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

Good Morning, and welcome to EcoRodovias' Second Quarter of 2023 Earnings Conference Call. With us here today are Mr. Marcello Guidotti, CEO; and Camilo Gomes, Finance and Investor Relations Manager. This presentation is being recorded. [Operator Instructions] The audio and the slides of this conference call are being broadcast simultaneously through the webcast platform at ri.ecorodovias.com.br. 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 to Mr. Camilo Gomes, who will discuss the second quarter of 2023's results. Camilo, you may proceed.

Good morning. Welcome to EcoRodovias' earnings conference call for the second quarter of 2023. We thank you for your interest and participation. On Slide 3, we would like to highlight that in May 2023, we started the operation and toll collection at EcoNoroeste on the stretch previously operated by AB Triângulo do Sol which toll revenue represents about 80% of the total toll revenue forecast for the concessionaire. In the months of May and June, EcoNoroeste contributed with a revenue of BRL 112 million an amount higher than what was foreseen in the business plan. The start of operation and toll collection on the stretch currently operated by TEBE is scheduled for March 2025. It's important to highlight that the 3 new concessions, EcoRioMinas, Ecovias do Araguaia and EcoNoroeste together represented 28% of EcoRodovias' consolidated adjusted EBITDA in the second quarter, which reinforces the success of the growth strategy implemented by the company in the last 5 years. In June 2023, the Federal Government published by decree, the framework of Eco101 for rebidding. According to the decree, Eco101 and the ANTT must sign an addendum to the concession agreement within 90 days of its publication. Also in June, the Ministry of Ports & Airports maintain the duration of the lease of Ecoporto for a period of 180 days until a public policy for the destination of the area is defined. This decision is not related to the economic and financial imbalances existing in the Ecoporto lease agreement and ensures the continuity of port and cargo storage operations carried out by the terminal. We also highlight that in the quarter, we successfully raised funds at Ecopistas, EcoNoroeste, Ecosul and EcoRodovias concessions in the total amount of BRL 3.4 billion. Even in a scenario of scarce resources in the local credit market, thus reinforcing the investors' perception of the group's credit quality, it is worth mentioning that these funds have improved the capital structure and tax efficiency of Grupo EcoRodovias, lengthened the debt profile and strengthened cash. On Slide 5, we see the operational performance. Consolidated traffic grew by 37.1% in the second quarter of 2023 and 29.3% in the first half of 2023 and mainly due to the start of toll collection by EcoRioMinas, Ecovias do Araguaia and EcoNoroeste. Comparable traffic grew 4.6% in the quarter and 4.3% in the half year due to the performance of soybean and corn exports, an increase in service activity and favorable weather conditions highlight for the growth of 7.6% of light vehicle traffic in the quarter. On Slide 6, we present the evolution of revenue. Adjusted gross revenue reached BRL 1.5 billion in the second quarter of 2023, a growth of 60.8%. Comparable gross revenue increased by 18.9% due to the growth in vehicle traffic mentioned in the previous slide and toll tariff adjustments of 14.4%. On Slide 7, we highlight the 19.5% increase in comparable gross revenue in the first half of 2023. On Slide 8, adjusted net revenue was up 67.8% in the quarter. While cash costs grew by 17.9% in the quarter, considering the new concessions, Ecovias do Araguaia, EcoRioMinas and EcoNoroeste. We note that comparable net revenue grew 22.1% in the quarter and adjusted cash costs remained flat when compared to the same quarter in 2022. In the same period, inflation was 3.2%. It is worth mentioning that EcoRodovias has intensified its digital transformation program began in 2022, which is one of the levers of the EVA project, EcoRodovias Value Agenda to maximize the company's value. Several initiatives on digitalization, innovation, operational and corporate efficiency are being implemented, such as automation of the processes of operation, collection, payments, sourcing and human resources with results to be captured throughout 2023 and '24. On Slide 9, we demonstrate the digital transformation and innovation initiatives at our concessionaires. The company has implemented at Ecovias do Cerrado a scale to test the weighting of trucks at high speed. The high-speed weight in motion system. This initiative, a pioneer in the country allows the increase of operational efficiency, facilitates inspection of excess cargo, ensures better flow and the safety of users. In addition, the company has installed 12 solar plants in the toll plazas of Eco050, Ecovias do Cerrado and Ecovias do Araguaia. Currently, EcoRodovias has 24 plants installed in the toll plazas of its concessions. By 2030, the company will generate enough power to supply up to 100% of the low-voltage energy consumption of the concessionaires toll plazas, an initiative that enables the reduction of electricity costs and is aligned with the company's ESG agenda to reduce greenhouse gas emissions. In the table on the right, we present the toll collection by electronic means, AVI, self-service and digital means, which totaled 77% of total revenue in the second quarter of 2023, an increase of 4.6 percentage points compared to the second quarter of 2022. On Slide 10, we present the evolution of EBITDA. Adjusted EBITDA reached BRL 918.2 million in the second quarter of 2023, a growth of 