Earnings Call: Q3 2018

Oct 26, 2018

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome you to the 3rd Quarter 2018 Annual Conference Call of CICI SA. We would like to inform you that all participants will be in a listen mode only during the presentation. After the company's remarks, we are going to start a Q and A session and then certain instructions will be given. Before proceeding, we would like to mention that forward looking statements about QTR's business prospects and financial and operating goals are based on the beliefs and assumptions in CTO's management and on information currently available to the company. Forward looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results in QTR and could cause those results to differ materially from those expressed in such forward looking statements. Now I'll turn the call over to Mr. Flavia Bobaei, Citiya's IR Coordination. Please, Mr. Bobaei, you have the floor. Well, thank you, operator. Good morning, everyone, and thank you for attending our earnings conference call for the Q3 of 2018. With us here today, we have Arthur Gilberto, our Chief Financial Investor Relations Officer Marcos Marcieto, Danieloperatoni and Marcela Bier, members of the IR team. The earnings result is available on the company's website at www.pti.com.pr/ri. Let us first take a look at some of the macroeconomic indicators we consider important for the performance of our business. We would like to start by highlighting then the unemployment rate came to 12.1% in 3Q 'eighteen with a 0.5% down year on year and RMB0.6, down from 2nd Q 2017. The average real per Capra income reached BRL 2,000 to BRL 125 in August, in line with the same period of 2017. Now, the last data informed by the Brazilian Institute of Geography and Statistics show that industrial production grew by 2.0% year on year in August and fell by 0.3% as compared to July. According to the latest credit results released by the Central Bank, credit granting in the financial system moved up by 3.4% year on year in August. The balance of loans to individuals increased by 7%, while the balance of corporate loans decreased by 0.4%. The credit to GDP ratio fell to 46.7% versus 47.2% in the same comparison. Credit to finance lease costs grew by 24% year on year in August as compared to the same month last year. It is worth noting that the automotive sector is closely linked to traffic growth and has a great influence on our industrial GDP. In this sense, the number of licensed vehicles increased by 13% in 3Q 2018 as compared to last year, while vehicle production moved up by 5% in the same comparison according to recent data from ANFIBIA. Now moving on to operating numbers for the quarter, we highlight the pro form a traffic, which edged down 4.2% over 3Q 'seventeen. On the same comparison basis, commercial vehicle traffic declined by 7.3%, while light vehicle traffic fell by 0.3%. It's worth to remember that the quarter was affected by exempted and the axles of anti trucks according to effective decrease 33 May 2018. As a result, all the concessionaires except for the federal high growth discontinued toll collection for suspended vessels. Excluding the effect of these exemptions, CTR's consolidated traffic, including Reno Villas and Via Rio, increased by 0.1 percent in 3Q 2018 over 3Q 2017. As a consequence, there was a loss of revenue in the quarter of approximately BRL76.3 million. However, it's worth noting that the alternative forms of compensation to reestablish the economic and financial balance of the agreement are being discussed with the granting authorities. In our press release, you will find more information on traffic trends for each concession year. We now show the pro form a the key pro form a previous in 3Q 'eighteen, considering all businesses which do not control or hold share control, consolidated according to CCR's share in each line. We also excluded the following items from the same basis comparison. Guillermo del Valle, post concession agreement was executed in April 2018. Non recurring expenses related to the independent committee with an impact of BRL 17,100,000 on EBITDA and BRL 11,300,000 on net income and CCI's gross margin recurring severance costs with an impact of BRL 31,800,000 EBITDA and BRL 21,000,000 on net income. According to the described EMEA, same basis adjusted EBITDA totaled BRL 1,400,000,000, a 5% increase in 3Q 'seventeen, accompanied by a margin of 63.1 percent with a down number of 1.2%. Net income on the same basis, net income total BRL 405 million, 15% down over 2017, which was chiefly impacted by the operating performance we recently mentioned. The pro form a investments in 3Q 2018, including financial and assets and maintenance, totaled BRL 167,800,000. The concessionaires with most invested in the quarter were Nava Bistra, Escazilla, Genes Vias and Metro Bahia. Redo Norte's investments are newly allocated to duplication and situation works in several structures. At Marbodutra, works were carried out in several business and overpasses SBVIA invested in weak services and duplication in several structures. And investments in Eutro Baia were mainly in construction works, rolling stock and systems. The pro form a gross debt was BRL 18,800,000,000 in September, 19% up year on year. Even with this increase, the company's pro form a leverage measured by the net debt to EBITDA ratio remained at 2.6 times due to higher cash position and EBITDA. But just to point again, we would like to highlight that on October 1, the company announced the acquisition of an additional stake in San Jose International Airport and now holds directly and indirectly 97.15% of the concession. Another highlight was that on October 13, the Board of Directors meeting approved a referendum by the company's 2019 annual shareholders, meeting the payment of interim dividends of approximately $0.39 per share to be paid as of October 31. Statements will be made to shareholders off record on October 23 and the shares will be traded ex dividend as of October 24. We end up our comments on the quarter's results, highlighting that although the traffic has been affected by the suspended natural