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Edited Transcript of ECOR3.SA earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q2 2019 Ecorodovias Infraestrutura e Logistica SA Earnings Call

Itaim Bibi, Sao Paulo Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Ecorodovias Infraestrutura e Logistica SA earnings conference call or presentation Friday, July 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Fernandes

EcoRodovias Infraestrutura e Logística S.A. - Investor Relation Director

* Marcello Guidotti

EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board

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Conference Call Participants

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* Felipe Vinagre

Crédit Suisse AG, Research Division - Head of the Latin America Transportation and Capital Goods

* Lucas Laghi

Citigroup Inc, Research Division - Research Associate

* Lucas Marquiori

Banco BTG Pactual S.A., Research Division - Research Analyst

* Lucas T. Barbosa

Morgan Stanley, Research Division - Research Associate

* Pedro Bruno

Santander Investment Securities Inc., Research Division - Research Analyst

* Victor Mizusaki

Banco Bradesco BBI S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to EcoRodovias' Second Quarter of 2019 Earnings Conference Call. With us here today are Mr. Marcello Guidotti, CFO and IRO; and Andrea Fernandes, IR Director, as well as executives of the company. This presentation is being recorded. (Operator Instructions) The audio and the slides of this conference call are being broadcast simultaneously at www.ecorodovias.com.br/ir. There, you will find the presentation for download from the webcast platform in the Investor Relations section.

Before proceeding, we would like to clarify that the forward-looking statements that may be made during this conference call relating to EcoRodovias' business prospects, projections and operational and financial targets are based on 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 Ms. Andrea Fernandes, who will discuss the second quarter of 2019's results. Ms. Andrea, you may proceed.

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Andrea Fernandes, EcoRodovias Infraestrutura e Logística S.A. - Investor Relation Director [2]

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Good morning. Welcome to another conference call by Grupo EcoRodovias today addressing the results of the second quarter of 2019. We thank you all for your interest and participation. We would like to mention some important events. Concessionaire Eco135 began toll collection in April, and after nearly 4 months, we registered a traffic volume 10% above the levels estimated at the time of the auction.

Pro forma EBITDA totaled BRL 39.8 million with a margin of 75.5% this quarter. In May, we concluded the acquisition of Eco050, MGO, in the amount of BRL 654.8 million. And as of May 31, the concession was consolidated on the company's balance sheet. It's important to note that Eco050 has already made 80% of the expansion investments anticipated in the concession contract. On July 6, the decision to suspend the bid process for Rodoanel Norte until December 31, 2019, was published.

The results of the second quarter of 2019 remain affected by the toll exemption for suspended axles at Ecovia Caminho do Mar, Ecocataratas, Ecovias dos Imigrantes and Ecopistas. Toll exemptions for suspended axles will be subject to contracts rebalancing.

We can see on Slide 2 that the consolidated traffic of equivalent paying vehicles on -- in the second quarter of 2019 increased 20.9%. Excluding the exemption of tolls for suspended axles, the truckers strike in 2018 and the operational startup of Eco135 and Eco050, consolidated traffic declined 1.2% in the second quarter, remaining flat in the first half of 2019 when compared to the same period of the previous year.

Comparable traffic of heavy vehicles at Eco101 was affected by the region's pulp industry cycle. Ecovias dos Imigrantes and Ecovia Caminho do Mar recorded lower traffic due to the reduction of soybean and corn crop shipments through these concessions. Ecopistas registered growth, driven by traffic induction after the exemption of toll for suspended axles.

In addition, light vehicle traffic was positively affected by the increase in tourist flow during the Corpus Christi holiday considering that in 2018 this holiday occurred during the truck drivers strike.

As regards, the group's consolidated results on Slide 3, pro forma net revenue this quarter amounted to BRL 695 million and the net revenue of highway concessions posted an increase of 17%. Even with the negative impact of toll exemption for suspended axles in this quarter amounted to BRL 32 million and accumulated since May 2018 was BRL 139 million.

Moving on to Slide 4. Comparable cash cost in the quarter amounted to BRL 192 million, excluding nonrecurring expenses and the operational startup of new concessions. The increase this quarter was up 7.8%, mainly due to variable costs at Ecoporto as a result of higher handling volumes as well as increased personnel expenses at the holding and services companies.

It's worth noting that comparable cash cost of highway concessions, the most relevant segment in the group's consolidated results, posted a 1.5% decrease year-on-year, even with an inflation rate of 3.4% in the period. This is a result of the continuous pursuit of operating efficiency over the past few years.