98.3% and margin of 71.6%. The contribution of EcoRioMinas, Ecovias do Araguaia and EcoNoroeste was BRL 260.8 million, reaching a share of 28% in the quarter's adjusted EBITDA, reinforcing the success of the growth strategy implemented by the company in the last 5 years. Comparable EBITDA increased 34.7% in the second quarter of '23 and margin of 70.9% due to the vehicle traffic growth, toll tariff adjustments, demonstrating the resilience and growth potential of our concessions. On Slide 11, adjusted EBITDA reached BRL 1.7 billion in the first half of 2023, a growth of 83.5%, highlighting the increase of BRL 392.6 million at the new concessions. Comparable EBITDA reached BRL 1.3 billion in the first half of 2023, an increase of 35.5% compared to the same period in 2022. On Slide 12, we highlight the increase in net income, mainly due to the increase in adjusted EBITDA and the result of new concessions. We ended the quarter with net income of BRL 123.7 million, compared to the net loss of BRL 13.1 million in the second quarter of 2022. On Slide 13, Net income for the first half of 2023 totaled BRL 237 million. We highlighted on Slide 15, the investment of BRL 924 million made in the second quarter of '23 and BRL 1.5 billion in the first half of 2023, 19% higher than the same period of 2022, demonstrating the ability to execute and deliver works of the company's growth cycle as well as the commitment to the maintenance of our highways. In addition, in April 2023, the company deposited the granting of the concession fee to -- of EcoNoroeste for the granting authority in the amount of BRL 1.3 billion. On Slide 16, we present the main deliveries made in the quarter emphasizing the implementation of toll plazas, operational bases and special road conservation works at EcoRioMinas. Expansion works and special road conservation at Ecovias do Araguaia, works of the second phase of the Nova Entrada de Santos, Binário II and special road conservation at Ecovias dos Imigrantes and intersection works, pedestrian overpasses and special growth conservation at Eco101. We also highlight that in the first half of 2023, Eco135 delivered 40 kilometers of road duplication, expansion and improvements on BR-135 and in June, Ecopistas completed the construction of 11 kilometers of the third lane of the Ayrton Senna highway, including the widening of 2 overpasses. The new lane increases by up to 50%, the capacity of traffic in the region ensuring greater comfort and road safety to users. The works of the second phase of the Nova Entrada de Santos are in advanced process of execution by Ecovias dos Imigrantes and the completion is expected to take place in 2023. In the lower left corner, we show the execution status of one of the 10 toll plazas at EcoRioMinas that will begin operations in the second half of 2023. On Slide 17, we ended the quarter with consolidated leverage of 3.9x stable compared to the first quarter of the year, even with the exit of BRL 1.3 billion from our cash availability to meet the deposit of the fixed concession fee of EcoNoroeste and a reduction of 0.4x compared to the fourth quarter of 2022. This stability is mainly due to the increase in adjusted EBITDA due to the start of operation of the 3 new concessions that in the last 12 months, generated BRL 488 million of consolidated EBITDA. The leverage of EcoRodovias Concessões e Serviços ended the quarter at 3.7x. On Slide 18, we ended the quarter with a cash balance of BRL 2.3 billion. The maturities of the second half totaled BRL 553 million. The maturities of BRL 3.3 billion in 2024 are concentrated in Ecovias dos Imigrantes with BRL 1.4 billion. And in the sub-holding EcoRodovias Concessões e Serviços with BRL 1.1 billion, and we are already evaluating the structuring of the refinancing. On Slide 20, we present the main highlights of our ESG agenda. In May, we published a 2022 integrated report dedicated to disclosing the environmental, social and governance indicators as well as the main events and achievements of the year. We invite you to read the full report by clicking on the link provided on the slide. We highlight in the governance pillar, the election of Sonia Consiglio as an independent member of the company's Board of Directors. In relation to the social agenda, we highlight the extension of the 180-day parental leave for all of those employees declared as primary legal guardians of a child and the elaboration of a strategic work safety plan for all of the group's units. In the environmental agenda, we have implemented another 12 solar power plants in our units totaling 24 plants. Finally, we highlight the upgrade in MSCI's ESG rating from A to AA. More details about our ESG agenda can be found in our earnings release and the integrated report. We close this conference call reinforcing that EcoRodovias is focusing its efforts on the execution of its investments, carrying out expansion works and important deliveries in its business units. In addition, the company continues to advance in its digital transformation and innovation program with the implementation of several initiatives of digitalization, innovation, operational and corporate efficiency, which will bring results throughout the years '23 and '24. We invite you to see more details about this in our earnings release. We also emphasized that the company will remain attentive and evaluating the opportunities, albeit more selectively for the new growth opportunities since the agenda of new auctions is promising for the medium and long term in Brazil. With that, we conclude our presentation. We would now like to move on to the question-and-answer session. Operator, we are ready for the questions from our analysts and investors. Thank you.

