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

Good morning, and welcome to EcoRodovias conference call pertaining to the results of the third quarter of 2023. With us here today are Mr. Marcello Guidotti, CEO; and Andrea Fernandes, CFO. This presentation is being recorded. [Operator Instructions] The audio and 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 over to Andrea Fernandes, who will discuss the third quarter of 2023's results. Andrea, you may proceed.

Good morning. Welcome to EcoRodovias' earnings conference call for the third quarter of 2023. We thank you all for your interest and participation. On Slide 3, we would like to highlight the excellent operational performance of our highway concessions, which resulted in a record EBITDA in the quarter of more than BRL 1 billion and contributed to the reduction of leverage to 3.5x. The results of our mature concessions, together with the new concessions won over the last 5 years, demonstrated the assertiveness of our selective and successful growth strategy, which has extended the duration of our portfolio to more than 20 years. It is worth mentioning that the EBITDA of new concessions represented 48.3% of the adjusted EBITDA of the highway concessions in the third quarter. The company made important deliveries in the last 9 months with investments of BRL 2.8 billion in road widening works, additional lanes, frontage roads, toll plazas and operational basis as well as road recovery works. We highlight that EcoRioMinas started operation and toll collection in 7 new toll plazas in October reaching approximately 96% of the total expected toll revenue. The other plazas will be operational by the end of this year. In the third quarter, funding for Eco135, Ecovias do Cerrado and EcoRioMinas was successfully concluded in the total amount of BRL 1.6 billion. It is worth mentioning that these fundings have improved the capital structure and the tax efficiency of the EcoRodovias Group, lengthened the debt profile and strengthen cash position. Additionally, in November, EcoRodovias Concessões e Serviços concluded the issue of BRL 1 billion in debentures. On Slide 5, we see the operational performance. Consolidated traffic grew 44.8% in the third quarter of 2023, and 34.6% in the first 9 months, mainly due to the start of toll collection by EcoRioMinas, Ecovias do Araguaia and EcoNoroeste. Comparable traffic grew 6.9% in the quarter, and 5.2% in the first 9 months due to the performance of soybean and corn exports, the increase in services activity and favorable weather conditions. The highlight was the growth of 6.3% in heavy vehicle traffic in the quarter. On Slide 6, we present the evolution of revenue. Adjusted gross revenue reached BRL 1.6 billion in the third quarter of 2023, up 54.1%. Comparable gross revenue increased by 9.6% due to the growth in vehicle traffic mentioned on the previous slide as well as toll tariff adjustments of 9.3%. On Slide 7, we highlight the BRL 1.4 billion growth in adjusted gross revenue reaching BRL 4.4 billion and the 15.9% increase in comparable gross revenue in the first 9 months of 2023. On Slide 8, adjusted net revenue increased 62.5% in the quarter, while cash costs grew 28.2% considering the new concession, Ecovias do Araguaia, EcoRioMinas and EcoNoroeste. We highlight that comparable net revenue grew 19.2% in the first 9 years (sic) [ months ] of the year, while adjusted cash cost posted a 4.8% increase in the period, a variation that is lower than the 5.2% inflation rate observed in the last 12 months. It is worth noting that excluding provision for Ecoporto, adjusted cash costs increased 5.8% in 3Q '23, and 3.4% year-to-date. On Slide 9, we saw the digital transformation and innovation initiatives in our concessions. The company implemented 9 self-service booths in the quarter, 8 for light vehicles and the first for heavy vehicles at Eco050. In addition, the company implemented the research and development project for a multilane free flow system at Ecoponte in the testing phase. We emphasize that since 2020, the company has been carrying out tests of the free flow system on a gantry at Ecopistas, still without charge for users. We also highlight the start of collection of suspended axles of nonempty vehicles through the integration with MDF-e at EcoRioMinas in August, EcoNoroeste and Eco050 in September, Ecovias dos Imigrantes and Ecopistas in October. In the chart on the right, we present the collection of tolls electronically via automatic vehicle identification, AVI, self-service and digital methods, which totaled 77.7% of total revenue in the third quarter of 2023, an increase of 4 percentage points compared to the third quarter of 2022. On Slide 10, we show the evolution of adjusted EBITDA, which reached more than BRL 1 billion in the third quarter