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

[Operator Instructions] The slides of this presentation are available on the company's Investor Relations website, in the Investor Information Results Center section at ir.ecorodovias.com.ir. After the end of the video conference, the recording will be available in the same 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 prospect, projections and operational and financial targets are based on the management beliefs and assumptions as well as on currently available information. They involve risk, uncertainties and assumption. They refer to future events and hence depend on circumstances that may or may not occur. Investors should understand that federal 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 from such forward-looking statements. I will turn the floor over to Andrea Fernandes who will discuss the results. Andrea, you may proceed.

Good morning. Welcome to EcoRodovias' earnings presentation for the fourth quarter and the year 2023. We thank you all for your interest and participation. On Slide 3, we would like to highlight the adjusted EBITDA of BRL 1.1 billion in the fourth quarter of 2023 and of BRL 3.9 billion in the year 2023. This result likes the operational performance of our highway concession, the tariff adjustments applied and the start of toll collection and the 3 new concessions. In addition, adjusted cash cost growth in 2023 was lower than the inflation recorded for the period, which demonstrates our cost discipline. Adjusted EBITDA growth in the fourth quarter contributed to maintaining leverage at 3.5x down 0.8x from the end of 2022. In 2023, important deliveries were made by the company with investments of BRL 4.2 billion in road widening, additional lanes, frontage road, toll plazas, operational basis and pavement recovery. EcoRioMinas started the operation and collection of tolls at 3 new toll plazas in the fourth quarter, reaching the full collection of the total expected toll revenue that only at EcoNoroeste, the entry of new toll plazas are planned in March, 2025 in the section that is currently operated by TEBE, which corresponds to approximately 20% of the toll revenue expected for the concessionaire. We highlight the approval by the Board of Directors in February 2024 of our ESG 2030 agenda as well as the management's proposal for the distribution of dividends in the amount of BRL 135 million, which will be submitted to shareholders for approval at the meeting in April. In the fourth quarter, pending operations for EcoRodovias Concessoes Services and EcoNoroeste were successfully concluded in the total amount of BRL 1.8 billion. On Slide 5, showed the operational performance, consolidated traffic through 35.2% in the fourth quarter and 34.8% in 2023, mainly due to the start of toll collection by EcoRioMinas, Ecovias do Araguaia and EcoNoroeste. Comparable traffic grew 11.3% in the quarter and 6.8% in the year, 0.3x higher than the GDP recorded in the period due to the performance of soybean and corn exports due to the increase in services activity and favorable weather conditions, highlight for the 15.2% growth in heavy vehicle traffic in the quarter. On Slide 6, we present the evolution of revenue. Adjusted growth revenue reached BRL 1.7 in the fourth quarter of 2023, a growth of 28.4%. Comparable gross revenue increased 2.7% due to the growth in vehicle traffic mentioned in the previous slide and the toll tariff adjustments. On Slide 7, we highlight the BRL 1.9 billion growth in the 2023 adjusted revenue, which reached BRL 6.1 billion, a 44.8% growth compared to 2022 and a 12.2% increase in comparable gross revenue. On Slide 8, adjusted net revenue increased 33.8% in the quarter while cash costs grew 24.9% considering the new concessions, Ecovias do Araguaia, EcoRioMinas, Ecovias do Araguaia and EcoNoroeste. We highlight that comparable net revenue grew 15.8% in the year while adjusted cash costs increased 3.6% lower than the 4.6% inflation rate observed in 2023. It is important to note that adjusted cash costs remains stable in the fourth quarter, reflecting efficient and optimized management. The performance is the result of the organizational efficiency initiatives we have implemented, operational excellence in the management of our assets and the successful implementation of the actions of our digital transformation and innovation corporate program. On Slide 9, we showed the digital transformation and innovation initiative in our concessionaires. In the fourth quarter of 2023, we highlight the start of toll collection for suspended axles of non-empty trucks through MDFE electronic tax document at Ecovias dos Imigrantes, Ecopistas and Eco135. As a result, the company has already implemented the system in 8 of the 11 highway concessions we manage. Additionally, we highlight that EcoRodovias has already installed 30 photovoltaic plants at the toll plazas of 7 of its concessionaires with 20 plants in 2023. By 2030, EcoRodovias will produce enough renewable energy to supply up to a 100% of the low voltage power consumption of toll plazas. In the chart at the right, we present toll collection by electronic means AVI, top service and digital means of payment, which totaled 79.2% of toll revenue in the fourth quarter of 2023, an