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

Good morning, and welcome to EcoRodovias' Third Quarter of 2022 Earnings Conference Call. With us here today are Mr. Marcello Guidotti, CEO; and Andrea Fernandes, Director of Corporate Finance. 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 third quarter of 2022 results. Ms. Andrea, you may proceed.

Good morning. Welcome to Grupo EcoRodovias' conference call. Today discuss the earnings of the third quarter of 2022. We thank you all for your interest and participation. Moving to the highlights. This quarter, the company won the auction of the concession of the Northwest Lot highway system, which will generate EBITDA from the start of the concession and lengthens the duration of the company's portfolio to over 20 years. Another highlight occurred in September where they started a toll collection in 3 plazas at EcoRioMinas, which jointly represent approximately 34% of the concessionaire's total toll revenue. And on October 3, the start of toll collection at the 9 plazas at Ecovias do Araguaia. It is also worth noting that the regulatory agency recognized the contractual imbalance at Ecopistas referring to the Taubaté extension work. Moving now to operations performance on Slide 5. Consolidated traffic had a 7% decrease in the fourth -- third quarter due to the termination of the contract at Ecocataratas and Ecovia Caminho do Mar. Comparable traffic was up 4% in the quarter. a reflex of the commodity exports, such as soy and corn, industrial recovery, the flexibilization of restrictive measures and the progress in COVID-19 vaccination. The highlight of the quarter was heavy vehicles with an increase of 5%. As for the group's consolidated financial performance, on Slide 6, we see the evolution of gross revenue with an increase of 29% in the third quarter. Net of construction revenue, gross revenue decreased 3% mostly due to the termination of concession contracts at Ecocataratas and Ecovia Caminho do Mar in November 2021. Comparable gross revenue was at 18% due to traffic increase and toll tariff adjustments. . It is important to note that, in July, there was a toll adjustment of 22.5% at Ecoponte, and in November, the tariff adjustment of 23.6% at Ecosul was applied. Ecovias dos Imigrantes and Ecopistas have signed a collective amendment to the contract TAM for the economic and financial rebalancing of concession agreements since the tariff adjustment of July 2022 was not applied. The rebalance is occurring through bimonthly payments. The amount for August and October have already been received, and the final payment is estimated for December 2022. The collective amendment also includes the 11.7% adjustment to be applied in December. On Slide 7, we show comparable gross revenue for the first 9 months of 2022 up 14%. Moving on to Slide 8, about digital transformation. We highlight the 8.4 percentage points increase in toll collection through AVI, self-service and digital means in the quarter year-on-year, reaching 74% of toll revenue. Another highlight is the multilane free flow, a research and development project implemented at Ecopistas in 2021 through an international cooperation agreement approved by the concession authority without charging users for the moment. Through this project, EcoRodovias analyzes the technological efficiency of the solution and potential risks and opportunities in the toll collection process. In the third quarter of '22, 4.2 million vehicles were detected with a precision rate of 99% when compared to the manual toll plaza in [indiscernible]. On Slide 9, comparable net revenue was up 18% in the quarter due to comparable traffic increase and toll tariff adjustments. The increase in cash costs adjusted at 7.4%, in line with the inflation in the period is due mainly to the expenses with personnel due to the provision for severance pay and salary adjustments and third-party services due to variable transportation and temporary labor costs resulting from the growth in warehousing operations at Ecoporto. Note that the increase in cash costs at the highway concessions was 4.3%, a variation below the inflation in the period. On Slide 10, comparable EBITDA in the third quarter amounted to BRL 563 million with EBITDA margin at 67% due to traffic increase and toll tariff adjustments. . Comparable EBITDA for the first 9 months of 2022 was BRL 1.5 billion, a 12% increase in EBITDA margin of 66% as we can see on Slide 11. On Slide 12, we present the evolution of recurring net income in the quarter with a 30% increase explained by lower depreciation and amortization due to the termination of the concession agreements at Ecovia Caminho do Mar and Ecocataratas and the better financial result mainly due to lower debt adjustment on account of lower IPCA in the quarter. Recurring net income of the first 9 years of 2022 was impacted mostly by the termination of the concession agreements at Ecovia Caminho do Mar and Ecocataratas and by the financial results, as we see on Slide 13. Investments in the first 9 months of 2020 on Slide 15, totaled BRL 2.2 million. The main investments were made in the initial works at Ecovias do Araguaia and expansion improvement in maintenance at Ecovias dos Imigrantes, Ecopistas, Eco101, Eco135, Eco050 and Ecovias do Cerrado as well as maintenance works at Ecosul and Ecoponte. The investments were allocated to 107 kilometers of road widening, 53 kilometers of additional lanes, 109 improvements at access roads and more than 1,100 kilometers of road restoration as well as contractual maintenance obligations demonstrating our capacity to execute and deliver works at our highway concessions. On Slide 16, the company highlights at Ecovias do Araguaia the delivery of 9 to plazas, 19 operational bases and pavement restoration works on 460 kilometers, all meeting, the highway concession requirement parameters and the start of toll collection on October 3, 2022, overcoming the challenges of accelerated degradation of roads due to the heavier-than-average rainfall in the region between the end of 2021 and early 2022, which resulted in the advancement of works that were initially scheduled for 2023. Moving to Slide 17. We closed the quarter with leverage of 4.6x, in line with the company's expectations due to the termination of the concession agreements at Ecovia Caminho do Mar and Ecocataratas, which accumulated by September 10 months without, contributing to the consolidated EBITDA. CapEx realization and -- toll collection at Ecovias do Araguaia, which started on October 3, 2022. The net debt over adjusted EBITDA indicator for EcoRodovias concession services is 4.2x. It is important to note that the company has prepared for this growth cycle and has also adjusted financial covenants to annualize the EBITDA of new concessions. The start of toll collection at EcoRioMinas and Ecovias do Araguaia, along with a good operational performance and the recent toll tariff adjustments, will allow the company to maintain the level of leverage in sustainable levels in the medium term. Moving on to Slide 18. We closed the quarter with cash balance of BRL 2.6 billion. It's important to note that the maturities of the fourth quarter are already equated, and approximately 40% of maturities are allocated for after 2026. On Slide 20, we present the main highlights of our ESG agenda. The conclusion of the materiality assessment, seeking continuous improvement and best practices, the installation of photovoltaic panels at Eco135, which helps reduce greenhouse gas emissions. The company's commitment to have 50% of women and 35% of black people in leadership positions by 2030 and the application to obtain the Fomento Infarma Integridade 2022 CEO from the Ministry of Infrastructure. More details of our ESG agenda are available in our earnings release. To conclude this conference call, we stress that EcoRodovias has been successful in executing its growth strategy over the last 5 years, winning 5 highway concessions through auctions and the acquisition of one concession in the secondary market, which have contributed to increase the duration of the portfolio for more than 20 years. The company will remain watchful, albeit more selective, of new growth opportunities, given that the agenda for new auctions will continue to develop in the medium and long terms. The focus of the company shall remain in the execution of investments in the new concessions, the search for efficiency and innovation to maximize the creation of value for its stakeholders. This concludes our presentation, and we would like to move on to the questions-and-answer session. Operator, we are ready for the questions from our analysts and investors. Thank you.

