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

[Interpreted] Good morning, and welcome to EcoRodovias' Second Quarter of 2024 Earnings Presentation. With us here today are Marcello Guidotti, CEO; and Andrea Fernandes, CFO. This presentation is being recorded. [Operator Instructions] The slides of this presentation are available on the company's Investor Relations website, ri.ecorodovias.com.br in the Results Center section. After the end of the earnings presentation, 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 presentation 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 Andrea Fernandes, who will give the comments about the results. Please, Andrea, you may proceed.

[Interpreted] Good morning. Welcome to Ecorodovias Second Quarter of 2024 Earnings Presentation. We thank you all for your participation. We begin our presentation with the highlights on Slide 3, where we demonstrate the performance of vehicle traffic at EcoNoroesti, a concessionaire that we started operating in May 2023. Note, the 10.6% increase in vehicle traffic in May 2024 and 13.3% in June, mainly driven by the performance of heavy vehicles, whose traffic profile is diverse and distributed mainly in fuels, agricultural products, food, vehicles, machinery and equipment, metals and industrialized goods. Next, we highlight the adjusted EBITDA of BRL 1.1 billion in the second quarter, up 25% compared to the same period of the previous year, and adjusted EBITDA margin of 73.8%, 2.2 percentage points above the second quarter of 2023. Net income totaled BRL 273 million in the quarter, an increase of 120%. Leverage reached 3.3x, down 0.1% from March 2024 and 0.6x compared to the second quarter of '23 due to the adjusted EBITDA growth in the period. Another highlight was the investment of BRL 1 billion in the quarter and BRL 1.8 billion in the first half of 2024, 11% and 19% above the same period in 2023, respectively. According to the strategy for the execution of works for the expansion, maintenance and safety of our highways. Also in the second quarter, funding with debentures totaled BRL 2.6 billion. And in the first half of '24, BRL 4.2 billion. To conclude with the highlights, we informed that EcoNoroeste will begin toll collection through the automatic free flow gantries in the second half of 2024, initially at the Itapolis Toll Plaza, according to the schedule set forth in the concession agreement. And by the seventh year, it should gradually convert all plazas. Finally, we highlight that the high-speed weight-in-motion scale at Ecovias do Cerrado has been approved by Inmetro. The certificate attests to the reliability of the scale for the collection and processing of data required for the operization of this technology currently in the testing phase. On Slide 5, we see our operational performance. Consolidated traffic grew 18.1% in the second quarter, mainly due to the toll collection by EcoRioMinas and EcoNoroeste. Comparable traffic was up by 7.7%, driven by a 10.6% growth in heavy vehicle traffic due to the increase in exports of soybean, corn, sugar and cotton, an increase in industrial production and the induction of traffic due to the deliveries of road widening works at Eco135 and EcoVias Do Araguaia. On Slide 6, we presented adjusted gross revenue of BRL 1.7 billion in the second quarter of 2024, up 18.5% vis-a-vis the same period in 2023. In addition, we highlight the growth of 5.1 percentage points in toll collection by electronic self-service and digital means, which reached 82.1% in the second quarter of 2024. In the coming quarters, we believe in the expansion of toll collection through those payments means mentioned above, in addition to the evolution of to collection through the free flow gantries at EcoNoroeste. On Slide 7, adjusted gross revenue totaled BRL 3.4 billion in the first half of 2024, an increase of 23.5% compared to the same period of the previous year. On Slide 8, we present the growth in adjusted cash costs, excluding EcoRioMinas and EcoNoroeste of 5.2% in the second quarter and 4.5% in the first half of 2024. In addition, we highlight the ratio between catch costs and adjusted net revenue in the first half of 2024, which reached 27.5%, down 1.2 percentage point compared to '23 and 7.8 percentage points compared to 2022, due to the company's efficient management of costs and expenses. On Slide 9, we present adjusted EBITDA of BRL 1.1 billion in the second quarter of '24, an increase of 24.8% compared to the second quarter of '23, and an adjusted EBITDA margin of 73.8%, an increase of 2.2 percentage points compared to the same period in '23. Adjusted EBITDA of highway concessions grew by 25.4%, and adjusted EBITDA margin of 75%. On Slide 10, we present adjusted EBITDA of BRL 2.2 billion in the first half of '24, an increase of 29.7% compared to the first half of 2023. On Slide 11, we highlight a net income of BRL 272.5 million in the second quarter of '24 and BRL 510 million in the first half of '24, an increase of 120% and 115%, respectively. On Slide 13, investments totaled BRL 1 billion in the second quarter and BRL 1.8 billion in the first half of 2024, an increase of 10.8% and 19.1% compared to the same period in 2023. The highlight is the lane duplication works carried out in the urban perimeter of the city of Cristalina in the state of Goias by Eco050, the delivery of user service bases and special payment conservation works at EcoFioMinas and EcoNoroeste, and the capacity expansion works carried out by Eco135 and Eco101. On Slide 14, we ended the second quarter with consolidated leverage of 3.3x, a decrease of 0.1x compared to March '24 and leverage of EcoRodovias Concessoes and Servicos at 3.2x. As of 2023, EcoRodovias has been intensely dedicated to optimizing its capital structure and tax efficiency. In June 2024, the share of net debt from highway concession reached 66%, an increase of 2 percentage points compared to December 2023 and 25 percentage points when compared to December of 2022. On Slide 15, we ended the quarter with a cash balance of BRL 4.8 billion and maturities of BRL 465 million in the second half of '24. In 2025, maturities totaled BRL 5 billion and are mainly concentrated between EcoNoroeste and EcoRioMinas, whose long-term financing is already in process of being structured. Finally, on Slide 17, we highlight that in June 2024, MSCI ESG ratings maintained EcoRodovias AA rating and the company's federal concessions were ranked between classes A and B in ANTT's Environmental Performance Index, Eco50 in the first place, followed by EcoVias do Cerrado and Eco101. We conclude this presentation by reiterating that EcoRodovias is focused on the efficient cost management and execution of its investments with expansion works and important deliveries planned for its concessions. In addition, the company will continue to advance and prioritize occupational safety, innovation and sustainability. We also highlight that the company will remain attentive in evaluating opportunities, albeit more selectively for the new growth opportunities since the agenda for new auctions is promising for the medium and long terms in Brazil. With that, we conclude our presentation, and we would like to move on to the question-and-answer session.