increase of 5.8 percentage point compared to the same quarter of the previous year, demonstrating the growing adherence of users to these means of payment. On Slide 10, you see the evolution of adjusted EBITDA, which reached more than BRL 1.1 billion in the fourth quarter of 2023, up 36.7% with a margin of 71.7%. The contribution of EcoRioMinas, Ecovias do Araguaia and EcoNoroeste was of BRL 365 million reaching a 33% share in the adjusted EBITDA for the quarter. Comparable EBITDA increased by 8.7% and EBITDA margin by 72.1% due to the growth in vehicle traffic, toll tariff adjustments and cost efficiency demonstrating the resilience and growth potential of our concessions. On Slide 11, adjusted EBITDA reached BRL 3.9 billion in 2023, up 67.6%. The highlight for the increase of almost BRL 1.1 billion and the EBITDA of the 3 new concessions in the year. Comparable EBITDA reached BRL 2.8 billion in 2023, up 23.3% compared to 2022. On Slide 12, we highlight the increasing net income mainly due to the increase in adjusted EBITDA. We ended the quarter with recurring net income of BRL 310.1 million compared to BRL 194.5 million recorded in the fourth quarter of 2022. On Slide 13, recurring net income for 2023 total BRL 777.2 million due to the company's record operating performance that year driven by the robust results of the 3 new concessions. On Slide 15, we highlight the investments of BRL 1.4 billion made in the fourth quarter of 2023, demonstrating the capacity to execute and deliver work in the company's growth cycle as well as the commitment to maintain our highways. In 2023, we invested BRL 4.2 billion. Slide 16 presents important deliveries made by EcoRodovias with the emphasis on the implementation of toll plazas, operational basis and special pavement conservation works at EcoRioMinas, 11 kilometers of third lanes at Ecopistas and the works of the second phase of the remodeling of the Santos entrance Binario II. To the right of the slide, we present the works carried out by Eco135. In 2023 alone, there were 90 kilometers of road widening works, 11 kilometers of additional lanes and other improvements as well as the release of the first section of the Montes Claros Beltway. On Slide 17, we ended the quarter with consolidated leverage measured by net debt over just EBITDA of 3.5x stable from the previous quarter and down 0.8x from the end of 2022. This reduction is mainly due to the strong operational performance of our highway concessions, which resulted in an increase in EBITDA, even with investments made of more than BRL 5 billion in the year. The leverage of EcoRodovias Concessoes e Servicos ended the quarter at 0.3x. In the year 2023, EcoRodovias worked hard to optimize its capital structure and tax efficiency, increasing the share of net debt in highway concessions by 23 percentage points compared to December, '22. On Slide 18, we ended the quarter with a cash balance of BRL 4.6, 1.3x the 2024 maturities. The maturities of BRL 2.9 billion in the second quarter of 2024 are concentrated at Ecovias dos Imigrantes with BRL 1.4 billion and at EcoRodovias Concessoes e Servicos with BRL 1.1 billion. The fund for the payment of these maturities have already been raised in early November, 2023 and early March, '24 respectively. Pro forma cash considering the issuance of Ecovias dos Imigrantes reached BRL 6.2 billion, a value that is much higher than the short-term maturities. It is worth noting that we started 2023 with a challenging scenario characterized by an environment of restrictions in the granting of domestic credit. Despite these adversities, due to the quality of our assets, our operational resilience and the excellence in the execution of our projects, we've been able to raise funds through -- totaling BRL 7.6 billion raised in the year. On Slide 20, we present the main highlights of the ESG agenda. Throughout 2023 to better guide our sustainability actions, we structured the ESG 2030 agenda approved by the company's board of directors in February of 2024. The agenda includes 10 pillars, our sustainability pathways on which we will work to improve our social, environmental and governance performance. For each of the pillars, we have organized medium and long-term goals considering the potential contribution of our businesses to the achievement of the sustainable development goals set forth by the UN's 2030 agenda. Other highlights of our ESG agenda can be found in our earnings release. We end this presentation by reinforcing that EcoRodovias is focused on the efficient execution of its investments, carrying out expansion works and important deliveries in its concessions. The company will also continue to advance and prioritize in addition to sustainability, innovation and occupational safety. We also highlight that the company will continue to pay attention and monitoring to evaluate opportunities, albeit more selective, for new growth opportunities. Since the agenda of new auctions is promising for the medium and long-terms in Brazil. At the moment, we're studying the projects that are scheduled to be tendered in 2024. We invite you to learn more about our ESG 2030 agenda and the goal set out in our 2023 integrated report, which will be released later this month. Operator, we are ready for the Q&A session. Thank you.