Comparable pro forma EBITDA, excluding nonrecurring expenses was BRL 484 million in the second quarter at a margin of 70% and an increase of 19%. Despite the impacts of toll exemption for suspended axles, all concessions posted growth on EBITDA and margin in this quarter as we can see on Slides 5 and 6, with a special highlight to the operational startup of Eco135 and the consolidation of Eco050.

On Slide 7, we show the evolution of net income in the second quarter of 2019 positively affected by the higher EBITDA, but on the other hand, negatively by the financial result with the beginning of accounting for the monetary variation of Eco135's concession rates, the increase in provision for maintenance and increase in depreciation and amortization leading to net income of BRL 58 million.

As regards to investments on Slide 8, CapEx in the first half of 2019 was BRL 568 million. Estimated CapEx for 2019 is of approximately BRL 1.4 billion. The highlights are the duplication works at Eco101, the works to connect the Rio-Niterói Bridge to the Red Line and the Port Avenue at Ecoponte, which already has the BNDES financing facility in place. The initial works at Eco135 and Eco's financing facility from BNDES is in advanced stage.

Moving on to Slide 9. We see that with the conclusion of MGO's acquisition, the net debt pro forma EBITDA indicator this quarter achieved as expected, the peak of 3.3x. The long debt amortization profile along with a cash balance of BRL 3.2 billion and the future cash generation make us comfortable regarding the group's financial capacity. Therefore, the company maintains its attention on growth opportunities, in particular, the auction of BR-364/365 in September and Centrovias at the end of November. We are optimistic with the federal government's agenda for highway privatizations and with the state of São Paulo's agenda, which in addition to new privatizations is making progress in the discussion of new contractual amendments for Ecovias dos Imigrantes and Ecopistas as well as in finding a solution for the pending unbalances. It is also worth noting the programs in Minas Gerais, Rio Grande do Sul and Rio de Janeiro.

This concludes our presentation. We would like to continue to the questions-and-answers session. Operator, we are ready. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question, Pedro Bruno, Santander.

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Pedro Bruno, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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My question is, Andrea mentioned in the beginning of her remarks about the evolution of traffic in the new concessions compared to what was expected at the time of the auction. We're seeing a higher level than expected. Can you give a little bit more detail about BR-135 and MGO in terms of traffic and other metrics when compared to the auction's expectations from what you can already tell and what this means in terms of additional returns compared to what was expected and what you can imagine now, if we assume the recurrence of operating levels above what was expected?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [3]

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Bruno, this is Marcello. As Andrea said, the traffic is performing well at both. The MGO result is probably due to the fact that it's a very important corridor in economic terms and Andrea mentioned on her speech that the duplication works are 80% concluded. The effect of this duplication works is already occurring. The ramp-up is clear. Probably, all our initial data that we've captured, I would say, this is -- this effect is more a result of the conclusion of these sections of the roads in important regions that's tied it in the end of 2018, early 2019. So I think that was -- it was expected to see a ramp-up of traffic, but it has been above expectations.

At 135 as well, I think that what we put on our business plan was probably a ramp-up in the -- at the beginning of collection that did not occur. Normally, there is an initial traffic level and then there's -- with the toll plazas, there is a ramp-up 10%, 15%, up to 20% of the initial traffic. This didn't occur, and we're repeating the initial numbers.

At 135, of course, the result is at the present value. If the volume of data is confirmed, there is no event that leads us to believe this is punctual, then this is a very favorable data. So the return -- rate of return is above 15%, ideal to leverage 135. So we're updating the plan. We've changed the financing structure. We are now contracting with BNDES, but really the traffic point was a surprise.

Again, in general terms, traffic, as Andrea said, we expect the behavior over the year in line with the GDP. Of course, July was surprisingly good, good for trucks. The corn crop is performing well. So except for Ecopistas and 101, these 2 new ones are generating more, and if the GDP is consolidated at a more robust level, I think we will have a recovery at our concessions, Ecovias and Caminho do Mar.

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Operator [4]

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Felipe Vinagre, Crédit Suisse.

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Felipe Vinagre, Crédit Suisse AG, Research Division - Head of the Latin America Transportation and Capital Goods [5]

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I have 2 questions. First, about leverage and your firepower there for the -- taking new projects. How do you see this considering Brazilian interest rates? As if -- have you -- has it changed your maximum lever -- level for leverage? It's 3.3x, maybe it will decrease in upcoming quarters, but this is an above level -- above average. So how much more leverage can you increase?

