements, all the sell-side models, they're fairly well-designed, and they can provide some good clarity on that as we don't disclose guidance.

Operator

Our next question comes from Mr. Raul Cavendish from XP. [audio distortion] The Q&A session is now over. We wish to give the floor to Mr. Carlos Piani for the company's closing remarks.

Carlos Piani
CEO at SABESP

I'd like to thank everyone for participating in the call today and for the continued support, and hope to see you all on the next call. Have you all a nice day. Thank you very much. Bye-bye.

Operator

SABESP earnings presentation is now closed. Thank you very much for your participation, and we wish you all a very good day.

Analysts
    • Daniel Szlak
      CFO at SABESP
    • Carlos Piani
      CEO at SABESP
    • Bruno Amorim
      Analyst at Goldman Sachs
    • Arthur Pereira
      Analyst at J.P. Morgan
    • Francisco Navarrete
      Analyst at Bradesco BBI
    • Thiago Levy
      Head of Investor Relations at SABESP
    • Fillipe Andrade
      Analyst at Itaú BBA
    • Carolina Carneiro
      Analyst at Safra
    • Henrique Simões
      Analyst at UBS BB
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