of 2023. A record for the quarter and growth of 85.7% with a margin -- EBITDA margin of 71.8%. The contribution of EcoRioMinas, Ecovias do Araguaia and EcoNoroeste was of BRL 331.4 million, reaching a 32% share in adjusted EBITDA for the quarter. Comparable EBITDA increased by 20% in the third quarter of 2023 and margin of 70.1% due to the growth in vehicle traffic and toll tariff adjustments demonstrating the resilience and growth potential of our concessions. On Slide 11, adjusted EBITDA reached BRL 2.8 billion in the first 9 months of '23, a growth of 84.3%. Highlights were the increase of BRL 724 million from the 3 new concessions. Comparable EBITDA reached BRL 2 billion in the first 9 months, an increase of 29.7% compared to the same period of 2022. On Slide 12, we highlight the increase in net income, mainly due to the increase in adjusted EBITDA. We ended the quarter with net income of BRL 230.3 million compared to a net income of BRL 121.2 million in the third quarter of '22. On Slide 13, net income for the first 9 months of '23 totaled BRL 467.1 million. On Slide 15, we highlight the investments of BRL 1.3 billion made in the third quarter of '23 and BRL 2.8 billion in the first 9 months of '23. Demonstrating the capacity to execute and deliver work in the company's growth cycle as well as our commitment to the maintenance of our highways. Slide 16, shows the main deliveries made in the quarter with emphasis on the implementation of toll plazas, operational basis and special pavement conservation works. At EcoRioMinas, road widening and special pavement conservation works at Eco135, and special pavement conservation works at EcoNoroeste and Ecovias do Araguaia. We also highlight that in the first 9 months of the year, Eco135 completed work of 63 kilometers of road widening works, and 11 kilometers of additional lanes. In September, Ecovias dos Imigrantes deliver the works of the second phase of the remodeling of the entrance to Santos, Binário II, 2 months ahead of schedule. On Slide 17, we ended the quarter with consolidated leverage measured by net debt over adjusted EBITDA of 3.5x, down 0.4x from the end of the second quarter of '23. This reduction is mainly due to the strong operating performance of our road concessions, our highway concessions, which resulted in an increase in EBITDA. The leverage of EcoRodovias Concessões e Serviços ended the quarter at 3.4x. EcoRodovias has worked strongly on the optimization of our capital structure and tax efficiency increasing the share of net debt in highway concessions by 21 percentage points when compared to December 2022. On Slide 18, we ended the quarter with a cash balance of BRL 3.3 billion. The maturities of BRL 2.8 billion in the second quarter of 2024 are concentrated in Ecovias dos Imigrantes, BRL 1.4 billion and EcoRodovias Concessões e Serviços, BRL 1.1 billion. The [ amount ] for the payment of EcoRodovias Concessões e Serviços were already raised in early November. The pro forma cash, considering this issuance reached BRL 4.3 billion, an amount that is higher than the short-term maturities. On Slide 20, we present the main highlights of the ESG agenda. In August, EcoRodovias' shares were included in B3's diversity index. Being included in this index reinforces our commitment to promoting diversity and inclusion in the workplace and in leadership positions. In October, the concessionaire of Grupo EcoRodovias won 2 awards at the GRI Infra Awards 2023. The first place in the "Atmosphere: Decarbonization and Circular Economy" category with the project for the use of milled pavement, RAP, added to Ecosul's asphalt mix; and the second place in the "Connection - Transformation in Urban Life" category with the Internet implementation project, 4G Internet at Ecovias do Araguaia. As for the environment, our federal concessions were awarded in the ANTT's Environmental Development Index. More detail on our ESG agenda can be found in the earnings release and the integrated report. We conclude this conference call by reinforcing that EcoRodovias is focusing its efforts on the execution of its investment, carrying out expansion work and important deliveries in its concession. In addition, the company continues to advance its digital transformation and innovation program which will bring results throughout 2023 and '24. We invite you to see more details about this agenda in our earnings release. We also highlight that the company will continue attentive and evaluating opportunities, albeit more selectively for new growth opportunities since the agenda for new auctions is very promising for the medium and long terms in Brazil. With that, we conclude our presentation. We would like now to move on to the Q&A session. Operator, we are ready to take questions from our analysts and investors. Thank you.