exemption, the same basis pro form a EBITDA grew by 5%, underlining the resilience and solidity of our business. We would like to conclude by highlighting our commitment to the qualified and sustainable growth that has brought us notoriety along our history. The strong need to invest in infrastructure in Brazil, corroborates a new investment cycle for the coming years in which we can identify over 63 potential projects to be launched individually or in groups. Only in the growth segment alone, we can mention 44 highway concessions in the domestic and international markets, 13 of which are existing concessions whose contracts will mature over the next 5 years. Besides, the self integration road, with building processes scheduled for the next week, November 1. In the urban mobility segment, the company continues to be attentive to new opportunities such as Line 7, 8, 9, 11, 12, 13 and 15 in Sao Paulo in addition to some opportunities in both the national market. In the airport sector, as an ongoing process to generate profitable businesses, we are also avoiding certain airports, which should be built in 2 blocks. As we can see, our device side portfolio, our record of realizations and investment capacity enable us to participate in these opportunities, continuing our qualified and structural, economic and environmental development of the regions where we operate. We now open the floor to Q and A. Operator, please go ahead. Our first question comes from Robert Quatero from Merrill Lynch. Well, thank you for the opportunity and congratulations on the results. We have two questions. First on the new opportunities of growth, what's your appetite for next week's building profit? And what do you see about the pipeline? And if there is any news about the evolution of SRPG. Hi, Thiago. Good morning. This is Flavia. Well, in regards to your first question on our as I mentioned during the call, the company remains very attentive and working with some opportunities that come about. Next week, we have the self integration roadway billing process and the process will be delivered on 30 October. And the company is undergoing a competitive process and any decisions are made on the eve of the auction. But we don't want to assess this opportunity for sure. In terms of the other opportunities, we are expecting a new cycle of investment, as we mentioned. And I think that all the scenario with our economy and countries' current situation collaborate with the cycle. And we count on private players increasingly more. And not only new opportunities shall be announced in the coming years, As I noted, there are upper 63 projects that we have in our pipeline, but also highways that are going to end the contracts in the next 5 years. So the balance of highways they are going to end the contract by 2020 22 besides the new announcement. So the company goes on very focused on this type of new investment. In terms of your second question about the discussions on the investigation on Autobahn, this process started on February 2018. And on 27th February, we one of the ministers voted for this inspection. And recently, we have another section. And other 3 ministers also wanted to vote it favorably for this investigation. And we still need 1 minister to pronounce himself. So the judgment has not been carried out. We think that this advancement was positive. But in fact, we have to wait for the end of the process for final decision. And the 5th minister still has to give his vote. He asked for more time. And only with this vote, the whole process will be concluded. So thank you very much, Javier. Next question, Mr. Zacky Bradesco Belluno. Good morning. Congratulations on your results. I have two questions. First, when you analyze the data on the 3rd Q, you had almost BRL 32,000,000 increase in terms of the severance line in the room. I would like to know if you are expecting any reduction in the cost of personnel as of last year. And also, I would like to know the status of the financial. Good morning. This is Flavia again. Well, in terms of the nonrecurrence effect and the labor severance discussions, we don't have a figure to inform you. But this is a continuing and ongoing process. We are carrying out this in an ongoing basis. And the greatest impact is overall ready. It was mentioned now in this 3Q. And the company is going over some processes to make the company more agile, more accessible. And part of this program requires the preparation of some of our members to take over new responsibilities in the future. And we are going over the roles what can be accumulated or not. So this will be a continuous exercise. The greater impact is over already, but the benefits, I think, we are going to be able to see in a year's time or even a longer period. I would like to mention the headcount and how much this is presented as a reduction. Victor, well, we don't have this information and numbers to tell you. But I can tell you that some of these personnel cuts were on the executive level, And we are going over another restructuring process, and this was started last year. And all this is part of what we announced as part of our succession plan restructuring. In terms of your second question, the independent community, while their investigations are still ongoing. So we didn't have any detail on how it stands or on something more that we could share with you. But I want to reinforce that the independent committee is really independent. None of us have access to them. And therefore, we have to wait for the conclusion. Well, thank you very much. Next question, Felipe De Nardi from Credit Suisse. Good morning. And I have two questions. First about Via Cuatro, if you have any update on the status of the balance or what are you going to discuss in order to really perform that number? And how do you think you can rebalance it? What are the views you have on the rebalancing? Hi, Vinagre. Good morning. This is Flavia. Well, via Cuatro, in fact, we admit and we have noticed the unbalanced and the company is talking in order to find a way of rebalancing it. So we started 2 processes. One is how to reduce the loss of revenue and the other is how to pay back these losses since MTU business recognized these losses. But we don't have a deadline to conclude it, but we hope that this will be concluded by 2019 next year as the unbalances form in the case of Via Cuatro since it is a PPP. These PPP processes have a limitation in the deadline extension. So the balance, the rebalance, I think, would fit better, would be a compensation chamber. And today, 10% of passengers that go through Via Huata, from 10%, we get the full price and 90% half price. So the compensation will go around this. I have 2 other questions on 2 assets. 