Earnings Call: Q1 2019

Apr 30, 2019

Good morning, ladies and gentlemen. Thank you for waiting. Welcome to CCR Teleconference to discuss Q1 2019 results. Statements made about business perspectives, projections, financial goals are made up by beliefs of the company's management based on current information available to the company. Future considerations are not a guarantee of performance. So they are dependent upon circumstances that may or may not occur. Investors should understand that general conditions and industry conditions among other operational factors may impact future results of the company And they, of course, result in different consequences than those stated here. I would like to turn over to Mr. Eduardo Thalendo, Corporate Management VP of the company. You may proceed now, sir. Good afternoon, everyone. It's my pleasure to be here with you today for this quarter's results. Artur Pioto, the RI Financial Director and Flavia Godoy, She's from the RI team. I would like to start by pointing out the good performance of our company in Q1, very positive numbers. 2 indicators make that very clear. The operational adjusted EBITDA showed us a 15.8% increase when compared to Q1 'eighteen. The other one is the net debt EBITDA ratio, 2.8 to 2.6 this quarter Q1 from 2.8 to 2.6 reduction from Q4 to Q1 this year. These are positive indicators that show our good performance. I would like to point out that we may see this type of evolution throughout the year because we do have business that are in the ramp up phase. The subway system in Bahia, for example, has shown a 28.9% increase when compared to number of passengers when compared quarter year on year. In this quarter, we had over 500,000 passengers per working day. When compared to Viasu, traffic in Q1 2019 surpassed 5,000,000 vehicles. So these are ramp up businesses, and they will have this performance throughout the year. As to Viasu in particular, Let me point out that the company has shown its capacity when we managed to start the operations of this operations February 15, only 3.5 months after we were awarded the auction despite all the bureaucracy, the hiring of personnel, 3.5 months later, in other words, we were able to make that happen. We had to hire executives, workers and mobilize assets, rescue vehicles, the entire system, a concession that had been deactivated for over a year. So that's a clear or that's clear evidence that the company can properly run its operations. Before I turn over to Art Brewer, he will be giving you further detail about Q1 results. Let me just say that we are pleased to hear the proposals be approved on the 22nd. This is an important step to CCR so that we can overcome the issues we faced last year. I turn over to Arthur now. Thank you. Good afternoon. Well, let me thank you for attending this call. Let me just make some comments about the results. The release is available at www.ccr.com.br slash ri. Let me now talk about the highlights of the quarter. Pro form a traffic is down 1% year on year, that's Q1 2018. But recent effect of the exemptions of suspended axles and also VSU, the latest highway added to the company's portfolio earlier this year, There was a 1% increase. Let me point out the pro form a numbers of Q1 considers that we do not have total control or shared control that's consolidated as to our stake at each line, excluding nonrecurring expenses, new projects and assets in which we have a higher stake and incomparable basis, as we stated in our results release. Cost cash is down 1.8% as a result of the concession course. Adjusted EBITDA is BRL 1,500,000,000, up 14.2% when compared year on year with 63.8% margin. That accounts for a margin expansion of 11.2 percentage points. Net income is BRL37 1,000,000 in the Q1. It's down 23.2% when compared to Q1 of last year. This result is impacted by operational performance as we stated before and greater depreciation and amortization in that period. These two components, depreciation and amortization, are a result of the conclusion of Dutra Rotor Norte Metro Bahia construction projects that were ended. Another important component that contributed to that decrease of 23.2% is that end of the interest capitalization period for the construction, they were not used in 2 projects in Metro Bahia and the Confins airport. Still in Q1 this year, investments including financial assets and maintenance amounted to BRL 331 1,000,000. The company's Northern Arch, Nova Dutra and San Jose Airport International Airport in Costa Rica had better results. As to the net FIFR BRL 13,200,000, an expansion of 11.2% when compared to and 4.1% down when compared to Q4 last year. With the reduction from Q4, the company's leverage measured by net debt EBITDA, operational adjusted is 2.6 times. On March 11, the company made up of CCR with an 80% stake, presented the best proposal in the honors transfer for Line 15 silver in the subway system in the city of Sao Paulo. Analysis is further pending and the official announcement of the company awarded that bid. This