[Operator Instructions] Our first question comes from [ Andrea Teixeira ] from Bradesco BBI.

I have 2 questions. First, when we look at leverage the full year of 3.5x, if we bring this to the fourth quarter in annualized basis, we're talking about 3x that reflects the recent results. So considering this operating performance that is stronger in recent months and considering the investments you have to make. How should we consider leverage for EcoRodovias for 2024 and '25? The second question, a follow up on the tender topic of where are you putting more of your time? Is there any special potential to one of the 2 bids that will happen in April? And if you can talk about the cashflow profile of these 2 auctions or any other in 2024, if it fits with EcoRodovias strategy, it would be great.

Andrea, this is Marcello. About leverage, if we annualize the fourth quarter, it shows the strong generation 2024, but we will also have investments in '24 of around BRL 5 billion, so probably net debt over EBITDA tends to increase in '24 and '25 because there's a robust cash generation bigger than 2023, but CapEx also gets into the expansion phase, so there's still 2 or 3 years of a strong cycle before we start de-leveraging. About the auctions, as Andrea said, we study as a strategy all of the opportunities that we pre-select. We have the capacity to study them, so we look at a lot of the information of the study so that we're ready to participate in projects that are of our strong interests. The 2 coming ahead are part of the auctions in 2024. We're looking into them. There's still a lot. The last few weeks are always the most important weeks for us to make a decision. The cashflow profiles, both are relatively small projects, [ 040 ] as a tariff from the beginning. There's a CapEx expansion cycle starting in the third year, so it's a relatively comfortable profile and Litoral Paulista, the coastal, the entrance from toll will be in the second year, but there's small figures and in the coastline of San Paulo, we have synergy without our Ecovias dos Imigrantes.

Next question Guilherme Mendes, JPMorgan.

My first question is a follow-up on this previous question and this balance between leverage and growth. I think this is clear to look at the projects more selectively, but our point, Guidotti, is that leverage will also start to accelerate, right? So in this scenario, what's your assessment of the levers for this potential growth? I mean if an offer of shares is a need or if you should consider divestment or focus on projects that have a cashflow profile that still fits into the balance sheet you have planned for '24 and '25? And my second question is about traffic. We've been seeing very strong performance since last year. So how do you see traffic from now on? We have a higher comparison basis now, right?

Guilherme, about your first question. Our flows since we started to prepare and study and won those big major bids and implemented the strategy, they're very predictable. It's been surprising because they came actually above our predictions, but this is all reflected in the strong cash generation. The capacity to execute CapEx is within expectation in an inflation scenario that tends to decrease for inputs. So everything makes us very comfortable to move forward. There is some predictability, but of course we need to be ready at all times for good opportunities and as a result also to maintain the capital structure supported. So as you mentioned, between follow on, divestments, cost reductions, greater CapEx efficiency, these are all levers that we always look at. Follow on obviously is not an option that's on the table right now, but we're a listed companies so we consider all of these alternatives and we study them. But I would say that today we're very comfortable. Again, the operations are going well, cash is being generated by healthy businesses and CapEx is completely under control. So I think we have to look forward and analyze things. But I would say that we can continue as we are. About traffic. Traffic has been going very well. Started well in January and February. I'd say of course it's a lot more comparable to 2023, the end of '23 with all the toll plazas already built and we estimate traffic at around 3.5%, 4% until the end of the year, but we'll see.

Next question Rogerio Araujo, Bank of America.

I have 3 here. The first is a follow-up about this traffic increase of 3.5% to 4%. It includes the suspended axle. We have a lower comparison basis for some highways throughout the year or is it -- should it be stronger than that if we include the suspended axles? That's a follow up. And then if you can also talk a little bit about Ecoporto, we're getting close to the term and how are those balancing going one about investments and the other with the smaller received area and an update on the resettling of the contract of Eco101. That would also be great.