[Operator Instructions] Our first question, Guilherme Mendes, JPMorgan.

I have 2 points, 2 follow-ups about the comments. First about CapEx. If it's possible to expect any review on the balance that you have today, some savings or efficiency that reduce these targets? And the second point, Camilo, what you mentioned about leverage in the end to be more selective in terms of growth, how do you see this trade-off of possible bids that you participate in will be more mature credit actions that -- what would be the leverage -- the level of leverage that would be comfortable to be considered in view of the projects that are on the pipeline?

This is Marcello, about CapEx. Today, as Camilo said, we are making progress in our deliveries, deliveries that are being very well received by users who are supporting traffic growth. And we are going through a movement of [indiscernible] indexes are stable compared to inflation, that all allows us to maintain CapEx within what was projected, and we're always working on the definitive projects, and they're being implemented as they come in and we sometimes experience reductions. It's premature to say that we're going to have any major savings, but what makes us comfortable is that in the point of view of inflation of prices and the execution in engineering, everything is within what was foreseen. And there are important deliveries. We've delivered more than 40 kilometers at 135, 11 kilometers of additional lanes at Ecopistas a place that had a lot of congestion of traffic and all of that improves traffic and traffic performance is also supported by CapEx deliveries. About leverage and the trade-off of the new auctions, we will be very selective. There will be a lot of opportunities ahead, and I believe the market will adjust. There are probably other players that may come up. We will be selective and we will certainly choose the projects that are better supported according to our capacity. I'd say EcoRodovias priority today exclusively is to continue delivering the works that are planned, managing our concessions efficiently, generating EBITDA, of course, keeping track of the market. But we, again, about the auctions is an agenda that will -- it's a long-term agenda. It's not going to be concentrated only in 2023. It goes on '24, '25, and we will be very [indiscernible] in our analysis.

Next question, Alberto Valerio, UBS.

Congratulations on the results. I have a doubt here that we were seeing some follow-ons coming back, a window of follow-ons opening in the market, I'll be interested on that follow-on on this window, does it make sense for the company? I'd like to hear from you your opinion about the offer. And if you'd be interested in recycling assets, if it would be worth it, in your view, to sell a mature asset to improve the company's cash structure or maybe address some new opportunities?

I think that both the follow-up on and the recycling of assets is an equity strategy that must be continuously analyzed by the company, by its board and its control assets so that we can support the growth as long as the growth is something that indeed adds value. So growth in assets that have attractive return rates. So certainly windows, of course, the window of follow-ons. But beyond the windows, we need to be -- it needs to be connected to our strategy approach that equity support by recycling assets and follow-on and other partnerships and new bids may become necessary, but we will wait to see the new opportunities to analyze whether there are attractive assets, and we'll be prepared to also do a strategy for that.