[Operator Instructions] Our first question, [ Mateus Santana ], XP Investments.

First, I'd like to know if you could give us more color what you expect on the ramp-up of the highway, the Northwest Lot highway system and the impact in the short and medium term? Can I ask the second question and then you can answer?

Yes, go ahead. You can ask your second question, Mateus.

The, second question would be how you see the government's concession pipeline? Considering the current leverage than the success you've had with concessions this year, what's your position for new projects?

Thanks for the question. About the ramp-up of Northwest, we had the signature of the contract and the concession for the middle of next year, July. And then it starts to be 100% operational. So technically, there is no ramp-up. It starts already operational in the CapEx cycle, will be extended in the first 5 or 6 years, the main CapEx. About leverage, as Andreas said, we already have 10 months without the EBITDA of Ecovias and Cataratas. We have another 10 months in the fourth quarter, but made up with Araguaia, and we expect a net debt over EBITDA ratio stable in the fourth quarter, also stable in '23, '24 and starting to go down in '25. And the consideration is that if we annualize revenues and EBITDA of the 2 concessions that started now with their respective investments in comparable basis, the net debt over EBITDA expected for '22 is close to 4x. And if it's maintained also annualizing the [indiscernible] Northwest concession maintaining this level in '23 and '24, going below 4x in 2025, that's to explain that the concessions registered CapEx, but will also bring important EBITDA in coming years. In my view, the company's leverage, considering the operational concessions and annualizing the flow with the investments and their concession fees. So we're at the level of 4x. For '22 and in 24 starting to go down below 4 in '25 about the pipeline. We're prepared for the federal programs, the lots in Paraná. 381 is also something we're studying, but the company understands that for 2022, maybe there will be no more opportunities. We will look at the programs of the coming government and some federal programs, some state program being selective and continuing to look at nonorganic growth. But as you said, we expect that growth opportunities will come and remain present in the medium and long terms. The company doesn't need -- I mean, we've done a lot, and we'll continue to look and grow inorganically, but being very cautious.