[Interpreted] Thank you. We will now begin the question-and-answer session for investors and analysts. [Operator Instructions] Our first question comes from Gabriel Rezende, Itau BBA.

[Interpreted] Good morning, Andrea. Congratulations on the earnings yesterday. If you can talk a little bit more about this trend for margin, it would be excellent. It was clear, Andrea, by your comments that you remain focused on cost reduction, efficiency, CapEx management, but it would be great if we could get a little bit more generality in practical terms of what are the main pillars that sustain this recurring positive surprises in terms of profitability. With coming from some quarters with a positive surprise in that level of margin that you're delivering, and we saw another positive surprise yesterday. So it would be good for us to have more comfort on how we can think about the numbers going forward. That's my first point. And the second, more objectively, if you can give us an update about the overall expectation in terms of EcoPorto, it would be great. We saw the notice that you released a few weeks ago about the renewal of the 180 days, but we'd like to understand the main discussions that have been going on with the port authority, the dialogue there. And every now and then, we see news of players contesting the ports container-capacity. So it would be good to hear more from you.

[Interpreted] Gabriel, thank you for your question. I'll answer in terms of the margin expectation in the quarter's margin. The company has been performing very well in operating traffic. The new toll plazas EcoRioMinas started -- I mean all of the plazas as of next quarter of last year were up and EcoNoroeste starting on May 1 of last year with the operation. So May 1 of this year, it completed 1 year of operation. So we're seeing an expansion and a very good operational leverage. That is a result of traffic performance and toll tariff adjustments. The company has been very diligent managing its costs very efficiently, and a series of projects and initiatives in terms of innovation and digital transformation that are being put into practice, into operation, and we're already reaping some results, to the extent that we've been improving a lot in the cost over revenue indicator even after the last -- actually, during the last 2 years. So our expectation, and we've been working to maintain the cost discipline. And as we invest and bring new traffic inductions to the highways, where we're performing and with broad widening and improvement works, we will gradually see an improvement in margins over the coming months and years. Guidotti will address the question about EcoPorto.

