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Edited Transcript of ECOR3.SA earnings conference call or presentation 30-Oct-19 2:00pm GMT

Q3 2019 Ecorodovias Infraestrutura e Logistica SA Earnings Call

Itaim Bibi, Sao Paulo Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Ecorodovias Infraestrutura e Logistica SA earnings conference call or presentation Wednesday, October 30, 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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* Joshua Milberg

Morgan Stanley, Research Division - Equity Analyst

* Pedro Bruno

Santander Investment Securities Inc., Research Division - Research Analyst

* Rogério Araújo

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Stephen Trent

Citigroup Inc, Research Division - Director

* 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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[Interpreted] Good morning and welcome to EcoRodovias' Third 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, where you will find the presentation for downloads 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 third 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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[Interpreted] Good morning. Welcome to another conference call of EcoRodovias today concerning the results of the third quarter of 2019. We thank you for your interest and participation.

We would like to mention some important events. On September 27, the company won the concession auction to manage and operate highway BR-364/365 for 30 years. The concession stands for 437 kilometers between the cities of Jataí in Goiás and Uberlândia in Minas Gerais. The highway is one of the main corridors connecting the Midwest region to the state of São Paulo. In line with the group's strategy, this extends the duration of our portfolio to 17 years and 7 months weighted by EBITDA for 12 years and 3 months.

In the third quarter 2019, the pro forma EBITDA of the new concessions Eco135 and Eco050 amounted to BRL 74 million, representing approximately 14% of the consolidated pro forma EBITDA. We can see on Slide 2 that consolidated traffic of equivalent paying vehicles in the third quarter of 2019 posted an increase of 27.3%. Excluding the start-up of operations of Eco135 and Eco050, consolidated traffic presented a reduction of 0.5% in the third quarter.

Heavy vehicle traffic was affected at Eco101 for the cycle of the paper pulp industry in the region and that Ecosul due to the lower soybean flow. Ecovias dos Imigrantes and Ecovia Caminho do Mar posted an increase due to the increasing the flow of the corn crops and the improvement of Ecopistas is due to the induction of traffic after the toll exemption to Eco suspended axles. In addition, light vehicle traffic at Ecovia Caminho do Mar, Ecovias dos Imigrantes and Ecoponte presented a reduction in the flow of vehicles due to the unfavorable weather for tourism and to the long weekend on September 7, 2018.

Eco101 presented a reduction due to unfavorable economic conditions in the state of Espírito Santo. Ecosul and Ecopistas presented an increase due to favorable weather conditions for tourism in the region. And at Ecocataratas, it is due to the exchange devaluation of the real compared to the dollar in July 2019.

As for the group's consolidated results on Slide 3, pro forma, excluding construction revenues, net revenues this quarter amounted to BRL 777 million, and net revenue of highway concessions presented an increase of 23% due mainly to the start-up of operations at Eco135 and the consolidation of Eco050.

Moving on to Slide 4. Comparable cash costs in the quarter amounted to BRL 194 million, excluding nonrecurring expenses referring to attorney fees, specialized consulting services dedicated to support investigations, severance pay and the beginning of operations of new concessions. The increase in this quarter of 6.5% mainly due to the increase in maintenance costs in the concessions and an increase in third-party service expenses at Ecoporto due to an increase in handling activities. It is important to note that the company has already started the process to adjust the holding corporate structure to support future growth opportunities and the new assets recently acquired by the group.

Pro forma EBITDA amounted to BRL 545 million in the third quarter with an increase of 21% and margin of 70%. It's worth noting that toll exemption for suspended axles reduced toll revenues in BRL 34 million in the third quarter of 2019 and BRL 97 million in the first 9 months of 2019 year-to-date. This exemption will be subjected to rebalancing of the contract.

The majority of concessions presented at -- an EBITDA increase, as we can see on Slides 5 and 6, due mainly to tariff adjustments. The highlights are the new concessions, Eco135 and Eco050, where the pro forma EBITDA amounted to BRL 74 million. On Slide 7, we present the evolution of recurring net profits in the third quarter of 2019. Profit had a positive impact due to the higher EBITDA but a negative impact due to financial results due to the beginning of the accounting for monetary variation on the concession rights of Eco135, provision costs for maintenance and higher depreciation and amortization resulting on net profits of BRL 58 million.

As for investments on Slide 8, CapEx year-to-date were of BRL 897 million. Estimated CapEx for 2019 is of approximately BRL 1.4 billion. We should note the application works at Eco101, the connection works at Ponte Rio-Niterói to the Linha Vermelha and the Port Avenue at Ecoponte that have already BNDES funding. The amended-related works at Ecovias dos Imigrantes and start-up works at Eco135, which long-term financing is in the phase of contracting.