Next question, Gabriel Rezende, Itaú BBA.

Congratulations on the results. I have 2 questions about your operation. Camilo mentioned in the presentation that the cash cost, adjusted cash cost was flat although we saw positive inflation rates, it was low, but we still had inflation in the period. So I'd like to understand what you're already seeing in terms of gains in your profitability, considering all of these initiatives of cost improvements that you are adopting and to understand how much of that may appear in upcoming earnings we should probably see an upside in the analysis that we're projecting for the company. And the second point, also addressing margin is the stage of the implementation process of the new collection system for the suspended axle 4 trucks. Part of it is already reflecting on your results, but I'd like to understand better when we have all of the company's portfolios assets running in this new system and if that's going to offset the loss of the suspended axles.

I'll start from your second question aside from the 2 concessions that are already collecting that's do Araguaia -- Ecovias do Araguaia and Ecovias do Cerrado that already have positive results, at do Araguaia it's 3.9% of gross revenue -- toll revenue, 3% at Ecovias do Cerrado. We also have Eco135 expected for the third quarter of '23. EcoNoroeste also in the third quarter, EcoRioMinas in the fourth quarter of '23. We have studies for Ecovias dos Imigrantes, Ecopistas, Ecosul, Eco135, Ecoponte, Eco050. At 101, Ecoponte, 050 and -- will be balanced, but at Ecovias dos Imigrantes, I don't think it is. So those are the 2 where we'll probably work on by 2024. But the results we're seeing now at Cerrado and Araguaia are very encouraging. About cash costs, the activities we're implementing, it's an in-depth process of digital transformation of all of our -- at the company's main processes. And some of them will be the quick wins that are coming up already and the others has an early and initial investment phase to then be able to achieve the results and operating costs. We have our program, and we understand that by 2024, the major processes will all be implemented. So I'd say we could see this positive effect in cash costs throughout '23 and 2024. So certainly, maintaining and helping, contributing to margin expansion. But there are many activities especially what gives us a lot of support or the digitalization initiatives, transforming processes into automatic processes, control and administrative, corporate and operating processes as well. So I'd say that during '23 and during the year of 2024, we will certainly experience this operational control of the company's costs.

Next question, Pedro Bruno, XP Investments.

I'd like to get an update from you, if possible, you were talking about the decree in June about Eco101 to process or renegotiate the contract. The government has a different initiative compared to the previous attempts. I am talking about renegotiating the contract instead of that amicable return that was discussed before. I'd like to understand the current status of the process and on the company's perspective, what would be the resolution, but not only that, but in terms of contract adjustment, what would be the counterpart for both sides?

Pedro, thank you for your question. I would say both processes are running in parallel, of course. We have the publication of the decree, we need to sign that contract amendment, I believe, by the end of August to then continue with the rebidding process another 2 years possibly being renewed with the [indiscernible]. But at the same time, in a very strong way, we're also even encouraged by the government itself in the state of Espírito Santo to bring in the possibility to an agreement of the contract that may enable this concession. So both things are running simultaneously. We estimate that during 2023, we will have a definition if it's going to be a rebidding process or an amendment to the contract. But both possibilities are positive for the company, for the concessionaire and we are working simultaneously on both solutions.

Next question, Victor Mizusaki, Bradesco BBI.

Congratulations on the results. Guidotti, looking at the result of the second quarter, we see EcoNoroeste starting with an EBITDA margin around 87%. My question here is related to the EVA project. If maybe that already explains a little bit of this margin at Noroeste being at this level. And if we can consider that this model that you're implementing is something that we can expect to be replicated in the new concessions.

Victor, thank you for your question. Definitely, Noroeste has benefited from all initiatives that we already have in place. The unified operational control centers, centralization of multiple services, it's the one that benefited the most because it's the last one in this trend of digital transformation for the company. So a lot of new things and that led to a very high EBITDA margin. What we are seeing now at this quarter, fortunately or unfortunately, it's not the definitive margin because the first 2 months haven't normalized all of the flows. So we estimate a normalized margin at 80%. Of course, the first 2 months, it's not calibrated. But we're still considering a very high margin, that is definitely a result of our business model. We have 11 concessions today, almost 5,000 kilometers, and we have shared service center that is very well prepared to run the concessions and all of this platform allows us to extract great synergies, operational synergies and Noroeste benefited from that. RioMinas will also be the same, Araguaia as well. So I believe, in general, this will be the standard of EcoRodovias' operation.