achievement is evidence of the qualified service the company provides. We're still we remain optimistic and we are interested in new businesses, both domestically and internationally, both at the primary and secondary level for highways, urban mobility, airports and ports and related businesses. And this is of course in alignment with our bylaws. There are several opportunities to grow. 2 federal highways are now currently being prepared for the invitation to be in Santa Catarina 101 and 64, 365 between Golaras and Minas Gerais. Additionally, still in 2019, a rebidding process will take place in Tocantins Gerais by the transportation agency and stretches to 370 and 225 highways currently in the hands of Centro Villas. This process is going to be run by the State Secretary of Transportation. In terms of airports and ports, the federal government has just announced is going to include the private initiative in 6 airports concession. 36 different assets will be auctioned in the period between 2019 2022. In terms of urban mobility, Lines 89 of the Metropolitan Train System in Sao Paulo are going to start bidding still in this 1st semester of this year. Internationally, we're now prequalifying phase in the Bogota subway system. Let's move on to the Q and A session. You can move forward. Alexandre Falcone from HSBC is going to ask the first question. Thank you. My question is about that note. You paid over the PIC, you paid out BRL 15,000,000 and fines, was this voted in the general meeting? When we calculate the PIC, the remainder, I think the total was RMB 7,000,000 dollars for the approval of the General Assembly. Am I right in those calculations? Thank you. Hi. This is Eduardo. Thank you for your question. Those $15,000,000 were included in the contract. These are individual fines. CCR is accountable for those fines. They are being fined as individuals. That's what they are, these $15,000,000 are. This has been announced only now. It's a provision. To the best of our knowledge, this is the global amount, the total amount As to the amounts paid and the current remainder, these were all approved by the PIC, and there were some advances before. If that was not approved, that would be returned, of course. Have you hired someone in corporate governance? Could you have access to those 15,000,000 before the vote? Why wasn't it included? Well, actually, we do not have direct access to that piece of information. As to the agreements, the plea bargains, this is in secrecy. We have recently asked to get information about it. What would those individual fines be so that we could provision them? We knew they were below or under the PIC number that wouldn't be so substantial. The issue was a matter of information flow because we do not have direct access to those plea bargaining agreements directly. I have a final question, if I may. We talked about materiality because these are not material values actually. These are just small amounts. You said that there's nothing that is material in other states. Well, let me just try to understand that. In the same nonmateriality scale, would there be any amount that would be at this level in this neighborhood? Would you be liable to any type of contingency of that sort? Once again, Focal, what we can announce is what we have in our statements. Everything that was found that is material and again materiality is the accounting sense in the auditing point of view. Everything that is material is contemplated in the agreements that were signed. Everything that was found in investigations. That's what we can say now. I cannot divulge any further detail on the matter. All right. Thank you. Pedro Bruno Santander asks the following question. Good morning. Thank you for taking my call. Actually, most of it has been answered. Let me just follow-up on Falcao's question. As to those BRL15 million, my question is maybe you don't even you don't know yet. Is there anything else that might come up in the near future? Could there be anything else, something that was not in that voting. And I know you may not know how much it is. How much it is may be not the most important thing. But the my intention is to find out whether there is anything else that was not included in the PIC. That's it. Thank you. Hi, Pedro. Thank you for your question. As to the amounts, This is what we asked the lawyers. We wanted them to give us the numbers that are already known. This is the number they gave us. We're not expecting any significant numbers. Of course, we do not have full control of the situation, but we don't see any significant amount coming up. All right. Thank you. Lucas Najdi from Citibank is asking the next question. Shifting gears, you talked about government projects in the pipeline. What's the competition like for these new projects, especially considering foreign players that were not involved in previous processes? Lucas, let me just give you an overview. We've seen important foreign players in airports. This is an industry in which farm players play an important