Moving on to Slide 9. The net debt-to-EBITDA indicator maintain -- remains stable at 3.3x in the quarter. The longer debt amortization profile with cash balance of about BRL 3 billion and the future cash generation makes us comfortable as to the group's financial capacities.

The company remains attentive to opportunities for growth, in particular, the auction of the Piracicaba-Panorama lot at the end of November and BR-101 in Santa Catarina. We are optimistic with the federal government's agenda regarding highway privatizations as well as with the state of São Paulo's agenda that in addition to new privatization is progressing in the discussion of new contracts amendments for Ecovias dos Imigrantes and Ecopistas and as well as in the solution for the balancing should be defined. It's worth highlighting the programs in Minas Gerais, Mato Grosso do Sul and Rio Grande do Sul as well.

This concludes our presentation. We would like to move on to the questions-and-answers session. Operator, we're ready for the questions from our analysts and investors. Thank you.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) Our first question, Josh Milberg, Morgan Stanley.

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Joshua Milberg, Morgan Stanley, Research Division - Equity Analyst [2]

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[Interpreted] My question is if you could talk a little bit more about how you see the possibility of having an agreement with the state of São Paulo regarding the rebalancing and the amendments as well as, if you can, to talk about the specific case of the Santos-Guarujá Bridge, if there's anything new and how these discussions have been evolving in recent weeks?

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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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[Interpreted] (foreign language) Josh, this is Marcello. Thank you for your question. The discussions with the state of São Paulo about the unbalancing are moving along very well, continuing with different situations. But I would say that it's going well. It tends to have more progress and try to get to a conclusion as soon as possible.

About the bridge, the connection of the margins, that's one of the amendments that's being in discussions here in the state of São Paulo. Ecovias and EcoRodovias have to support the state of São Paulo to resolve all the technical issues and doubts and change the project design to meet the needs that could be impacted and all the solutions are being analyzed. We are following the discussions at the state government level with the federal government as well. It's an important work and things are going well, and we will be able to successfully have support through all these technical discussions.

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Operator [4]

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[Interpreted] Our next question, Victor Mizusaki, Bradesco BBI.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [5]

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[Interpreted] I have 2 questions. First is a follow-up with the amendments of the -- in the unbalances in São Paulo. I don't know if you could give us a time line expectation, if maybe we can have at least agreements announced this year and then the signature of new contracts next year. Does it make sense for us to expect this time line? And the second question about the leverage of 3.3x. This number, we also have to include the flow that probably will come from 364 and the Rodoanel discussions. How can we expect this leverage to evolve in your modeling? Like EcoRodovias leverage can get to how many times of the EBITDA?

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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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[Interpreted] Victor, thank you for your question. About São Paulo, as we said, the discussions are moving along well. I would say that the rebalancing of those unbalances are being discussed. As I said, the discussions are moving throughout the lifetime of the contract. But it seems to be defined and now we are trying to close this. It's not defined but we could talk about a few months' time line.

About the difference of the bridge and the new amendment, the discussions are a little longer and there will be an amendment term. But as I said, the discussions are also going well. About the leverage, I would say the 3.3x in this quarter is a stable level. The traffic is -- in October is very positive, and the more mature concessions gets to the double-digit growth in October. So it should start to improve in the fourth quarter and for 2020. So as I would say the 3.3x tends to decrease.

364 is more for 2020 when the CapEx is realized, and we believe that in 2020, we'll already see this. And Rodoanel, I think the beginning of Rodoanel goes beyond 2020 -- 2021, 2022. So the 3.3x tends to be a value that may even decrease. Thank you.

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Operator [7]

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[Interpreted] Next question, Pedro Bruno, Santander.

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Pedro Bruno, Santander Investment Securities Inc., Research Division - Research Analyst [8]

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[Interpreted] My question is about the line of suppliers. If you could give us more color, what was that reduction apparently a typical of BRL 90 million that kind of held back the operating cash generation in the quarter? We don't usually see big variations in the working capital sector, so that caught our eye and we wanted to know if you could give us more detail on this line?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [9]

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[Interpreted] We included MGO so there may be some variation on that consolidation but we need to look into it. In this quarter, we have the consolidation of the balance and it may be a variation relating to that.

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Pedro Bruno, Santander Investment Securities Inc., Research Division - Research Analyst [10]

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[Interpreted] Excellent. If I can, just one more question. If you can talk about the expectation of participating in the Centrovias auction, how it would be done, if you will, and if it makes sense to you and if you can help put this into context the news that came out today about some suspension of the auction if you're following this closely, and if that would make any sense, if there will be a delay or not or what your expectation is for the Centrovias auction?

