Earnings Call: Q2 2021

Aug 13, 2021

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the conference call of CCR SA to discuss the results relating to the Q2 of 2021. We are informed that all participants will be connected in listen only mode during the company's presentation. Later, we will begin the Q and A session when further instructions will be given. Before proceeding, we would like to clarify that any forward looking statements that may be made during this conference call relating to the company's business outlook, financial and operational projections and targets are based on beliefs and assumptions on the part of CCR's management and on information currently available to the company. Forward looking statements are not guarantees of performance as they involve risks, uncertainties and assumptions and have to do with future events, which depend on circumstances that may or may not materialize. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future results of the company, thus conducting 2 results which differ materially from those expressed in such forward looking statements. I would now like to turn the floor over to Mr. Waldo Perez, CFO and IR Officer. Good afternoon to all. I would like to inform you that today with me are Flavia Godoy, our IR superintendent Douglas Ripero and Kaike Moraes from our IR team. I would like to start by sharing the very important achievements of the Q2 of 2021. These have added significant value and place the company on a very privileged position so that we can continue to implement our growth strategy, be it by adding new businesses or by leveraging opportunities in the current portfolio. In April, CCR won the Central and South Group's airports with 15 airports in total. This further strengthens our national position and places us very well to tap new opportunities. With now 16 airports under our management, we are the largest airport operator in the country, and we handled nearly 23,000,000 passengers in 2019. We are the 2nd in number of passengers. This victory was essential for us as it justifies our strategy to create a sustainable and robust platform in airport so that we can tap scale gains and efficiency and operate a network of airports. It also allows us to be more competitive to grow in the segment. In April, the auction for Lines 8, Diamond and 9, Emerald of CPTM, took place. We were awarded the concession contract and signed it on June 30. Our concessionaires for Lines 45 gave us a competitive advantage, which was unique because they allow us to create synergy and creation of value, which is not allowed to which was not allowed for other operators competing in the sector. There are also different points of integration between lines 4, 5, 8 and 9, which will allow us to operate in a more reliable manner. We are eager to start the operation of these new lines in the Q1 of 2022. And finally, it is with great pleasure that I say that we ended the quarter by signing an agreement between CCR and the government of Sao Paulo. Under the agreement, we will establish measures to for Artesb and the granting power to drop lawsuit, and it allows the recognition by the parties in an irrevocable manner of the events having to do with the imbalancing of the contracts in favor of the concessionaires and the granting power. It reestablishes the rebalancing of the contract with Autobahn and extend the contract to January 2037. This term will allow our test to validate the calculations and thus to validate the final agreement. Additionally, in addition to the expressive value generated for the company, this negotiation has put an end to a a dispute that had been going on for over 7 years, and it has also allowed us to increase the duration of the company in terms of EBITDA and has rebalanced former claims. This agreement ratifies the long term partnership between the company and the state of Sao Paulo and its commitment towards the development of infrastructure in the state. This allows us to have legal certainty and will allow us to tap future opportunities of investment for the future. All of these achievements have made us very happy. These achievements are based on the soundness of the regulatory framework, on capital discipline, on our fundamentals and on value generation. We are well positioned to tap new opportunities of growth that will come in the future. I would like to highlight the long pipeline we have ahead of us, and we will have opportunities for the different segments where we operate. In highways, there are auctions or new auctions of assets for 30,000 kilometers at the federal and state level. These projects represent BRL140 1,000,000,000 investments for Brazil according to the BNDES. There are different projects that may take place this year. I highlight the Litorao, which action is going to happen in September, BR381 and other projects such as the package of highways in Parana and the ring road in Belo Horizonte. For airports, we expect the 7th round next year. And in the segment of urban mobility, we are awaiting for the auctions for Asia Norte in Campinas, including Line 7 and Lines 11, 12 13. We are also looking at opportunities for auctions in the underground and in Brasilia. All of these opportunities speak to our positive vision and the positive outlook for CCR. In 2021, we will still see the impact of the pandemic. However, in the Q2, there was an improvement in the performance of our concessions, especially in the highways. There were social measures, which were less intense and less strict as regards to the same period last year. Also in May 2021, we started charging tolls in the tolls plazas of Via Costa. In a communique released to the market between January 1st and 29 July 2021, we presented a growth of 5.8% in traffic in our highways as compared with the same period last in 2019. That is relative to the pre