[Interpreted] So just to add, it is our duty to operate as a platform. We have a lot of standardized processes, unique technologies in auto plazas with important synergies. And we must fulfill this journey because we have a lot of CapEx to execute in coming years, so it's important to generate this capacity of operational leverage. About EcoPorto, we have until December to move forward in the negotiations and the potential renewal. We presented the investment plans and the discussions are moving along. But as you mentioned, it's an environment of discussions about the best alternative for the entire Port of Santos and the Santos region. So it's a broad discussion and we're part of it. It's not maybe the most important part of this discussion, but it is a positive reality today. It's a port that works very well with special [ carters ] and its multipurpose and we're discussing a renewal in the investment plan. The consequence could be a renewal, and we'll see whether there'll be any news to announce in coming months.

[Interpreted] The next question, Guilherme Mendes, JPMorgan.

[Interpreted] Good morning, Andrea. I have 2 points about portfolio management. Andrea, you mentioned in your presentation about being more selective in terms of new projects. Can you give us more details on what are the projects that, in your view, fit into this level of selectiveness. And the second point also related to that is about the investments. You talked about this that you could make potential investments still maintaining the operation and control, but selling a stake in terms of balance sheet. Is there anything being discussed or close to unfolding in the sense?

[Interpreted] About the pipeline, there are a lot of projects that are being launched or will be launched. And there is -- we have some criteria to select the most relevant ones that we believe have a better potential for synergies or less competitiveness, less competition actually in other arms that other sites that all the projects have that could be of interest to EcoRodovias with the level of technology involved, CapEx, the effort, the type of CapEx, complexity. So we've been selecting and monitoring the development of the market, as the market remains relatively constant in terms of opportunity. Of course, we're present in central regions in Brazil in Minas Gerais, Tocantins, we have -- we're present in Sao Paulo as well. These are the regions of interest for us. We have been selective. So we're studying a series of projects to be able to, at the right time and the right moment to make the choice. So we haven't had selected yet which exactly it's going to be. We're monitoring and studying, and we'll be ready when the time comes. So that's our day-to-day basically. About recycling or a potential sale of a stake in a part of the portfolio. This is something that's been discussed internally. We are analyzing the best options. There's -- it's not an alternative that may be required as a step, but it's a discussion that must be done together with the studies of the business. And these are discussions that are analyzed and alternatives are eventually tested. And as soon as things become clearer or a good opportunity arises in that sense, we will move forward. But in real terms, concrete terms, we don't have anything

[Interpreted] Congratulations.

[Interpreted] Next question, Victor Misuzaki, Bradesco BBI.

[Interpreted] Good morning. Congratulations on the earnings. I have two questions on our side. As you mentioned maybe that you should start capturing [inaudible] revenue. I think it's March 25. And on the other hand, we've been seeing the EcoRodovias' leverage and drop in the quarter. So my first question is if you can talk a little bit about this additional revenue from [inaudible] that starts to come in, in '25. How should we expect the company's leverage dynamics? And my second question, going back to operating efficiency, you show that the percentage of net revenue will see a significant improvement since 2022, and now at 27.5%. But if you can talk a little bit, if you have a target or on the move, how it's going with the free flow and weigh-in-motion and how that can reduce or increase the company's efficiency.

[Interpreted] Victor, thank you for your question. I'll start with the second one about the target. We don't have a target. What we have is to try to improve year-on-year, every 12 months. So we have a target of continued improvement, so that number tends due to other dynamics as well as Andrea mentioned, traffic increase, toll tariff adjustments and solving internal efficiencies, our target is to improve even if marginally, but we must improve quarter-on-quarter, so it builds up, but we don't have a specific target. And I think it will be clear in coming quarters that we have the capacity to bring this level further down. So just to talk about it, it's not a large concession. It's 20% of total of Noroeste. So we would add an additional 20%. It helps, but together with all the others that will grow organically with tariffs and so on. So all of this movement in 2025 will contribute so that the accumulated CapEx execution reaches the indebtedness level but in line or even below what we originally expected. So we are in line with the plan, fulfilling the CapEx and performing with good cash generation. So until December, that was already in our plans. And if it continues as good as it has been, Noroeste will be even better. The region there, as you see, the numbers at Noroeste exceeding our expectations via great margin. So if it continues improving, it's going to be even better. But the news is that we are fulfilling the plan, and we're moving according to plan and even better than the plan. So that makes us confident that we can be selective and evaluate growth opportunities.

[Interpreted] Next question, [ Felipe Nielsen ] from Citi.