And the second question would be about the investigations. If there is a status or more specific information you can give us. If there is an agreement or a fine or any time line expectation, any additional information that you can give us on the status of investigations?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [6]

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Felipe, about the leverage, we expected this peak as we mentioned -- as Andrea mentioned in the speech, because there is MGO, there's all the debt of MGO as well, we were starting to spend money in the works at 135 on to the bridge on 101. The bridge is already crossing the middle level of its investment plan, getting to the end of the investment plan for the bridge, that 5 year. Eco101 is also accelerating and some of the investments in the duplication work to have the contract up-to-date, all this was expected. So of course, we have the suspended axles that are affecting our results. So it was expected, but I think -- and I think in the next quarters, this tends to become stable and will start to decrease again.

In terms of leverage, we don't have much. I would say the limits would be around 3.5. We have new debentures and covenants consolidated debt of 4. If you look at the cash as well and our consolidated, but also at the holding and concessions, we still have stamina to be able to participate, in particular, the 2 auctions that are planned for this year. But yes, definitely, we'll see that it will demand a lot of the projects and it depends on the federal and state levels. We'll continue paying attention to costs. We're already adopting the dividend policy. The market is a good liquidity. It is good and competitive at reasonable rates, but of course, we do have balance to be able to phase the 2, 3 years of projects in the highway segment. I don't think this is for right now, but we know that it will be possible in the next quarters.

About the investigations, we don't have anything new to disclose. Our investigations have been concluded. We're now working internally with lawyers and consultants to try to see the best way that we have to take or to follow to be able to solve this, but we don't really have any actual new information.

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Felipe Vinagre, Crédit Suisse AG, Research Division - Head of the Latin America Transportation and Capital Goods [7]

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One more question about São Paulo. You mentioned quickly at the end that you're in negotiations with the amendments and depending on balancing needs, do you have any expectation of the outcome of these negotiations in duration? Or do you think it's anything for the second half of the year or will it take longer?

And the second point is, do you think it's going to be a one-off package for all the points or is it going to be focused case by case with renegotiations for one thing for suspended axles and other negotiations for the amendments and other, what do you think?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [8]

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In the state of São Paulo, the contracts have been accumulating for many years with events of unbalancing. Of course, the best solution would be to close a package, but we've been dealing with this for many years with open current accounts. And the more we can close and agree on, the better. Of course, if we have a concession contract that may be amended with new investment, it would be fair to get our contracts rebalanced so that we have a solid base to include more investments, but there's no strategy in place. I think what's good is that the company has the interest and the granting authority as well to find the agreement and balance -- rebalance everything in time as needed. And discussions are very positive. So I would say that throughout the rest of the year we will get some outcome. I hope that for all of the points, but definitely something will advance and progress.

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Operator [9]

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Lucas Barbosa from Morgan Stanley.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [10]

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Two questions. First is a follow-up on Felipe's question. If you can give more details about the consultancy service that was hired to help you in the investigation of integrations 1 and 2. If you can give us more information what the consultants are doing, if they're carrying on internal investigations or if they're providing legal counseling, any detail that you can give us would be excellent. Second question, have you had any expenses on the studies for the Santos-Guarujá Bridge in the second quarter and if you can give us any detail of these expenses. That would be my question.

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [11]

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Lucas, about the first question, it's a combination of different points of expenses. Of course, the main ones are -- were the consultancy services to carry out the investigations and then, of course, there's clear methodologies with forensic, surveys and everything that add up, and the costs for internal audits and investigations. But I would say that now it's more on the legal side of lawyers and the majority of the investigation's been concluded. So we're spending with the implementation of programs -- or improvements to our programs that also involve the consultants, but also with the lawyers and analysis of risks and sensitivities and so on. The idea is that all of this will get to a conclusion and a reduction until it comes to a stop, but we are still with these costs at the holding.

The other question was at Ecovias, the expenses. We are making -- having expenses. They're linked to environmental licensing and the project of the bridge. The executive project and the investments are adding up. It's important expenses that have been done. It started in '18, but now in '19 as well and it's important. If this amendment is concluded and approved, these expenses will be a part of it. I would say that it's more than expenses, it's an investment. I wouldn't address that as an expense, but it's happening. We need to make progress so that we don't do different than our time line.

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Operator [12]

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Lucas Laghi, Citibank.