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

Two questions from our side. The first Andrea mentioned in the end of being more selective on growth. Do you want to talk a little bit more about your interest in upcoming processes, there's some for this year and the ones in Paraná next year. How is your interest? And how aggressive do you think competition will be for those auctions? And the second question about Eco101, today's announcement -- earlier today leads us to understand that you're getting closer to an agreement -- to a settlement. But considering the secrecy, we don't have any details. So is there any type of detail on the terms of the settlement or the timing for that to happen? That would be great to know.

Guilherme, this is Marcello. Thank you for your questions... [Technical Difficulty]

I'm sorry. I do not hear him.

Once again, thank you, Guilherme...

Marcello, your audio is open but we do not hear you.

It seems that the audio is down. Please hold. Hey, Guidotti. Can you hear us?

We had an issue here with the audio when we interrupted but we're back. So about your first question about the selective growth...

The sound is breaking up. Guidotti, I don't know if it's my audio, but you're on mute.

Speakers, please, you can follow -- continue on the backup line.

Hello, Guilherme. Can you hear me now?

Yes, Guidotti.

I apologize. We had an issue here, getting feedback. And anyway, so about your first question about the selective growth. EcoRodovias as a strategy, map and select ahead of time, the potential assets based on some criteria that we follow, which use the structure of cash flows, the documents the complexity of investment, whether there are fewer synergies with the current volume and the CapEx volume a series of return rate indicated, and we have a team dedicated to study and prepare to make the best decisions possible. So we continue with this approach. There's a lot of opportunities coming up. Of course, we don't have any decisions of participating in any specific auction but we'll be very selective and rigorous. We will look into and select the best assets that could bring us the best returns, and that's what we're doing. There's one auction this year planned, a few more next year. And we're always prepared to make the most of the opportunities but we're going to avoid making any detailed comments, but -- that's EcoRodovias approach to study and be prepared in order to make the best decision when there is a positive opportunity ahead. About Eco101, it's confidential, but what we published is the formalization of the lawsuit in the account court, the federal account court, that's the last level of the discussion for the possible amendment that will be improving this contract. And if we make progress in the discussions, the discussions will start now with the responses and -- there's a lot of details, a lot of analysis. It's going to take some time. I think we still have 90 days plus 30 for discussion. But the objective of EcoRodovias is to make Eco101's agreement, a good, balanced profitable contract that's good for users, for the granter and for EcoRodovias. So it's going to be a complex discussion, but we're optimistic. We believe that we'll be able to succeed. On the other hand, the return on process is concluded, of course, suspended until February next year. And we have this time to see whether or not we can improve the conditions of the current agreement.

Our next question, Gabriel Rezende, Itaú BBA.

Guidotti and Andrea, congratulations on the results. I'd like -- I appreciate it if you could talk more about operational performance in the highway concession segment, we saw progress in margin quarter-on-quarter. I think there's the traffic side tariffs, but the business model, highway business model has great ratability and we're seeing positive surprises repeatedly. So if you could talk a little bit more about the main drivers of these advances, it would be really good for us. And the second point, just touching on something that's been recurring and this discussion is about the CapEx curve for the company, not only the curve that you present in the release, but considering the new assets, if you could talk to us a little bit, looking today to the commodity price levels, the negotiations with suppliers, what do you see for the curve now? Is there room for this to be corrected downwards? Or is it going to remain in line with what you've been showing in previous quarters?

