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

Good morning, and welcome to EcoRodovias Fourth Quarter of 2022 Earnings Conference Call. With us here today are Marcello Guidotti, CEO; and Andrea Fernandes, Director or 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 Information 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 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 fourth quarter of 2022's results. Ms. Andrea, you may proceed.

Good morning. Welcome to Grupo EcoRodovias' earnings conference call to discuss the earnings of the fourth quarter of 2022. We thank you all for your interest and participation. On Slide 3, we highlight EcoRodovias' main accomplishments in the fourth quarter. In October, Ecovias do Araguaia began collection at 9 toll Plazas. In November, tariff adjustment was implemented at Ecosul, with an increase of 23.57%. And in December, toll tariff adjustments were implemented at Ecovias dos Imigrantes And Ecopistas, increasing 11.7%. In addition, I'd like to highlight the beginning of toll collection at EcoRioMinas at the Viúva Graça plazas on highway [indiscernible], which represents approximately 32% of the estimated toll revenue for the concessionaire. Consisting these plazas and the others that began collection in September '22, toll revenue already represents approximately 66% of the concessions' estimated toll revenue. On Slide 5, we show our operations performance with consolidated traffic up 8.9% in the fourth quarter of 2022, due mostly to the beginning of toll collection at EcoRioMinas and Ecovias do Araguaia. In 2022, consolidated traffic was down 2.1% due to the termination of concession contracts at Ecocataratas and Ecovia Caminho do Mar in November of '21. Comparable traffic was up 1.3% in the quarter and 4.7% in the year of '22 due to the performance of soy and corn exports, industrial recovery and flexibilization of the social distancing rules to fight COVID and the progress in vaccination programs. On Slide 6, we see the evolution of revenue. Adjusted gross revenue reached BRL 1.3 billion in the fourth quarter of 2022, a 30% increase. The highlight is the revenue from the beginning of toll collection at EcoRioMinas and Ecovias do Araguaia in September and October of '22, respectively, amounting to BRL 181 million and 13.5% share in the quarter's adjusted gross revenue. Comparable gross revenue was up 27% in the fourth quarter due to traffic increase, toll tariff adjustments and the increase of operations at Ecoporto and Ecopátio. On Slide 7, we highlight the 17.1% increase on comparable gross revenue in 2022. On Slide 8, we see our digital transformation initiatives. We highlight the partnership to expand 4G Internet coverage throughout the 850 kilometers of Ecovias do Araguaia. Ecovias do Cerrado and Ecovias do Araguaia have innovated in charging for suspended axles on nonempty trucks via integration with MDF-e digital documentation in partnership with the Secretary of Finance and ANTT, an important initiative to increase revenue at the concessionaires. We also point to customer service provided on WhatsApp and the SOS Navegue Grátis website. WhatsApp service is provided through artificial intelligence and users may obtain information about traffic conditions, requests, mechanical and medical emergency services, among others. The website, SOS Navegue Grátis available Ecovias dos Imigrantes and Ecopistas allows for emergency calls without consuming users' internet and data packages. On the right, we see toll collection through AVI, self-service and digital payment assets amounting to 73.4% of toll revenue in the fourth quarter of '22, an increase of 6.4 percentage points compared to the fourth quarter of '21. On Slide 9, comparable net revenue was up 18.2% in the quarter due to traffic increase, toll tariff adjustments an increase of operations at Ecoporto and Ecopátio. Adjusted cash costs grew 6.8% in the fourth quarter due to the increase in personnel costs with a collective bargaining agreement, provision for profit sharing and provision for severance pay due to the termination of the Ecoporto lease agreement in June of 2023. We note that adjusted cash costs at highway concessions were down 3.5% in the quarter. On Slide 10, we see the evolution of EBITDA. Adjusted EBITDA reached BRL 809 million in the fourth quarter of '22 and BRL 2.3 billion in the year of '22. The contributions of EcoRioMinas and Ecovias do Araguaia amounted to BRL 118 million, reaching a 14.5% share on the quarter's adjusted EBITDA. Comparable EBITDA was up 42.0% in the fourth quarter due to traffic increase, no tariff adjustments and increase of operations at Ecoporto and Ecopátio. On Slide 11, comparable EBITDA reached BRL 2.2 billion in 2022, an increase of 19.6% vis-a-vis 2021. On Slide 12, we highlight the increase on recurring net income mostly due to the increase on adjusted EBITDA and the result of the new concessions. On Slide 13, a reduction on recurring net income in 2022 is mostly due to the decrease in adjusted EBITDA due to the termination of concession agreements at Ecocataratas and Ecovia Caminho do Mar in November '21 as well as the increase on financial expenses. On Slide 15, we highlight the investment of BRL 853 million made in the fourth quarter and BRL 3.1 billion in the year '22, demonstrating our capacity to perform to the works of the company's growth cycle as well as our commitment with the maintenance of our highways. In 2022, investments earmarked for highway concessions amounted to BRL 2.9 million and approximately 70% of funds were for the concessions won at auctions carried out over the last 5 years. The highlights include the delivery of 9 toll plazas, 19 operational basis and pavement restoration works at Ecovias do Araguaia to meet highway's required parameters and the start of toll collection on October 3, 2022. On Slide 16, we ended the quarter with a leverage of 4.3x, down 0.3x compared to the third quarter of 2022. This reduction is mostly due to the increase on adjusted EBITDA in the period with the start of operations at 2 new concessions. EcoRodovias Concessões e Serviços leverage ended the quarter at 3.9x, down 0.3x compared to the previous quarter. On Slide 17, we closed the quarter with cash balance of BRL 1.6 billion, debt maturities of BRL 937 million in the first half of 2023 and BRL 1.3 billion in the second half of '23. The maturities in the first half are at the early stages of conclusion. And the maturities that exceed the cash balance shall be equated through refinancing and the cash generation expected for the period. On Slide 19, we present the main highlights of our ESG agenda. EcoRodovias was maintained at B3's Corporate Sustainability Index, ISE and Carbon Efficiency Index. Our federal concessions were included in ANTT's Environmental Performance Index. State concessions, Ecovias dos Imigrantes and Ecopistas, received an award in the sustainability category at the Concessionary of the Year awards given by the São Paulo state Transportation Agency. EcoRodovias ranked second at the GRI Infra Awards for the solar power project at Eco135. And Ecoponte achieved ISO5001 certification. More details on our ESG agenda are available on our earnings release. We close this conference call stressing that the execution of EcoRodovias' growth strategy between 2018 and 2022 was a winner. We won 5 highway concessions through state and federal auctions, 2 of them in 2022. And we acquired the concession in the secondary market. All of which have contributed to increase the duration of our portfolio to more than 20 years. We are now focused on the consolidation of the portfolio and on making the investments planned for the coming years on improving corporate and operational efficiency and on developing innovation to maximize the creation of value to our stakeholders. The company will remain watchful, albeit more selective of new growth opportunities. Even that the agenda for new auctions is promising in the medium and long terms in Brazil. This concludes our presentation. We would like now to move to the questions-and-answer session. Operator, we are ready for the questions from our analysts and investors. Thank you.