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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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[Interpreted] Pedro, about the PiPa auction, it's a big auction, complex, many kilometers. And we are studying it deeply, doing our due diligence and it's very important. It is of our interest but I would say we don't have a conclusion -- a conclusive position but we are studying it.

About the news of today, we already knew. There seems to be an issue that may be clarified via test. It doesn't seem to us that there has been any serious issue but we are following it. But it seems to us that things are being worked out. Thank you.

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Operator [12]

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[Interpreted] Next question, Rogério Araújo, UBS.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [13]

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[Interpreted] Two questions, one about the Factor D applied to Ecoponte, if this tariff reduction is reversed for the company to make the investments that are delayed and what is the time line expected? Also about 101, if you would accept an agreement with the government to return it and what parameters because there were news this week that the government would be willing to negotiate. So what's the parameters? What are the terms, including the nonamortized investments, if you would accept this return? That's my first question.

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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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[Interpreted] The Factor D is calculated based on the CapEx -- contractual CapEx delays. So it tends to become balanced with the development of the concession. So it maintains the project stable. If the CapEx is concluded in the [peer-rated] Factor D's are reposed. But it's part of the dynamics of this contract. It's nothing out of the reason.

About 101, it is being discussed at Eco101. We are trying to close the rest of the duplications and the improvements to the assessment. Duplication works depend greatly on environmental licenses and we haven't received the license yet so that, of course, leads to a delay. But EcoRodovias is committed to work on it and at the same time, we are moving forward in the negotiations to adjust the investments the best way possible. We know it's very delayed. There are bottlenecks.

About this devolution, the return, of course, we're following the discussions and at the right time, we could -- the idea is to continue and renegotiate and succeed.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [15]

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[Interpreted] Just a follow-up about the Factor D at Eco101. Can we interpret this tariff reduction as a resolution of that old operation about the expert reports?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [16]

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[Interpreted] No, it's not related.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [17]

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[Interpreted] Excellent. In conclusion, when will there be the cash disbursement for that fine, on that penalty on the leniency agreement?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [18]

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[Interpreted] The fine is done. In October, it was done. But the tariff application, it will be at least 12 months. And we're discussing it to see where it will be applied in the back half. We don't have a defined time line yet.

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Operator [19]

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[Interpreted] (Operator Instructions) Next question in English from Stephen Trent from Citi.

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Stephen Trent, Citigroup Inc, Research Division - Director [20]

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Guidotti, Andrea, [Camilo]. Just actually 2 from me. And the first actually pertains to your relationship with Gruppo Gavio. To what extent -- excuse me, are they still engaged with you in terms of looking for any strategic solutions in Santos Port? And are they also doing any analysis with you on new concessions? And then my second question, when you think about potential acquisitions or participation in auctions, any thoughts with respect to how you might plan to fund such projects?

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [21]

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[Interpreted] Thank you for your question. The third -- first question about the Gruppo Gavio, we confirm that our controllers are engaged and believe on -- in EcoRodovias and the growth of this industry in Brazil. About Santos, I didn't really understand.

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Stephen Trent, Citigroup Inc, Research Division - Director [22]

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Yes. I was wondering if...

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Marcello Guidotti, EcoRodovias Infraestrutura e Logística S.A. - Chief Financial, IR Officer & HR Management and Member of Executive Board [23]

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[Interpreted] The terminals in Santos are being operated and we're discussing about the concession about the Santos bridge. They're engaged, giving us support about the technical study for the bridge between the margins. About auctions and future acquisitions, the lots are very relevant. It's important to have the support and the participation of BNDES.

It has been a very liquid market and very involved, participating. Although there are turbulences occasionally, I think it's a very strong position. We also tend to show mechanisms to protect against exchange variations to raise funds in dollars. But in general, EcoRodovias has a good regulatory position in the midterm. Our equity strategy is also a good point at EcoRodovias. Thank you, Stephen.

Stephen, on your question about the suppliers, the movement in June to September is for the payment of suppliers at Eco050 for that previous question about suppliers.

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Operator [24]

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[Interpreted] We now close the questions-and-answer session. I will turn the floor to Ms. Andrea Fernandes for her final comments.

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Andrea Fernandes, EcoRodovias Infraestrutura e Logística S.A. - Investor Relation Director [25]

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[Interpreted] I would like to thank you all for attending this call. And in October, the term of our concessions already show a recovery, especially concessions in São Paulo, Paraná are showing a double-digit performance in some cases. And I remain available for any doubts you may have. Thank you.

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Operator [26]

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

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]