role. In other areas, highways and urban mobility, we haven't seen that many foreign players. There was a wave last year, stronger wave of foreign players last year, but we haven't seen that important presence more recently. Let me just follow-up on what Eduardo said. In our industry, especially in highways, which is older, so to speak, And it's an industry that has always been open to foreign players. There isn't any preference on for domestic players, especially during the auction phase. It's only natural that they'll come. This is a result of the economic scenario abroad. There are not only strategic players that we need to know introduction. But we've seen other players such as financial players, pension funds, pension funds coming to Brazil and being part, an important part of some projects. More than being concerned about the competition, I think we should look at the number of opportunities. We should be optimistic, be it in new projects or re bidding process of concessions that are expiring between 2019 2020, 2021. There are several projects out there. So that's what we are aiming for. We're not only trying to maintain our portfolio of those projects that will be expiring in the same time frame. But at the same time, we're trying to expand even our portfolio. In that sense, in the past 12 months, the company has done great work. We've added a new project or increased our stake in 1 concession per quarter. So I believe it's good rhythm and has to do with CCR. That's our desire to benefit from this new macro economic scenario. It is a competitive one, of course. But the country as a whole has the necessary conditions so that the market can actually take off finally. I understand. I was more concerned about highway construction. There was some time with no foreign players and now we had in this latest auction, somewhat aggressive player in the auction. What's your take in the next auctions? Do you think foreign players will play a more important role? Can you share your take on the balance sheet? Do you believe you have a great leverage ratio even to take part in these new ex options? Well, in terms of highways, it's a local issue. Everything is local. The revenue, it's based on domestic currency, local inflation. Airport is somewhat different. You talk to major airlines, major brands, it's more of a global issue. But highways is very local in nature. Foreign players will be competing within the same conditions. And we at CCR has a competitive advantage because of its know how. And I think Arthur is right. Partners are welcome because there's a lot of supply. There will be opportunities for everyone. The pipeline looks very positive. As to the leverage, the number that we use as a benchmark is 3.5 net debt to EBITDA ratio when we are more leveraged. That's the standard. That's the benchmark we aim for. Perfect. Thank you. Lucas Macchiotti from Safra is asking the next question. Good morning. Thank you for the call. I have two questions. First one is the CCR date. In the presentation of the Governor Doris administration, he was very optimistic about the renewal of contracts and we're considering about changes. I would like to hear a take on the update. And I would like to know whether the government is demanding anything to extend concession, something as tariff reductions. Are they demanding that to extend the time frame? And the second question is about the latest two, Mobile Lidade and Via Sur, the most recent assets. Could you compare the financial performances and traffic of the two assets compared to what was budgeted, especially if you have to a very sought after asset, I would like to better understand the traffic, whether they are performing according to the forecast. Thank you. Thanks for your question. Okay, let me address the first question about the extensions from the government of Sao Paulo. I think the outlook is very positive. We've been publicly discussing these issues. The focus is in new projects, projects that can improve highways overall and again, including extensions. That's the main focus of conversations. These negotiations are currently underway. They're moving forward. And we can clearly see the desire on the part of the government, Doris administration, to move forward in that direction, and that's very positive. There's nothing new, nothing that hasn't been discussed in the media. As to the ramp up projects, okay, Via Su, we started 2 months before what we predicted. So we are going to have traffic that will be above expectations. So things are looking great. Biasu is a project that has a very positive outlook. As to the other project, everything is according to plan. Over 500,000 passengers per working day, completely in line with what we expected. Our traffic was down. But again, it's a country that was expecting to grow 4% a year in the next 4 to 5 years, but rather it was had 3% GDP was down by 3% for 2 years in a row. It's a combination of factors, a lot of expectation at that time and a major recession that the country has to go through. Projections