[Operator Instructions] First question, Henrique Simoes, Credit Suisse.

Congratulations on the results. First, if you can talk about this innovation for the collection of the suspended axle on nonempty trucks, I'd like to understand what it is and how -- what the effects it causes. And second, about margin at Araguaia, it's similar to what we had. But what's the margin we should expect for the future in this concession, the ceiling of 10% of volume that comes this year from the government, should it have any impact based on what was projected?

Henrique, thank you for your question. About the collection that we called MDF. It's an electronic system connected with the Federal Revenue Service that the detects trucks that raised their axles even if they are loaded and the legislation in place determines that they must pay for the axles. So with this mechanism, when the truck comes in, it is detected, and the collection is made even if they raise or suspended 1 axle or 2, they will be charged at full. This represents almost 4% of revenue with an innovation advanced on 050 and now on Araguaia. It's also going to be done in RioMinas and all concessions. And the legislation is very clear. About Araguaia, this margin, you're correct. We need to make the adjustment. It's not on traffic, but it's on revenue, revenue minus a concession fee of 10%. So it's a smaller difference. The estimated margin for Araguaia for 2026 or '27, that's the first year without those mechanisms estimated to be of 70%. Today, we're at 77%, close to 78%. Of course, that throughout 2023, we will make this accounting. We don't have the exact number, but it will affect the margin. This is expected as per the concession agreement. But it's on revenue, not the axles. The calculation of the axles will give a large -- higher amount. But the amount to be discounted throughout the year will be smaller. When we look at 2027, that will be the first year of full. We are at a margin at 77% today. MDF will also contribute to that.

Our next question, Julia Orsi, JPMorgan.

Congratulations on the results. We have 2 questions. First, thinking about EBITDA margins. There was an impact of the burnout and increase the EBITDA margins for this quarter. But from now on, is this margin level sustainable? The second question is about the project pipeline. If you can talk about the projects that you're looking at and what would make sense for EcoRodovias to participate?