About the 3.5% to 4% growth, it includes everything. It includes suspended axels that once we implement MDFE, the suspended axels will start to disappear because it will no longer make sense for them to continue to suspend the axels because they're going to be charged anyway. So that's a value that will be diluted and get into the official figures. So it includes everything. January, February, we're quite positive. We always have that. We tend to maintain our overall predictions, but we'll keep monitoring. I think I'm confident, but let's see if there's an upside. So far we're at 7% higher in January, February. About Ecoporto, it is -- it has been renewed twice for another 130 days on the contract. We've been discussing an investment plan for a potential renewal and the claims about the unbalanced points, it's not a claim but it's a credit we have in the contract, a non-amortization of the investments made. So basically the containers, it's a recognized credit that will be paid including a renewal or a rebid, but it's recognized. The other is in the first courts of justice. So we're waiting for the decision for the ruling and we expect it to it to be favorable about the unbalance on the area size. About Eco101, we extended for another 180 days, the freeze of the contractual amendment that starts the return phase so that we can advance with the discussions for the resettling of the contract. So the discussions are going well. We are being very cautious and transparent with all the technical details that are required for this type of negotiation. It's going well when we're optimistic that we'll be able to conclude it with a resettling of the contract and maintain the concession agreement.

Gabriel Rezende, Itau BBA.

Two questions as well on our side. I suppose you've updated the CapEx curve, that update that you run every year-end. You already put the CapEx counting on the new asset. It'd be BRL 40.5 billion for the whole curve. My question is just to understand, I understand that the assumptions that are there for the CapEx have been used over the last year and if we look at the way commodities have behaved in past months with a drop year-on-year for some commodities, I wonder if maybe there's not some excess fat in the assumptions you used for the CapEx. And my second question, a bit more technical. We've noticed that the income tax rate when we adjust for the impairment you had in the fourth quarter, it was slightly below the company's history. Without the adjustment it's higher of course above 50%, but with the adjustment, it was about 20 points below that. So I'd just like to understand for 2024 if there should be an income tax rate slightly lower than the history or if there's any other non-recurring factor?

So on the CapEx question, I hope we have surprises that on the long-term the price of commodities and services are lower than inflation but we did not consider that. That basically reflects the predicted future inflation and the assessment we made on the projects and the ideas. Everything's confirmed, all on a solid basis and now on top of that value we are going to work to have more efficient solutions, bring a positive inflation difference that will be recognized in coming years. But we don't consider, I mean we start with an adjusted base with today's prices considering long-term inflation. About the tax rate probably reflects a little bit of the work that has been done throughout the year. Pulling that closer to the project level, we'll do more. We are doing more for 2024. It's a challenge because they're separate contracts, concession agreements with its own features and listed companies. But we are working on a strategy to be able to pull the debt to the units more and less to the holding and that is reflected on that improvement. So of course it's a path that we're starting and we'll continue on.

Next question Pedro Bruno, XP.

That's a follow-up. I think you already talked about Ecoporto, but I'd like to revisit Ecoporto in the context of capital allocation and just remember with you how you look at it in terms of capital allocation, the priorities, the breakdown we have in mind here and I'd like to hear from you, but thinking you have renewal for Ecoporto and if you have an insight of information and the investment plan that they announced for the region of the Port of Santos, they included an amount of BRL 490 million for investments that I imagine is some sort of forecast thinking about this possible renewal. I'd like to see if you had any comment on that but to have it into context, the Ecoporto, the ongoing renegotiations that we talked about already on Eco101 and Ecosul that we see as new projects at the end of the day and maybe with the possibility of consuming that leverage in the medium-term and new projects that have already been discussed. So how do you see strategically these 3 possibilities for capital allocation? And if you have any details about this number that the government recently released about Ecoporto.