today for Versus 2 are now way more optimistic. So it's very possible to overcome those difficulties. Projections were conducted when the country was more cautious, if I may. All right. Thank you. Victor Mizusaki from Bradesco asks the following question. Good afternoon. I have a couple of questions. Let me go back to another issue. So this is something that we our customers demand. In terms of the payments in real, is that for Roto Norte? Or would that include concessions in Sao Paulo? My second question is about the accounting materiality. Is that the same concept that the DA's office used to analyze this issue? And thirdly, Thank you for your question. Let me go back to the RMB 15,000,000. That includes the individual fines both in Sao Paulo and Parana. So that would include both cases, two claims. What was your second question again? From the well, let me give you an update. There have been some decisions made. But overall, every time we have an analysis or an expert opinion, and they can show clearly what we have been doing. This is in line with recent decisions. And my third question, the comparison between the concept of accounting materiality. Is this the same criteria that the DEA's office uses in investigation process? I cannot answer that question. I don't know what the criteria they use. So I see it. I'm referring to the accounting issues. I don't know what criteria they use. All right. Thank you. Samuel Alves from BTG Pactual asks the next question. Thank you. Good afternoon. My question is a follow-up on the comment on MSVF. Could you elaborate on the negotiations of the contract? Are they going to think are they thinking about some financial consideration to reshape the investment? Or is the composition moving towards a return of the assets just like the TRI153? Thank you for your question. As to MSVIA, we filed a suit and we have received that legal support We cannot keep on investing according to the plan, the initial plan because of the major imbalance we have on the concession. So within that claim, within that lawsuit that would involve the grantor. So both parties are now submitting their fleet. And during that phase, it's desirable to come to some sort of settlement. So these settlements, the way we see it, should protect investments we have made. This is the most important part. But again, we are willing to negotiate. And at the same time, we are taking all legal measurements available to protect the company's interest. Thank you. Adeshhendri Falcom from HSBC asks the next question. My question is about commercial traffic. Even excluding suspended axles, traffic is very slow for the quarter. Was it in one specific highway or in specific line in which traffic was much slower than usual. And is it going back to normal in April? Or would that be a trend for the year because this number is very small? Hi, Falcone. Thank you for your question. As to CCR, I think we're impacted by 2 nonrecurring events. That's viaduct on Pinera and again, viaduct in the Tutra highway. There were 2 major problems. Traffic had to be rerouted. There were some restrictions that impacted us to a certain extent. Anyway, numbers would have been better not for those restrictions, but going back to trends now. We earlier this year, January February, we detected some more positive traffic. And now March, April, things is again going back to normal. I think the economy numbers reflect the same temperature, if I may. It's not picking up as rapidly as we expected earlier this year. All right. Thank you very much. Victor Mizusaki from Bradesco asks the next question. Thank you. Just a final question, Eduardo, if you please. When you talk about the materiality or accounting materiality, how much do you make that calculation? Is that a fixed calculation based on the number or the size of the company? How can you how should you make that calculation, if you could please? I'm not a specialist on the matter. That calculation takes into account several variables. Every accounting company or every auditing company makes their own calculations. That's dependent upon the size of CCR. But I think it has some relation with accounting materiality, but it will change depending on the auditor, sales, assets. Those variables are taken into account, but not the same criteria amongst several auditors. All right, thank you. That concludes the Q and A session. I turn over to Mr. Eduardo de Toledo for his final remarks. Mr. Toledo, you may proceed. I would like to thank you for taking part of this call. At CCR Day, we had the chance to give you more detail in every we talked about every business opportunity, just like we did here today. New highway concessions, new airport concession rounds that have been announced by the government, the new concession of railway system mentioned by Arthur. And these are my 1st 6 months in the company, and Citiara has the necessary conditions to play a significant role in this new cycle. Once again, thank you for attending this call and see you next time. Thank you.