pandemic period. If we exclude Viasu and Costa Rica, there was a drop by 1.1%. However, our financial position is sound, and there is plenty of room to tap new opportunities, which is at the core of our strategy. We closed the quarter with a very robust cash position and our leverage measured as net debt over EBITDA of 2.3 times, which is below 2.7x, which we saw in the Q2 of 2020 and below 2.4x, which we saw in Q1 2021. This level is very appropriate to allow us to maintain a sustainable growth within the company. Our indebtedness is very healthy even with the addition of new projects. According to our financial policy, we have plenty of room to surpass our leverage rate of 3.5 as long as we can bring it back to the usual leverage within 24 months. I would like to also to highlight that CCR can tap credit in the banking system or can use national and international capital. We will continue to act in a diligent way, focus on capital discipline and to promote the sustainable improvement of the company's portfolio so as to generate value to our shareholders and stakeholders. Before we speak about the results of this quarter, I would like to highlight that you can find in our IR site a panel with indicators, which include the environment, social responsibility and governance. For over 10 years, CCR is one of the highlights of B3, which attests to our active position in terms of promoting sustainability. As a result of our many actions in 2021, the rating has been elevated from B to A by NCI. ESG is one of our fundamental pillars and is included in our sustainable growth strategy. We will always try to improve, however. And finally, I would like to invite you all to our 15th CCR Day, which will take place on August 31 at 9 It will be 100% virtual. And in the next few days, we will make the agenda available from our IR site. I now turn the floor over to Flavia Godoy, who's going to walk you through the results of the Q2. Thank you very much, Waldo. Good afternoon to all. I want to highlight the main figures IFRS, for Q2 2021. For all the numbers on the same basis, we have excluded new projects and nonrecurring effects as detailed in the release. We start with the highlights for the quarter, and I would like to talk about the traffic of vehicles, which grew by 33.7% relative to Q2 2020. This performance was the result of the growth by 46% in light vehicles relative to the same period last year and 18% growth in the traffic of heavy vehicles. At the end of our release, you can see a graph where you can see that despite the impact of the pandemic, we are on recovery relative to the beginning of the pandemic and this in the highways business or in the company's other businesses. The net revenue was EUR 2,300,000,000 in Q2 2021, a 31.7% increase relative to the same period last year. Adjusted EBITDA increased by 65.4 percent and reached EUR 1,400,000,000. The EBITDA margin was 63.7 percent, a 12 0.4 percentage point increase relative to Q2 2020. Although this was a quarter that was impacted by the effects of the pandemic, we had very robust results, which attest to our efforts towards controlling costs and maintaining operational efficiency. As you know, our costs are mostly fixed, and all of this happened during the pandemic, which impacted lots of our business units. In terms of costs, we see that total costs increased by 24.7% in the Q2 of 2021 relative to the Q2 of 2020 and reached EUR 2,200,000,000. This increase had to do with the recognition of the disbursement relating to the preliminary agreement with the government of the state of Sao Paulo. This is a nonrecurring effect, which we have excluded from the same basis comparison. Cash costs, same basis, were reduced by 0.6%. This considers the Brazilian companies. And if we consider the Brazilian companies, the increase was 0.2%, therefore, below inflation. This again attests to our efforts and discipline in terms of cost containment. For more details, please refer to the cost section of our release. Net income, same basis, was BRL 294,000,000 relative to a loss of BRL 140 2,000,000 in comparison with the same period last year. Relative to net indebtedness, we reached EUR 14,300,000,000 in Q2 2021, a 5.1% increase and a reduction by 0.8% as compared with Q1 2021 and Q2 'twenty, respectively. In terms of leverage, measured as net debt over adjusted EBITDA, there was a slight decrease in comparison with the Q1 of 2021. And this was 2.3x in Q2 2021. As said by Waldo, this reflects our comfortable position to continue with our growth strategy whilst maintaining financial discipline. And I would like to end by saying that despite the impact of the pandemic in this period, which directly affected our business, the company has been able to deliver sound operating results as can be seen when you analyze our release. We will now like to open to the Q and A session. Ladies and gentlemen, we will now begin the Q and A session. Our first question comes from Regis Cardoso from Credit Suisse. Good afternoon. Good afternoon, Valdo Flavia. My first question is more of a provocation. The price of shares at the current level that is below BRL 12, with this kind of prices, wouldn't it make sense to think that the potential results the potential results relative to the price of the shares are very high even if we compare it with the new projects and concessions. Would it make sense to have a repurchase program to allocate some of the cash that you have in your balance sheet, to repurchase some shares as opposed to entering into new concession contracts? And the second question is what type of change in government is necessary? Change in governance, rather, is necessary in terms of the controlling block and to account for the entry of IG4? And also, how do you see the pickup in demand going? How are we going to go back to normal? The highways are operating