EcoRodovias Infraestrutura e Logística S.A. (ECOR3) Earnings Call Transcript & Summary

Good morning, and welcome to EcoRodovias' First Quarter of 2022 Earnings Conference Call. With us here today are Marcello Guidotti, the CEO; and Andrea Fernandes, IR Director. This presentation is being recorded. [Operator Instructions] The audio and the slides of this conference call are being broadcast simultaneously at ri.ecorodovias.com.br, where you will find the presentation for download from the webcast platform in the Investor Relations section. Before proceeding, we would like to clarify that the forward-looking statements that may be made during this conference call relating to EcoRodovias' business prospects, projections and operational and financial targets are based on the management's beliefs and assumptions as well as on currently available information. They involve risks, uncertainties and assumptions as they refer to future events and hence, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future performance of EcoRodovias and lead to results that differ materially from those expressed in such forward-looking statements. I will now turn the floor over to Ms. Andrea Fernandes, who will discuss the first quarter of 2022's results. Ms. Andrea, you may proceed.

Good morning. Welcome to Grupo EcoRodovias' conference call today, discussing the earnings of the first quarter of 2022. We thank you all for your interest and participation. The quarter was marked by some important achievements. Ecovias dos Imigrantes signed the amendment that extended the term of concession agreement by 2 months until January 2034, increasing the duration of the portfolio. The Board of Directors approved the internal regulations and corporate policies to strengthen its conference -- corporate governance. The company has renewed its international certification, ISO 37001. And debentures issued have equated the maturities of the first half of the year. It is important to note that the company has concluded the work with a specialized consulting firm, which had the objective of reassessing the operating model and proposing actions to enhance processes and seek synergies to drive operational efficiency and ensure sustainable growth. These actions are already being implemented, and results will be seen from the second half of 2022 until 2024. Moving on to operations performance on Slide 3. Consolidated traffic had a 3.7% decrease in the first quarter. Excluding the start of operations at Ecovias do Cerrado, which began toll collection in the final plazas in March 2021 and concessions, Ecovia Caminho do Mar and Ecocataratas, which had their concession agreements terminated in November 2021, comparable traffic posted an increase of 8% in the quarter, a reflex of flexibilization of restrictive measures and the progress in COVID-19 vaccination coverage, the export of commodities, such as soybean and corn, and the industrial recovery. The highlight of the quarter was light vehicles, with an increase of 9.7%. As for the group's consolidated financial performance on Slide 4, we see the evolution of gross revenue with an increase of 11.4% in the first quarter. Excluding construction revenues, gross revenues decreased 6.9%, mostly due to the termination of concession contracts at Ecocataratas and Ecovia Caminho do Mar. Comparable gross revenue was up 13.2% due to traffic increase and toll tariff adjustments. On Slide 5, net revenue dropped 8% in the quarter due to the termination of the concession agreements at Ecocataratas and Ecovia Caminho do Mar. The 12.4% increase in cash costs, in line with inflation, is due mainly to the expenses with consulting and advisory services for the studies for new business for auctions, salary adjustments and profit sharing and provision for administrative fines. On Slide 6, comparable EBITDA amounted to BRL 475.5 million in the first quarter, with EBITDA margin at 65% due to traffic increase as well as toll tariff adjustments. On Slide 7, we present the evolution of recurring net profit, impacted mostly by the termination of the concession agreements at Ecovia Caminho do Mar and Ecocataratas. Investments on the first quarter of 2022, on Slide 9, totaled BRL 547 million. The main investments have been for the implementation of operational buildings, pavement conservation works at Ecovias do Araguaia, improvements at intersections, accesses and pavement conservation works at Ecovias do Cerrado as well as road duplication and pavement conservation works at Eco135. On Slide 10, we closed the quarter with net debt of BRL 8.1 billion, an increase quarter-on-quarter mainly due to the investments made on the quarter. Leverage measured by the net debt over adjusted EBITDA indicator is in line with the expectations for the period at 3.6x compared to 3.3x in the fourth quarter of 2021. Moving on to Slide 11, we closed the quarter with cash balance of BRL 2.2 billion. In 2022, maturities in the first half of the year are already equated with the issues of the holding and Ecovias dos Imigrantes, in the total amount of BRL 1.9 billion, cash availability and the company's cash generation. In the second half, the main maturity is at Ecorodovias Concessões. On Slide 12, we highlight the highways that the company is studying, federal concessions in Paraná, CRT and Triângulo Mineiro in the state of Minas Gerais and EcoRodovias' drivers of growth. The company's capitalization, along with target projects that generate cash already from the beginning of concession, partnerships on future auctions, the extension of the agreement at Ecovias dos Imigrantes, dividend distribution in line with the growth cycle and future cash generation, shall enable the search for opportunities to invest in the Brazilian highway market, with capital discipline in a sustainable manner. We take this opportunity to mention that Ecovias do Araguaia, BR-153, continues to invest in pavement conservation works and in toll plazas, with collection expected to begin in the fourth quarter of 2022. On slides 14 to 16, we present the main ESG indicators, highlighting the conclusion of the studies on climate vulnerabilities and the B score on CDP, above the global average. In the ESG agenda, for the third consecutive year, EcoRodovias has joined the companies that make up the Climate Resilience Index, compiled by CDP, in partnership with Resultante ESG. With regard to people development, EcoRodovias launched the 2022 performance cycle, which includes the contracting of targets, with executive officers and managers having a percentage earmarked for the ESG targets, which underscores our commitment to the agenda. In April, the shareholders approved the election of Ana Grizzi at the Shareholders Meeting. The new Board member is a specialist in sustainability/ESG, with broad experience in incorporating the environmental, climate and social variables into strategic business planning. More details on our ESG agenda are available on our earnings release. This concludes our presentation. We would like to move on to the questions-and-answer sessions. Operator, we are ready for the questions from our analysts and investors. Thank you.