I confirmed that both Ecoporto, Eco 101 and Ecosul compete with growth opportunities for new business. But that's why the importance of this at Eco101, they compete in the capital allocation decision for Eco101 of years and are part of our strategic plan. Of course these are 3 assets that are well-known. They generate cash and obviously they are more adjusted to our cashflow profile but they compete without a doubt. They're important renegotiations. Ecoporto, we've already allocated capital there a lot in the past. So of course we had the expectation of Ecoporto was an acquisition in 2012 to renew the concession agreement. Of course now we have to get deeper into it and negotiate at Ecoporto that's an asset that operates very well serving a type of cargo that's unique in the Port of Santos. Discussing the renewal, what we are doing right now, the amount, the value that was published, it's with an investment plan for 5 years. So it's an important investment for Santos and we're at the table but at Ecoporto, we've already put a lot of equity and it's important even though it's not a highway, it's a concession agreement where we've already allocated capital and we need to renew and discuss the renewal of our agreement and the divestments are spread out throughout the years in this plan, this investment plan at Ecoporto.

Next question Filipe from Citi.

I have 2. One about margin and costs. We saw a positive improvement in margins. You're able to capture operational improvements expanding the company's margin this year. I'd like to understand what you see, how much room you see you have in the levers you have today. If you already extracted all of the potential for margin improvement and cost improvement or if there's any extra potential for margin improvement. And the second is just a brief follow-up about traffic and what you see in terms of exposure to the harvest this year and the impact of the harvest. The harvest will be smaller than last year. You even talked that it was a point that benefited traffic this year, but I'd like to understand if that's included in that 3.5% or 4% and your exposure to that factor.

About the margins and costs, we've already captured a lot, but actually I understand that this margin expansion will continue as a trend for the company's numbers. Basically, we're strongly based and focused on the digital transformation of our digital model, including the moving weighting and use of technologies. And of course all of that will transform the infrastructure industry, the highway sector and we'll expand margins. We work with the concept of platform. We have a shared service center concentrating a lot of our or the services to the highway concessions and we can extract as much as possible from the platform concept based on a digital transformation journey. That's already a given. It's moving forward and it is bringing results in addition to the investment and expansion of CapEx. So those investments, as I say, are investments that return quickly with traffic. It's not CapEx that will be the villain of EcoRodovias's strategy. It's true that CapEx, that we can transform this investment into results. As Andrea said, we had 90 kilometers of road widening at a concession that transforms flow. Other investments of improvement in and improvements and Araguaia was elected the best Pedro highway 3 years ago. It was not possible to drive there. So investments become flow and expand margin. So we can expect the continuity of this trend. About harvest and traffic harvest. Harvest so far there's a job, it's always a very large, harvest is very expressive and that shows that exposure to harvest in Brazil will always be good. But we effectively don't have, our traffic is very diverse today and harvest represents about 15% of the axels. So it's, if there's a drop of 5% or 15%, it's relatively small. So I think we don't have any significant impact of the potential job of harvest numbers. It's always excellent harvests and of course we, I believe we'll have good surprises in the development of the GDP. We will be positive if it's confirmed and at the end of the day we are more aligned and elastic to the GDP.

Next question Andressa Varotto, UBS.

It's just a quick follow-up about Ecosul. We're seeing in the last quarterly results the effective recognition of the retroactive adjustment and now there's this discussion of the resettling of the agreement. So what are the claims? Is there anything pending at Ecosul? And maybe comparing it with Eco101, which one is progressing faster? Which one do you expect to see resolved first?

Our resettlement of that we are keeping close eye at. It's Eco101. We have an amendment that officially it's the return. So the resettling was suspended because we are focused on resettling the agreement because the agreement is very long still with a number of issues and that's what's important here. Ecosul received its tariff adjustment. Ecosul has another 2 years of concession. The tariff is a big business, so it's a high number and we offered the opportunity to potentially discuss tariff adjustment in exchange of some works. And we filed that opportunity. So it's very different. Ecosul is very different from Eco101. Eco 101 is a contract that does not stand on its current legs. We need to resettle this agreement. Ecosul is an opportunity of potentially making adjustments with some works because the works have been pretty much concluded and we still have 2 years ahead. So it's more an opportunity for improvement. These scenarios are very different. Eco 101 is more advanced and I'd say it is close to coming to an end.

The questions-and-answers session is now closed. We would like to turn the floor to Andrea Fernandes for her final remarks.

I would like to thank you all for your presence. My team and myself and the investors relations team are available. Have a great day.

EcoRodovias' earnings call is concluded. We thank you all for your participation. Have a great day.