close to normal levels, but urban mobility and airports are lagging behind. So is there anything you can tell us in terms of expectations of when we are going back to the levels of 2019? Is it going to be in 2023? Or what can you tell us about it? Hello, Regis. Thank you for your questions. We are going to address them now. And the first one has to do with the price of our shares and your provocation about a repurchase program, if I'm not mistaken and if I understood correctly. I think you're right in saying that the price of CCR today does not reflect, in our opinion, the intrinsic value of CCR as a whole. I think CCR has been very successful in new projects and with the agreement with Sao Paulo state. All of this gives us a net present value, which is substantial, and this is not captured in the price of the shares. You can look at the reports of analysts, and the perception is that the price share should be above the current levels. If this creates an opportunity, we are always aware of the opportunities about how best to use our capital. Our balance sheet is extremely robust. The leverage is very appropriate. It's 2.3x in terms of net debt over adjusted EBITDA, and this makes us think about various alternatives to use this cash. But today, the pipeline of opportunities in the market is huge. There are very good opportunities, which will demand if we achieve what we are expecting. These new opportunities will demand substantial capital. So for the time being, we are focusing on growth, and that's how we want to use our cash. The return of the projects will be very good. But yes, the repurchase scheme is under our radar. And as regards to your second question, the company is not part of the negotiation of IG4 and Andrade. We know that there are all the things involved. We are not part of the negotiation. So I cannot make any comments about that. And the third question has to do with the recovery of demand. You saw that in Q2, there was a strong recovery in the highways business. There was an improvement in urban mobility and airports as well, but we expect greater recovery to come in the airport sector and in urban mobility. As regards to highways, there is ample room for improvement there. We have been helped by the commercial vehicles. That traffic has helped us. So as the vaccination program improves and accelerates, and this has been happening, And as people are completely vaccinated, that's when normality will come back. We should see a strong recovery in the traffic of light vehicles, and we expect them to be above the levels of 2019. And also, we are going back to normality in urban mobility and airports. And in terms of airports, as you know, our portfolio is a domestic includes mostly domestic flights, and we believe that the recovery will be accelerated because we do not depend on international travel. For those portfolios where the international component matters, you depend a lot on other countries. That's not our case. That was very clear, Baldo. Thank you very much. Our next question comes from Victor Missak from Bradesco BBI. I have two questions. Waldo, you talked about looking for alternatives for growth and the robust pipeline of auctions in Q2, including the Campulia Airport. Can you talk a little bit about your priorities given the schedule for Q3 and Q4? And then if you can tell us a little bit about the processes to rebalance after COVID. There were some events having to do with MSVIA. So can you talk a little bit about that as well, please? Thank you for your question. As regards our priorities, what we have now for the short term are basically the highway auctions. We are analyzing Litorao Dutra, which is a major project that we also know very well and the 3.81. So these are the 3 projects that are the most relevant for us, and we are now deciding where we should place our efforts. And we are also trying to define our strategy for each of these concessions. Pampulia is a smaller asset. Yes, it is under our radar, but our objective today is the 7th round of airports. And I think our portfolio places are very well to tap this opportunity of the 7th round. So all of these opportunities are under our radar. We have our strategy and the most relevant in terms of generating value and returns are the ones we are going to focus on. As regards COVID, we have been discussing at an ANTT and Artest. We had a preliminary discussion last year regarding airports. And at A NTT and Artest, we have placed proposals for rebalancing. These proposals are being analyzed, and these two agencies should come back to us very soon. We have been discussing this with them. As regards to airports, we have been discussing an additional rebalancing. It's not actually rebalancing. The BNDES has given us an extension of standstill, which has helped the cash flow of BH and the airport portfolio as a whole. In Ecuador and Costa Rica as well, we have been holding conversations about rebalancing, and we believe we will be able to have a result in the next few months. The issue is, for all these cases, that the pandemic has not ended yet. So for us to have a number, an agreement that will define what the rebalancing will be and what it look like in terms of values, we need the pandemic to end. So this is something to bear in mind. And lastly, as at MCVS, there's nothing too relevant. We have been working with the granting power for the re auctioning of this asset, which should take place in 2 years maximum. So we are working towards that, and we believe this will come very shortly. Thank you very much. Our next question is from Munir Finberg, Bank of America. Good afternoon. Thank you, Waldo, for your clarifications. I we think that you've been doing a wonderful job in terms of costs. And when we compare the performance of the revenue and costs, we see margin that kind of surprised us. But in