[Operator Instructions] First question, [ Aline Zhu ] from BTG Pactual.

We have a question on our side. In terms of leverage, you increased in comparison to the fourth quarter. I would like to know the level of leverage we can expect for upcoming periods and whether this can bring any restriction in the company's participation in new auctions. And the other question is that I saw that you had some data on toll in line with the inflation at around 10%. I would like to know if there was an impact in traffic due to this toll increase and just your expectation in terms of mix between light and heavy vehicles from now on.

Good morning, [ Aline ]. It's Marcello. How are you? Thank you for your questions. About the leverage, it was expected. As Andrea said, the termination of the 2 concessions in Paraná and the presence of Ecovias do Araguaia in the pre-operating stage are influencing this, which is expected. We understand this will continue throughout the year. And as soon as Ecovias do Araguaia starts collection in the fourth quarter, we expect leverage to stabilize and go back down in 2023. We understand the level this year could be around 4% and 4.5%. But again, this is expected. It is not limiting our capacity to look at new businesses. We have some clear targets, the majority already with cash generation since day 1. So there are projects that have been chosen because of this feature so that they don't add pressure to our leverage. So this is quite under control. About tariff adjustments, they are at the same level, Ecovias do Cerrado, Eco135. We're expecting the adjustments at Eco101 as well and Eco050 in the second quarter, all absorbing and exceeding the IPCA index for contractual reasons, and this will have a good impact in our revenues in the second quarter. And I would say it should not affect, and it's not affecting at this time, the traffic that -- especially the commercial traffic has not been affected by tariff adjustments. Traffic is doing very well. This morning, we informed the data, 11.6% up compared to April, and it remains like that. So I believe we'll have good traffic ahead irrespective of the tariffs.

Next question, Gabriel Rezende, Itaú BBA.

One question. I would like to understand a little bit more about the CapEx adjustments, from BRL 635 million, compared to the inflation. It corresponds about 3% of the BRL 20 billion CapEx realized in the beginning of the year compared to the 3% adjustment that you've made on the fourth quarter as well. Was this adjustment calculated including the CapEx adjustment of Ecovias do Araguaia? If we can expect, since inflation is still high, new adjustments on this level in the upcoming quarters?

Gabriel, thanks for your question. This adjustment is in line with the total prices, 100% of CapEx as today currency. So all the inflation that is coming to date has been updated. If inflation continues going up, from now on, it will be reflected in the total CapEx base. As you can see, this is on current currency, totally adjusted. As I said on [ Aline's ] previous question, we're receiving now all tariff adjustments, the São Paulo adjustments as well coming in. So this will have a very good impact on our revenues.

Great, Guidotti. If I can just follow up. So we can expect that the company, with efficiency gains, will be able to offset some of this inflation increase that we're having in the CapEx expectation, right?