[Interpreted] Good morning. Thank you for this opportunity and congratulations. I have 2 questions here. One, starting with the leverage follow-up. You talked about this in the last question about how you've been seeing this leverage vis-a-vis was coming. It's better than expected, but I just wanted to confirm. I mean, you've been talking about leverage, maybe getting it to 4x, 4.5x during the coming years of higher CapEx levels, but maybe can we see leverage maintaining below 4x? How do you see this number compared to what you have been talking about in previous quarters? And the second question, still on CapEx related. But for this year, do you still expect a CapEx ramp-up in the second half as the works advance and whether leverage should respond according to this? Or how -- what's your expectation on that?

[Interpreted] Good morning. As for the leverage, as we implement with the CapEx, especially in the last 3 concessions, Araguaia, RioMinas and EcoNoroeste, without a doubt, we're going to see an increase in leverage. We expect that the leverage peak would occur between '27 and '28 and then the consolidated may reach levels between 4x and 4.5x of net debt to EBITDA. As for our expectation in terms of CapEx for this year. In the first half, we invested BRL 1.8 billion. Our plan has been -- it is being followed, so we're sticking to the plan, but there are 2 concessions, EcoVias do Araguaia and EcoRioMinas that may have some delays due to licensing affect. The others should perform as planned. Excellent.

[Interpreted] Next question Marcelo Arazi as BTG Pactual.

[Interpreted] We have 2 questions on our side. First, referring to traffic. We are seeing significant growth even in comparison basis even above the historical average. So I'd like to understand how you do this dynamic moving forward, if you expect us to accommodate somehow and what has been the main driver of this growth. And the second question is also on leverage in the side of new projects. So I'd like to understand how you look at the company's capital structure overall to embrace the potential new project within this high CapEx and leverage structure that we've been talking about.

[Interpreted] Thank you, Marcelo. About traffic, traffic is, as you saw in June, it's continuing to lie at the same levels as the recent months it remains. July of last year was warm. So there was -- it was good because July is an atypical month in the middle of the year where light vehicles gain more space. This year, July, June was good and commercial vehicles remain performing well. So we're seeing growth more or less in line with the growth rates of frequent months. We expect this -- of course, this growth rate will go down over the year. We expect growth around 4% to 5%, accumulated growth. The biggest drivers in general are for commercial traffic. This is the main highlight around our concession at EcoSul that we had a problem in May, but June, July, the traffic has been good and exceeded what was accumulated last year. Heavy vehicle traffic is -- it doesn't matter if it's from harvest or industrial traffic, it's commercial traffic in general, different types of trucks, more axles, less axles, but really, that's what drives it. About capacity for new projects. Of course, the more we -- or the better we perform or the more we perform better than expected, we have a better margin for that. But it's still not sufficient to ensure inorganic solid growth. I'd say we need to have a capital structure that is reinforced. Then, we'll work on development that depends on our operating cash flow and the operational effects that we can see in different ways, but good performance and better cash generation gives us more room to maneuver and makes us more confident.

[Interpreted] The next question, Gabriel Frazao, Bank of America.

[Interpreted] Good morning. I have one question on my side. If you can update us about the development of the discussions on the re-agreement of Eco101 contract agreement and EcoPorto, the contract balancing.

[Interpreted] Eco101, the rebidding process is suspended. We had an additional amendment that extended this term, the duration, and we continue with the discussion to optimize this agreement. So everything is already at the TCU with the court, and we are waiting for their movement that may bring a final decision and continue with this optimization. We expect to have something new to report in August. About the credits at EcoPorto, it's a recognized credit that's in our balance sheet that will have to be equalized somehow according to the solution that is going to be given to EcoPorto. If it's going to be renewed or if it's going to re-auction, we are going to have to receive this credit because it is recognized. And the other is a balance issue that's being discussed in the court system. We're in the second level, and we had an initial negative decision, and we appealed to the second court. So it's a long process, and we are optimistic, but it will be long.

[Interpreted] The next question, Luiz Pecanha, Safra.

[Interpreted] I have 2 questions here. If you can tell us a little bit more about the tax rate. We saw that in recent quarters, it has already been lower. So I'd just like to know whether we can continue to project this lower tax rate going forward, or if there's a perspective of a further reduction on the tax rate. And my second question about CapEx, if you can tell us a little bit more about the sensitivity of the CapEx, the total CapEx balance that you have with the depreciation of the exchange rate, what would be the impact, the potential impact with the devaluation of the Real against the U.S. dollar.