terms of the pandemic, what about these gains in terms of costs and profitability? Are they permanent costs? Are they going to stay? And then as regards the amendments for Sao Paulo, There was some detailed spending, an extension, some small details that had to be sorted out. What is the negotiation like? And what is the timing for us to have the final details of these agreements with Sao Paulo? The first one, if I understood correctly, has to do with the costs. And if I remember rightly, in some previous calls, we were asked about the costs, and we explained that we have been working very hard during the pandemic to contain costs, to improve operational efficiency as a whole. And what you see is the result of the good work that has been done. It started in Q2 last year, and we have implemented a series of controls, of improvements in our budgets and controls so that when the recovery happens, what you see could take place. So for us, this is here to stay. We are not 100% happy with the cost containment. We are now working on the budget. And in this budget process, we are looking to further increase operational efficiency that will allow us to contain all the costs and increase the margins. This is extremely important for us, and we will continue to focus on that. As regards the amendments, there are 2 aspects. The first one has to do with auto ban and what was agreed and is now documented in great detail in the attachment of the agreement. We have the method for calculation that defines the values for the extension of Autobahn. Artest needs to run this calculation and validate the term of the extension. And we believe this is going to be confirmed. And then relative to Via Oeste, there are some works which are part of the agreement. These projects are being analyzed by Artest. And after their analysis, these works would be executed. We believe that this should happen within the current year. Thank you, Waldo. Thank you very much. Our next question will be in English from Mr. Stephen Trent from Citi. Good afternoon, Waldo and Flavia, and thanks for taking my questions. Just a quick one from me. What sort of competition are you seeing in the airport and urban mobility segments? And do you think that higher interest rates maybe deter some competition from entering these events? Thank you. Thank you, Steve, for your questions. As regards competition in the airport sector, in the 6th round, the competition was very limited and some players were not the winners of previous auctions. With the recovery and the pickup in economic activity worldwide after the pandemic, some of these players who were very aggressive in the past may be in a more comfortable position, and they may decide to participate in the 7th round. We also think that financial investors may want to participate in infrastructure and take part in the process. So there might be many more competitors or different types of competitors. Funds usually have return rate requirements which are quite high, so we feel quite comfortable with that. And the synergy of having a portfolio and of being able to operate a whole network of assets and tap those synergies and create new routes and optimize those routes, I think this will place us in a very competitive position. And this will be very good for our participation in the 7th round. As regards urban mobility, where competition has been consistently limited, it exists. But in each of these processes, as we have been able to grow and have gains, we have achieved greater operational synergies, something that others in Brazil haven't been able to achieve. And we do believe that this will continue to be an advantage for us and allow us to win new projects. So we are very excited. We believe our position is very sound and healthy in this segment. And these segments will be very good once life goes back to normal. Our next question comes from Guilherme Mendes from JPMorgan. I have two follow-up questions. The first one has to do with competition. You talked about competition in airports. Can we talk about competition in highways? There will be a concentration amongst the large players, which are more capitalized. But do you think other players could come to Brazil and be more aggressive? And then Renovias is out of the agreement. So what is going to happen there? Hello, Guilherme. Thank you for your questions. In highways, you were very right when you said that competition depends a lot on the profile of the highway and the level of complexity in operating the highway. So those highway concessions that are smaller, that have a smaller impact on the portfolio of CCR, which are not very relevant. These assets sometimes are faced with greater competition because of their sheer size and smaller capital needs. In RS 287, there was a lot of competition. When we look at the assets that really matter to companies like CCR, when we believe that there is a relevant value, then yes, the competition will be very limited. So assets like Dutra, concessions like BR381, the portfolio in Parana, These are assets that are very complex in terms of engineering, of investment, of structuring, and we believe there will be less competition, and we therefore have a greater chance of being successful. As regards the amendments, VENOVIAs was negotiated separately. There is another controlling shareholder of that asset, and the conversations are very advanced. And there should be a final result very soon. Thank you very much. We are now closing the Q and A session. I would like to turn the floor over to the company for their final remarks. We are relative to the achievements of this quarter and by expressing my optimism relative to the outlook in the future given the pipeline. We are sure that we will have many good pieces of news in the next few quarters. Thank you very much for your interest and for participating.