About performance, I think the results and you're right, the concession model is relatively stable. And all the costs or fixed costs technically. But with structured programs for efficiency in the medium term, we're able to improve that base. And that's what EcoRodovias has been doing in these years, taking the potentialities to the most in the platform model. Today, we operate 11 concessions but with a lot of services that are centralized. EcoRodovias Concessões is a single platform and the 11 concessions managed centrally. So when you get to a dimension this savings in scale naturally appear. So we have the efficiency program, digitalization, these programs that you've been following and this digital transformation, everything makes the base of the fixed cost of the concession to get to a higher level. And of course, the quality of the assets and the control of traffic. We tap into all the positive trends that happened in agribusiness, tourism, the industrial performance. Our corridors capture all of these dynamics and this is also reflected in margin. This year, the tariff adjustments that follow inflation in addition to maintaining balanced contracts, adding other triggers, for example, for Ecopistas and Ecovias that had two triggers due to rebalancing from the past. So all of that is combined and get margins to improve. So it's not surprising, but is the result of work that has been ongoing that leads to these good margins, good EBITDA margins. About the CapEx curve, we today can assure you that we are within the business plan. There's nothing today that indicates anything different or inflation curve, the parameter curves, everything is in line with the business plan. I'd say some of them are even better than in the business plan, but we're concluding all of these analysis now. And by the end of the year or the beginning of next year, we'll update the contractual obligations, including Noroeste and RioMinas with all the studies already updated. But what I can tell you is that we are within the expected according to the business plan.

Our next question, Rogério Araújo, Bank of America.

I have two questions here. The first, still talking about costs, I think it was clear to have the -- about those initiatives of cash cost. If you can talk about a trend looking forward, if you've already captured the majority or there should be a carryover or is therefore, the reduction to happen based on those initiatives. And noncash costs. Depreciation went down compared to the second quarter, even with the relevant investments in the quarter, was there any specific reason for that? Any change on depreciation rates for us to understand and to project how it's going to be forward? And my second question is about the holding debt. You're talking about a drop from 59% to 38% of the total debt. Is there a target to further reduce it? And what would be the time line for it?

Rogério, thank you for your question. About operational efficiency, as I said, our objective was to transform the company's fixed cost base into a more efficient and sustainable basis that's what's appearing now is the results of all that work and it's sustainable. Starting at a certain point, the gains become more marginal, but we will continue with digitalization activities of the operating model that's quite advanced, and these results will start to come up. A lot of efforts been made. And this guarantees that the future cost base will remember -- will remain in these levels with the trend towards improving, if there's no disruption. But of course, the -- any changes in the structures will have an impact in the cost base, other technologies that we're implementing in some concessions as well. Such as the weight in motion system that's also going to reduce the cost base of automatic booths, the use of technologies and the monitoring of highways. All of that brings results and this will show up in the margin. It's not going to be disruptive, but it's going to be a continuity. The traffic continuing to improve -- perform well. Of course, the margins tend to do so. And about your second question, Rogério, your second question, we'll get back to you to answer, okay?

Great. The second, do you mean depreciation or the holding debt?

No, depreciation. We're gathering the information here and we'll get back to you. About the holding debt, it was a way to show that there is a series of actions that may be taken to reduce the holding debt. We don't have a lot of flexibility, but everything that we were planning to do was done. And what's happening actually is the good performance -- explaining the good performances of operating assets, both the new and the mature assets, like Ecopistas, Ecovias and Ecosul, allow us to expand the leverage capacity at the units and return -- so all of these strategy of improving the performance of those units with cost reductions and capturing revenue. The natural consequence is for us to be able to transfer debt to other assets where this tax benefits and reduce pressure at the holding. So it's one of the consequences of having a good operating performance. But if there's a onetime event where we can have an operation like we did at Ecopistas, an operation that returned with a lot of inter companies and so on, we will. But looking now, we just make the most of the operating performance, reducing the holdings exposure and the debt.

Next question. Victor Mizusaki, Bradesco BBI.

I have two questions. The first, if you can talk a little bit more about the CapEx for 2024 and how this will impact leverage? We've been seeing a continuous drop on leverage. So how can we think about these two variables in '24? And my second question, you distribute dividends again. And what can we expect looking forward?