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Lucas Laghi, Citigroup Inc, Research Division - Research Associate [13]

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Two questions. First is also a follow-up on Vinagre's question, but also thinking of new project, as Andrea mentioned, 364. With the organic growth of EBITDA, do you think you can sustain the appetite of this shorter terms auctions? Or after consolidation of MGO in the balance sheet, do you think that maybe you consider a capital increase?

And the second question about Ecoporto, especially now that in February you've resumed operations and there's ships on docks, if you see changes for the operation, and if you think that the perspectives are better even for maybe a spinoff of Ecoporto?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [14]

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Lucas, about the capacity, we do have the means to participate at 364's auction and Centrovias' auction. These are projects that there's CapEx spread out and it shouldn't be such a high disbursement immediately. I believe we do have the capacity for them, but there's 2 in terms of expectations, having 30, 40 highway projects, that's when we will have difficulty. But for this next 2, we are already getting prepared and studying with due diligence and care and we will see.

Your other question about the port. You see the port today is starting to run again, of course, not at the levels of when we bought the port, but we're operating, using the assets to pay operating expenses, CapEx, but that is close to being paid off. And I think it's an asset that it's no longer a problem, so to speak, getting to a neutral balance, but it's a strategic asset. It's not a core activity, but strategic. It's an area with the possibilities for expansion. So we don't have -- or I would say that our idea is for the port to be -- to improve the concession being renewed and then we make a decision.

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Operator [15]

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Victor Mizusaki from Bradesco BBI.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [16]

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Two questions as well. One, about the Ecoporto. If you can give us an update of the process that's been analyzed by [MTAC]? And the second question about capital structure. If you can give us an estimate of how we should see net debt to EBITDA of EcoRodovias at the end of 2020, considering the concessions of the current portfolio?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [17]

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About Ecoporto, we're waiting for MTAC to get to a conclusion at the instruction. It's going well. I'd say it's moving smoothly. It's moving along. I'd say it's a good environment as well for this discussion. I don't have a lot to add on that. It's going well. I believe we have good perspectives. About the leverage for 2020 -- end of 2020, I don't have a number. We're mature. The cycle of Eco101 and Ecoporto are starting to decrease. In 2020, I think, those 2 business that we should maintain at around 3, maybe slightly above that, but to start a reduction, of course, it can happen in 2021, at the end of '21. In the year of '21, we'll have the cash generation of current businesses.

So I see this trend of net debt to EBITDA that has reached the peak, it is reaching a peak and it will starting to decrease at some point, and depending on traffic as well. Of course, if traffic starts to increase at the levels of 10, 15 years ago, 3.54%, which is reasonable, I think, it can accelerate a decreasing curve of the ratio. And cash capacity in terms of our debt profile, that is important. It's a long debt profile and of course, the fact that we have access to the market, and the market is solid.

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Operator [18]

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(Operator Instructions) Lucas Marquiori, BTG Pactual.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [19]

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Quick question about 364/365. The invitation to bid's already out on the street and I'd like to hear from you what you have in mind for the project? Now that you have MGO in the region as well, is it right to assume that you would have a gain of scale or synergy in this specific project? Just to understand what you're thinking. And if you see this is a positive project, the return level to expect, that type of detail.

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [20]

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We're a few -- many weeks away from the auction and we can't give you a lot of details. We will have all the details end of the time, but the project, the rate -- 9.2, the project rate, for the current moment is reasonable. It's -- but in terms of synergies, I'd say there aren't many, they're separate. But there may be some synergies. It's a federal project. With federal power that we have a lot of contract with already, so the risk is well known and accepted. It's a difficult contract as all newer contracts they have more penalty mechanisms in terms of delay, but the risks are well allocated. They are clear.

So it's a contract in line with the last few ones that are well defined, well detailed and that for us in general is positive. We are operators. We are capable of meeting the contractual obligations and we are used to this type of contract. So that's the overall view. But what we've been seeing in the projects that I think is that we're going to leave this discussion for later.

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Operator [21]

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(Operator Instructions) We now close the question-and-answer session. We'll turn over to Andrea Fernandes for her final remarks.

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Andrea Fernandes, EcoRodovias Infraestrutura e Logística S.A. - Investor Relation Director [22]

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I would like to thank you all for your participation. My team and I are available for any doubts you may have. Thank you. Have a great weekend.

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Operator [23]

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EcoRodovias conference call is now closed. Thank you very much for your participation. We wish you a very good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]