Next question, Regis Cardoso, Credit Suisse.

I have a few points here about the debt allocation on Slide 17, there's a lot of CDI debt and a lot of that -- there's already 60% of that in the highway concessions. But on the other hand, there is debt in the holding, either the main holding or intermediate holdings. So Guidotti if you can give us an assessment of whether you've been able to enjoy the or use the tax shield or if it generates inefficiency and maybe it could be a future upside thinking about the better use of the company's capital structure now that you have sound portfolio? That's one question. The next question is about the next auction specifically, the blocks of the Paraná highways. If you see any complementarity of these highways with the portfolio of Eco and it seems that there's an advantage that's a brownfield asset that comes in with an EBITDA and does not need an allocation of a relevant concession fee and then maybe that matches your cash flows. I don't know if that's how you see it. If it is an asset that you have an appetite for, I'd like to hear about that as well?

Thank you for your question. About the debt allocation, we are already implementing a strategy to allocate and we've been successful this quarter. We've increased the allocation of that in the concessions decreasing exposure at the holding. It's not an immediate work because there's a lot of different debts allocated with their own maturity times and rolling times, but we have been implementing this, and we reduced the exposure of almost 11%. At EcoRodovias Concessões e Serviços increased 74%, the debt allocated to the concession. And there are another 3 operations being prepared for the second half in highway concessions, all of them with the same objective of leveraging the concessions more and reducing exposure of EcoRodovias size in coming years, whenever possible. And the longer concessions will rethink on holding or rebridging the concessions. We adopted CDI on its bridge loans, but that has been done without major issues. For the coming year, we have some important maturities at the holdings, and we're already, in addition to reducing the holding exposures with these operations that are -- that have been done and will be done this year. We're probably also going to anticipate some operations at the holding to be able to bring some relief as well and get off the way the rollout in 2024. So there's different possibilities. We can't simply do a single operation and solve the whole problem, but we are managing this to improve debt allocation and the tax shield obviously. So this is work that if you look carefully at the numbers, you can see that the debt at the concession levels increasing more than the debt at the holding level, and that's important because it reduces the holdings exposure and improves tax shield. About the Paraná blocks, the first block we are studying -- we're studying both of them. These blocks have been discussed at length. There's a return rate that's even lower than the return rate that's being used for other projects. It is true that they are known projects with resilient traffic rates but we need to understand it well because these concessions, these highways are not being operated for 2 years almost, and it's definitely not going to be an immediate collection. Although, of course, they are very attractive blocks in terms of traffic. We need to understand more about all of the allocated risks, CapEx complexity and the fact that they are highways that have not been operated or recovered for 2 years and that may bring additional costs that affect the return rates. So we're finalizing our studies, looking at it carefully. But we don't -- if it's not a good deal, of course, we don't have any need to participate, but we're concluding studies, we'll see.

Excellent Guidotti. Congratulations on the results.

Our next question, João Frizo, Goldman Sachs.

Just a quick follow-up about CapEx. In your earnings release, you showed a commitment to invest BRL 18.8 billion that do not include EcoRioMinas and EcoNoroeste. If you can give us some color what you expect for those 2 assets that are not included in that number and what would be the full commitment?

This is important information. It's part of the company's obligations to release and publish these commitments. Throughout this year, we are making progress as much as possible in the definitive project of the stretches that we're going to tackle and to have a final visibility, we intend to publish this information by the end of the year in the final statement of 2023. So until then, we'll give you some indications during conversation, but we are waiting -- there is no surprise, actually, quite the opposite. As I said in the beginning, we're getting positive surprises in the inflation curves. Noroeste and RioMinas are certainly benefiting from it, but we'll wait till the end of the year to provide this and publish this in our balance sheet.

We now close the questions-and-answer session. I would like to turn the floor to Mr. Camilo Gomes for his final remarks.

If you have any doubts, please feel free to contact our Investor Relations department. Thank you very much, and have a great day.

EcoRodovias' conference call is now closed. Thank you for your participation. Have a good day.