Exactly that. The inflation exists at the moment. Companies like ours who have an operating model that works well with a certain level of inflation, an increase like this, we need to make more. So we're already with efficiency -- organization efficiency and operational efficiency projects as well as improvements in projects and in the CapEx. Our task now this year is to offset this, and I would say that we will be successful.

Next question, Pedro Fontana, Bradesco BBI.

Congratulations on your results. We've seen some highway auctions being canceled in recent months, the lack of participation or becoming more selective in the choice of projects in the macro scenario. I would like to understand what you've been thinking about the new actions in the pipeline -- new auctions in the pipeline, how you see it for coming projects and what you expect of each one, if you can tell us.

Pedro, thank you for your question. We have a very clear strategy. We've mapped the auctions ahead and the opportunities very well. We have a team dedicated to this. We chose the projects due to their attractiveness, of course, that they have synergies and we have competitive advantages, with a good CapEx that we understand. We're capable of creating value, realizing the CapEx. So we've dedicated to the projects. We're looking at the Paraná program, the federal program, CRT, that's coming up, the Minas Gerais programs, Triângulo Mineiro, that include some improvements. And the federal program is intensive as well. So we select and participate. Of course, the situation that some of them are large projects, and of course, they require the inadequate return at times like this. So the auctions that have been postponed are probably to adjust the return rate to be able to attract investors. Our return rates, the return rates reflect the current scenario, with a certain premium to generate it. So we think a real-world inflation in Brazil, the returns, the Brazilian risks and of course, all at present value.

Just to complement, how do you see leverage if you achieve these 3 projects, CRT, Triângulo Mineiro and Paraná?

Both CRT and the Paraná highways, the Paraná highways, will probably be 1 or 2. CRT and Paraná both have a long CapEx flow, and they're already generating cash, so they will pressure and impact leverage. And as of the years 3, 4, 5, the structure of these structures -- the projects, so these years there will be years when other concessions like Eco135, Cerrado, Eco101, will already have much lower investments compared to today's. So it's very well-thought out to avoid any type of pressure. So that's our line of thought.

Next question, Lucas Barbosa, Santander.

It's a follow-up about the tariff increase that you mentioned in the beginning, tariff increases at Ecosul and Eco050 are being analyzed by [ NPP ]. If you can give us more color of why this process is taking longer, if there's a discussion of any point in the transfer of tariff increases. And if I understood correctly, Guidotti implied that this tariff will be on the second quarter, they will occur on the second quarter. If you can confirm that, I would appreciate it.

Yes, Lucas. We expected for the second quarter at Ecosul and Eco050. They take long because the federal contracts, every year, there's the ordinary and extraordinary adjustments and other types of calculations and balances, the Factor D, and in some cases, we're also discussing the effects of COVID. And this all takes time and delays the process. But that's all it is. But I would say, at Ecosul and Eco050, we're about to receive the adjustments.

Next question. Filipe Nielsen, Citibank.

I had 2 questions, but one has been discussed about leverage. So I'll start with my second question. I would like to understand the restructuring process of the company's management. Marcello, today, you're centralizing. We had [ Gianfranco Caprini ] that was coming in, in the coming periods. I would like to understand, in addition to his arrival, when you expect it, and how do you intend to structure the company after these changes that are expected to happen.

Well, Filipe, we're going to structure the company in the best way possible to focus on the business. We're working on that. The executives are following it, and I understand that it's a process that must be well done, but it will be done throughout this year. And that's the structure. It's structured to run a business that is complex. But it's a highway business in Brazil, so we'll be well structured to be able to deliver results. As Andrea said, we announced a new Board member, independent Board member. We reinforced everything on our policies, updated them. So we saw normalization, and the company will have a good capable structure to run the business. I don't think there's anything new about it, Filipe.

Excellent then. So we can expect maybe one change or another throughout the year, but [ Gianfranco ] will come in?

[ Gianfranco's ] no longer a part of the Board of Directors. That was in January, so I have the position accumulated. We have a legal director and just, first, to form the C-suite and run the business.

[Operator Instructions] There's no further questions. Our Q&A session is now closed. I'll turn the floor over to Ms. Andrea Fernandes for her final remarks.

Thank you for your participation. My team and I remain available for any further questions or doubts. Have a great weekend.

EcoRodovias' conference call is now closed. Thank you very much for your participation. Have a very good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]