[Interpreted] Regarding the effective rate, the company has been moving in the sense of improving its fiscal tax structure. As the concession bring better results, they allow us to re-leverage our concessions that generate a lot of results to the group. Interest for the earnings to the holding, reducing the holding indebtedness, that's where we have that tax inefficiency. So we made an important movement there from 2022 until now. And our expectation is to continue working on this process and seeking improvement in the effective tax rate. As for the CapEx, CapEx grows, and we correct it every quarter according to the IPCA index. And I believe that a small part of it of some inputs may fluctuate because of the currency exchange rates. But today, all of our numbers are indicators, especially in the 2 newest concession, RioMinas and Noroeste, that when we bid at the auction, we had provisions and an expectation that the inputs would remain more expensive for a longer period of time. We're already seeing that there was a resumption in the control. It's actually below our IPCA curve earlier than we expected. So it's lower before we expected it to lower. So from our side, we are seeing and there's a series of tools there to monitor and implement software for us to monitor those numbers, but the percentage of the inputs that have an impact with the exchange rate, as I mentioned, especially for the last 2 contracts, if we combine them, they probably half of the total CapEx that the company has. We are already -- we remain with better numbers than expected and planned for.

[Interpreted] Excellent, Andrea, just a second follow-up and the effective tax rate, do you estimate that they will be possible to reduce it from the current rate that's already close to 34%?

[Interpreted] That will happen over coming years, as we're able to reduce the debt of the holding. So in coming years, we still have important investment cycles, some investments to make in the concessions, but as we reduce this cycle, it would be natural for the effective tax rate to drop.

[Interpreted] Next question, Pedro Bruno, XP.

[Interpreted] We have 2 quick follow-ups. The first about traffic. I think Guidotti saying -- or talking about an expectation to reduce the growth percentage over the second quarter that makes sense for the second half, especially including the suspended expos and a stronger margin than compared to the second half of last year. So I'd like to confirm whether that was what you mean, Guidotti. And confirm the percentage you mentioned the expectation of 4%. I don't understand. Is that for the year or for the second half of the year? If you can confirm that, I'll have a second question then.

[Interpreted] That's exactly that. But the first month, June and July, are exceeding our expectation, so we could project the same for the end of the year. So we're being more conservative. I see -- I'd say 4% and -- 4% to 5% will be to the second half of the year. It already came at a strong level. So we'll see how it behaves. We'll see. But of course, we shouldn't expect such a strong traffic increase continuity. So we estimate that the second half would be a little bit lower between 4% and 4.5%, or 4% to 5%.

[Interpreted] Excellent. I think that's very clear. That's what I understood. It's just because maybe if it were for the year, it would seem too low for me. But that's great. The second question about Eco101, I think you already talked about the process itself, but I'd like to hear a little bit more on how you see the restructuring of the agreement. If you think of it as a new project, I mean, how do you see -- you mentioned that you cannot provide specific data, but I understand that there's already an agreement. And in this agreement, how do you see the project finance, thinking as an isolated project or a new project and a marginal way, if it's already included in that expectation of 4x to 4.5x in terms of leverage and the peak for '27, '28 and how it goes on the new project or the contract or the agreement re-pactuation would impact the cash flow.

[Interpreted] Yes. So Eco101 -- the optimization of the agreement at Eco101 brings a lot of new FX, and it could be and should be considered as if it was a new project in our portfolio because it brings a lot of new points. So we already consider this with this characteristics and the provisions, as Andrea mentioned, and future leverage already includes that in an optimized agreement, and of course, in comparison to an agreement as bringing improvement to the capital structure of EcoRodovias. We expect this process to be defined and authorized finally so that we can provide all the details -- everything about the project and what it looks like. But of course, the optimization will happen and will be positive. But it's already integrated into all of our provisions and expectations.

[Interpreted] The question-and-answer session is concluded. We will turn the floor to Andrea Fernandes for closing remarks.

[Interpreted] I would like to thank you all for your participation. I remain available, myself and my team, for any further questions you may have. Thank you. Have a great day.

[Interpreted] EcoRodovias' conference call is now closed. We thank you all for attending. Have a great day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]