About the EBITDA margin, yes, I'd say it is sustainable. It's the margin that -- it was -- the quarter was in line. So I believe it is sustainable. We don't see reason for this margin not to be sustainable. As Andrea said, we're making progress in the digitalization and efficiency. So it's very clear that the use of technology is being massive, and we're really moving with it. So it is sustainable. About the pipeline, as Andrea said, the agenda we look at is for the medium to the long term, we're mapping the opportunities -- we know that there's a program in Paraná, the federal level, is more advanced, although there have been some discussions now regarding the model for concession and discount, concession fees. So we don't have a clear visibility of when the government will be able to put it up for auction. We studied Paraná's program in São Paulo, there's a [indiscernible] coastline that may be an interesting asset, that it makes -- right next to our Ecovias dos Imigrantes. But overall, we don't know whether there will be good opportunities -- we know there will be good opportunities in '24, '25, '26 in federal concessions that are to come. EcoRodovias will also be very cautious. We're only going to enter on projects that guarantee an adequate return rate that is attractive, and with the CapEx profile and a cash profile that are sustainable. So we are in no hurry. We are not going to accelerate our pace. We already have our challenges. We're starting to deliver results, and we're in no hurry. So we understand the window of opportunities will continue in '23, '24, '25, '26, and we know we'll be very rigorous in our choice.

Next question, Alberto Valerio, UBS.

Andrea, Guidotti. I'd like to look at into more details about the new projects. If you can tell us, so the discussion in Paraná, it seems the state government wants to maintain the regulation as it was in the past, if you want to give tariff discounts and deposit guarantee ahead of time, as we had in the last 4 or 5 years, but the federal government wants to go back to a methodology that is closer to the past, to remove the concession fee and give all the discounts and the tariff. I'd like to know your opinion about the 2 methodologies, if you have any preference, and if you see the possibility of BNDES to come stronger again, back to infrastructure in Brazil this year. Congratulations on the results.

Alberto, thank you. I'll start with your second question. We were recently at BNDES to begin the discussion of the funding for EcoRioMinas [indiscernible] total interest and willingness and we're lucky to have a lot of time to structure these 2 very important financings because they're both planned for 2025, but BNDES is already active and ready to begin discussions. So I'd say we left a meeting at BNDES, happy and pleased that BNDES will certainly continue to support infrastructure. About the Paraná although, it's what you said. There are news. But from what would make sense is the return rate. As I said, return rate needs to be adequate. Return rate is the profile -- and the profile of the project, of course. It doesn't make sense to have billions of CapEx and we are going to look into the projects with these metrics in mind. The discussion may develop, may occur, but there's no problem. We'll wait for the model to be chosen and then we'll assess whether or not it makes sense. If they will be proper return if the risk to return is adequate on the profile or the financial pressure and the investments, if it's also adequate. So what we have to do is wait.

If I may add a follow-up about the inflation of costs. We had a strong inflation process in '21, '22. And now it seems to be giving us some relief. What can we expect for '23 and '24, especially in the new projects [indiscernible], Noroeste Paulista.

We expect a return of prices, especially of asphalt and the inputs and diesel to the second half of '25. What we're looking at now and the prices of these inputs are quietly going back to the inflation level we believe by -- that still in '23 will improve. But in our forecast, the news are positive. We're going to see a deflation. Our expectation for this year in these 2 assets. It took some time to come, but there's the parametric formats of adjustment of construction contracts, there's all other metrics, not only materials, but we expect that these parameters will also be in line with inflation in 2023 very quickly. So from this point of view, we have good news.

Next question, Victor Mizusaki, Bradesco BBI.

I have 2 questions. The first we saw an improvement or a reduction in the company's leverage now in the fourth quarter. So my first question is what we should expect for '23, '24, if the leverage may decrease a little further? And the second question about -- related to Henrique's first question about the collection for the suspended axle, does it makes sense for us to consider for the concessions that don't have the system yet that we would consider another 4% increase in traffic and that would have a positive impact in revenue and directly on EBITDA, and the new concessions, if there are more plazas to enter operation in '23 '24.

Victor. About leverage, we reached what we believed would be and will probably be our new level actively regulated by cash generation. Maybe it's a little better than we forecast, but I'd say that this is the level of indebtedness for the next few years, until '27, '28. We will continue on the others of 4x, 4.5x because in addition to cash generation, we have to make the investments. It's coming a little bit better. The operational performances are improving, so we may even be surprised positively in this sense. But I would say that this is a stable level, and that is being maintained. It is going according to our forecast. We're at a position of still high interest rates. The inflation hasn't given completely. So I believe we're relatively comfortable. About the new toll plazas, the new concessions. We are still going to have to plazas at RioMinas. RioMinas today has toll plazas representing 60% of its toll revenue throughout 2023, we'll conclude all the toll plazas. So in 2024, RioMinas will be 100% collected, more -- another 30% revenue in '24. In 2023 -- actually, I forgot. In '23, we will have the entry of toll plazas at Noroeste. Noroeste comes in full. And in '24, 30% more in RioMinas. We also have increased passes in '23 and '24. Araguaia, all of them have entered in '22.

Guidotti, does it makes sense with this new technology for the collection of suspended axle -- I'm sorry, I forgot. Yes, there was an increase of 4%, does it make sense to consider the same proportion for the others?