Victor. On your first question, CapEx, we're finalizing -- fine-tuning the numbers, but it will be around BRL 4.5 billion in investments next year. Including all of the obligations, new contracts, RioMinas and so on, this is more or less the amount we're estimating. About the dividend, the minimum dividend payout that is from 2022, the company will have to discuss and propose at a general meeting about the next results, but we need to watch this very closely considering the capital structure, sustainability of the debt, and we will take that into account. It's a matter of prioritizing capital structure and whenever possible to resume having better dividend payments. But this year, we distributed last year's minimum and we'll present the proposal to the meeting and prioritizing the capital structure and the balance sheet.

Next question, Filipe Nielsen, Citibank.

Congratulations on the results. I have a question related to capital structure. We've been hearing from you talking about higher leverage for some time considering the CapEx level. I'd like to understand if you're evolving or seeing any type of alternative for equity, be it partnerships, new concessions to be able to achieve a new capital structure or if we should expect leverage at this levels for longer? And my second question about competition in the coming bids, what you've been seeing in terms of level of competitiveness and thinking, especially of BR-381, that's the shorter-term one.

Thank you for your questions. About leverage, we are deleveraging now, but it was expected as the CapEx, especially of Noroeste, RioMinas, the start of road widening works from 2025 onwards. Leverage will go up again probably at around 4x as a reflection of the CapEx cycle. So all of that is anticipated. It's known. And we have the good performance of the efficient assets that further increase the capacity to withstand this type of CapEx level. As I said in the beginning, with good news about the inflation make this CapEx a lot more reliable and safe. And then the price point of view as well. So all of that makes us comfortable with the possibility of going through this cycle of a more concentrated CapEx cycle for RioMinas and Noroeste, in '25 to '30. So the capital structure in itself is sustainable. New businesses, of course, [indiscernible] and the new auctions. We will have to, in the future, look cautiously and how they fit into this and how they affect this period we have in the current business plan and consider solutions to reinforce capital structure via equity or maybe even an M&A that may come in the future. But these are discussions, again, that let's take care of the current portfolio and watch carefully at the new opportunities. And if it makes sense or when it makes sense, we will have the possibility for equity alternatives. About competition, competition exists. It's been structuring, we've been seen new players a lot, the auctions as BR-381 and the others are not as large as the auctions we had a few years ago, like Dutra, RioMinas and here in Sao Paulo, some of the very large auctions, Araguaia, even. So that, of course, calls the participation of other players that may be structured to participate in consortiums. But competition exists, and it's not, of course, and out of control competition, it's very positive. It's the competition that studies and does their homework, and I think it's positive for the industry. There's a lot of opportunities ahead. So even with slightly bigger competition that does not prevent us from making the most of good opportunities and adding value.

Next question, Andressa Varotto, UBS.

I have a quick question. About traffic that we've been seeing very good traffic data. My question is whether this trend is sustainable? Or if there is any effect here that may be nonrecurring that affects the traffic trend?

Andressa, thank you for your question. I would say it's sustainable. It has been sustained for a number of months. If we had 10% in 1 month and 3% in the other, maybe, but it's coming. Of course, it's a wide big portfolio, almost 5,000 kilometers. Each concession has its own dynamics. Maybe one benefits from one event, the other from another. But overall, what we're seeing constantly and significantly, it's a solid traffic level. So it's not a one-off thing and we know that it's more of a traffic here or there, rainy months are different. But throughout the year, there is seasonality at play, but still, it's going very well. I also think it's worth noting that it's a result of the investments we're making. Our highway work has been improving constantly, the road widening works [indiscernible], the overpasses, signaling maintenance, all of that helps traffic growth. So it's normal. The quality of the assets as well and the works and maintenance and the care that we take with our structure also play a role there.

Ladies and gentlemen, this concludes our Q&A session. I would like to turn the floor over to Ms. Andrea Fernandes for her final comments.

I'd like to thank you all for your participation, and myself and my team are available for any questions you may have. Have a great weekend. Thank you.

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