The next question, Victor Mizusaki, Bradesco BBI.

I have 2 questions. The first, if you can talk a little bit more about the balance at Ecopistas, if I'm not mistaken, this process EcoRodovias need to judicialize last year, but if you can talk about it. And if it makes sense for us to although it's not decided, but if it would make sense for us to consider the likelihood is that the maturity would be extended, considering the differential of the tariff price at Ecopistas compared to Rio, Sao Paulo? And the second question about the regulatory side, if we run a comparison between the federal model and the state model with the result of the election, if we can expect a change for the state highways, maybe for new bids, that could be adjusted considering the comparison with the federal regulatory model?

Victor, about the imbalance of the extension of Carvallo Pinto Road it works from 2008, concluded with extra cost, which was recognized by the justice system and the agency. And last week, it was formalized, almost BRL 500 million. It's already in use considering costs and amortization. And if there's a rebalance, we expect that it will be by extending the deadline and the concession by -- until 2045. So it's long, 5 or 6 years. And at the end, the result has been positive. And I think that's how we're going to face all contractual challenges and whenever not possible, we will move forward judicially. It's important to do things well and be the inform results will come about the regulatory side in Brazil, I don't see any major change between federal and state levels. The agencies tend to be there independent. They have been for some time in Brazil and the highway industry and other industries. And I don't see any major changes in terms of approach. What we've seen in recent years, it's an agreement of the regulatory side from a solid contract being maintained, rebalanced. It's not possible to reach a conclusion. The agency has been attentive and capable of regulating. So we are comfortable with the change of government. We've had government changes in the past, and it's not really going to change what's already happening.

If I can just add a follow-up, correct me if I'm mistaken, but I think, recently, we started to see the federal government talking about integrating a higher return rate for projects. Is there still a delay in Sao Paulo compared to other projects? Could this maybe have a positive impact for the new Sao Paulo Highways?

The federal government has integrated in Sao Paulo. There's an interest increase defined calculated based on long-term interest rates that's reasonable. Some -- in Sao Paulo, some projects have lower risk, are more mature, may have a lower return in some cases, but it's not behind. In Sao Paulo, we are balanced, our contract amendments with all the toll rates. I don't think there's any difference.

Next question, Julia Orsi JPMorgan.

I have a question. If you can give us an update about the rebidding process of Eco101, if you can update us?

Julia, thank you for your question. Eco101, I had a request for return. It's been analyzed with the entity. We understand that, by the end of the year, we may have the approval and acceptance of this process and start the discussion of the amendment term. We expect for 2023 that opens the third phase for the rebidding of the concession. So we are at an entity, and we understand that the first phase, that's the authorization for the process, is achieved by the end of the year.

Next question will be asked in English by Stephen Trent from City.

Just 2 from me. The first, I missed what you said about financial covenants over the short term. And I was wondering if you could just let us know what are those financial covenants? And then the second question, intrigued by your ESG goals about leadership positions by 2030. And I presume that this leadership commentary applies to the executive team and the Board of Directors. Just wanted to make sure.

Thank you, Steve. And Stephen was asking about the company's leverage, especially the level of covenants in the short term and the second question about the ESG leadership targets, what leadership positions are being considered. About your first question, I mentioned the leverage that today is at 4.6x and tends to remain stable in the fourth quarter and in '23 and '24, and it will start to go down in 2025. Annualizing revenues and EBITDAs of what's already entered and what will enter in '23 new toll plazas at RioMinas and some covenants that already consider the annualization of this flow will have values around 4x in 2022 and holding this level in '23 and '24 and going below 4x in 2025. So we have covenants that are already at for 4.75, 5, 5.15. So we'll be -- this makes us comfortable with the CapEx expansion cycle that we have ahead of us. About the leadership position targets, leadership, we're considering as of starting at C level. Managers, coordinators, directors, those are our -- leadership position starts on coordinators and go all the way up to C levels, and that's going to be the positions that are on our ESG targets for diversity. Thank you, Stephen.

If there are no further questions, I will turn over to Ms. Andrea Fernandes for her final comments. .

I would like to thank you all for the presence in this conference call and wish you a great week. Myself and my team remain available for any additional questions. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]