Those 4% Was the number of concession with a high traffic of heavy vehicles, okay? Araguaia has heavy vehicles, there's a certain type of cargo that is industrial. It's not always like that. But again, Noroeste as well, the levels at Noroeste may be between 3% and 4%, Cerrado in 050 as well. But of course, a highway that has a higher flow of light vehicles or smaller trucks, for example, at Ecopistas or Ecovias, maybe it won't be such a big difference. And it is a very positive solution, not only for revenue but also for the wear and tear of pavement and operational safety and so on.

Next question Filipe Nielsen, Citibank.

Congratulations on the results. I have a doubt first about CapEx. I like to understand how you expect I saw that you have more than [indiscernible] of contractual CapEx. I'd like to understand how much of that would be for this year? And how you see this distribution, whether you have a margin to delay some of this CapEx considering the scenario of high interest rates and so on. And the second question is about on the port in Santos, I'd like to understand whether it's still a core asset in your business? Or if you could maybe makes sense to make a type of partnership or sell part of this operation to be able to raise funds for other businesses or new concessions or so on. So if you could give us some color.

Filipe, I'll start on the second question about Ecoporto. The concession expires on June '23, so it's coming up soon, and then we close Ecoporto's operations. Of course, we have discussions and rebidding or the renewal. So for now, we're [indiscernible] not necessarily a concession scenario. We have credit recognized more than BRL 300 million that will have to be paid, and we also have to judicialize a lawsuit about [indiscernible] balancing in different areas and deliveries at Ecoporto. So for us, Ecoporto not at core. It's a concession that already has its regular path to follow. But we also keep track of the discussions being made about the board and capacity, new auctions. Of course, we are keeping track of all that. For CapEx. This CapEx there, BRL 19 billion or current assets. Of course, we still have to include Noroeste and RioMinas. Contractual CapEx, of course, is a CapEx that we managed throughout the year. There is landmarks of deliveries, we've always been doing that. There's some flexibility. But these are the contractual obligations that add capacity and end up increasing traffic. So we always need to do this math so that it's as effective as possible and generate value to the business.

Next question, Gabriel Rezende, Itau BBA.

Guidotti, Andrea. Congratulations on the performance this last quarter. I'd like a quick follow-up on your question about Ecoporto. It's clear Guidotti that there is still pending topics. You have more than BRL 300 million that have been confirmed from what I understood, the funding for that would come from the STF and auction and another BRL 700 million related to a dispute that's already been arbitrated relating to Ecoporto. So if you can give us a little bit more color how we should think about Ecoporto? Contract exception for a few months, maybe a year, considering that the rebalancing of the BRL 300 million may be delayed? Maybe we should only remove this asset from the model or extend the asset for a longer period until the government does get the funds to rebalance EcoRodovias. And then talking about rebalancing, there's a discussion at Ecopistas that is relevant as well, BRL 1 billion at Ecoporto and another BRL 500 million at Ecopistas. I believe the market is not really watching this closely. But if you can talk about the progress made in the discussion, that Ecopistas considering it will be very relevant for you, this NPV level.

Gabriel, about Ecoporto, the credits that we have to receive solid and recognized and must be paid. SPA has the money to pay this liability, and we expect to receive it, but it's precisely whether it's going to be to a new bidder paying for the concession fee or the payment of concession authority, we need to find out that it doesn't make a difference for us. We must receive this money. And this is agreed at all levels that this is recognized. It has already been recognized, and it must be paid. The timing of when, if in '23 or '24 at the time of rebidding, we are still discussing and waiting for definition, but it is recognized. About the other liabilities, we have not succeeded on arbitration, so we judicialize that open lawsuits that are running. The values are very significant. And we will wait for justice to run its course, and we are optimistic that we'll be able to achieve a positive results. The values are important. But this is already ongoing. It's no longer in the concession agreements level, it's not going to interfere on the rebidding. It's a judicial issue. About Ecopistas. We also have been an important credit recognized and quantified and we intend in 2023 to sign the contract amendments that definitively rebalances these unbalance. So we are making progress in the discussion to finally achieve the balancing put an end because this credit has been running at a very high adjustment rate and inflation of 10%, so it makes a lot of sense both for us and for the government to put an end to it. Otherwise, it's going to be a very high bill if we leave it and let it go. So these are the 3 credits that we have. You reminded as well, the Ecoporto, final one to be received. Ecopistas will be played this year and as the judicialization of the areas that may be a little bit longer, but we are optimistic.

As there are no further questions, I will turn the floor to Ms. Andrea Fernandes for her final considerations.

I would like to thank you all for your consideration. My team and I will remain available for any questions you may have. Thank you. Have a great weekend.

EcoRodovias Conference Call is closed. We thank you all for your participation. Have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]