1, on the airport of Beloiticante, I would like to know your view on Pampuclia, how does it stand? And what have you taken as at Intraer? What have you decided with them? And how can you increase demand? Thank you. As to the possible reopening of Campulia Airport, I want to say that the concessionaire started filed a suit, a limonere, and asking that all the documents will be reanalyzed for the opening of Sampulia. But we still wait for the final sentencing in order to discuss whether Pampuglia will be reopened or not. So the reopening of Pampuglia effort has not been definitely canceled. In terms of Metro Bahia, we had very important advances this year. And in terms of the demand of passengers, we concluded the project as well. And the cut of the lines, which were 14 in our concession contract, this is still in an implementation phase. This is obviously very important for the company for the performance of our business in this specific asset and also to improve the implementation. We had a very good advance in 3rd Q as compared to 2nd Q, and we hope that this will be finished by end of the year. The company, I want to mention also that since this is foreseen in the contract, if there are more delays, the company has the right to file a suit for rebalancing. Thank you very much. Next question. Alberto Banderas from UBS. Good morning. Thank you very much for the opportunity to ask my questions. I think that the federal auction next week will have a new rule for the concession grant. You will have to provision the amount and as a loss, you'll give the discount on that tariff. I would like to know how will this provision how will it be made? Well, Andrea, this is Marcos. Well, in terms, it's slightly different from what you said. The rule is that for each percantage of discount offered in the tariff, the auction winner will have to put a higher capital amount in the project. The project is not for concession. Unfortunately, since we are in a competitive bid, we cannot share with you the conditions and the company's strategy for the project. But after the auction, if we are successful or even if we participate in it because the decision will be made much closer to the auction, and then we will be able to mention and comment on more details. I hope you understand it. But since we are in a bidding process, we cannot share these figures with you. Thank you very much, Marcos. Next question, Lucas Lager, Citibank. Good morning. I have two questions to Flavia. 1 relates to the timing for the financial rebalance And second, regards via mobility, can we give any idea of additional impact that sees actions of the end of the quarter, how will this be added in asset demand? Hi, Luca, good morning. It's Flavia again. Well, in terms of the negotiation of the suspended access, the negotiations have been started, but we do not have a definition. The company is still negotiating with the government of the state of Sao Paulo and the other governments as well because we have concession in other states as well. But I focus in Sao Paulo because the concentration of our assets is here. But these negotiations are taking place. In fact, the reception was very good by the government and our company, but the rebalanced form has not been defined. We have to wait. In terms of Line 5, the project for the operation was started in August. At the end of the quarter, we opened 2 new stations, very important ones for line 5. And the expectation, which is the information that was given by the government, is that we're the line 100 percent operational. The idea when we must probably will reach the level of 700,000. And our expectation, therefore, is that we will meet this number in the next few months. Thank you very much, Flavio. Next question from Lucas da Bosos, Morgan Stanley. I want to follow-up on the compensation for the suspended vessel. In your mind, I mean, the concessions in the state of Sao Paulo, do you think that the disputed effect could be a barrier for you to close the deal in order to have this balance for not charging the percent of excess? Or what? Thank you. Hi, Luca. Good morning. I don't we don't believe that there would be any type of interference because in this dispute, because it is the right it's a contract right we have. The negotiations are in an ongoing basis with the granting authority, but we did not find the way we haven't defined the way we will find a rebalance of this. But we don't think that these discussions can impact the negotiating. This is a period of a contract and the period of the contract has to be respected. Thank you very much. Next question, Lucas Macchiore from SACHS. Good morning. Thank you. But I have two quick questions. Clavic, please tell us on MSV what is the company thought in making the compensation to find a rebalancing? And the second point is that you mentioned several opportunities for new investments, efforts, highways and urban mobility. And respecting your limitations in mentioning all these subjects, I would like to know if you could make return metrics comparing airport and urban mobility and highways. Where do you see more greater opportunities of return? This will help us on the company's allocation appetite for new assets. Julien, Luca, good morning. Well, in terms of MSV, the company has filed a suit to discuss the contractual unbalances. We are living with this. In this, we are undergoing a contractual unbalance. And the law 13 for 4 8 enables highlights to return the assets within this period. But we the company was not regulated so far. So we have this idea of rebalancing with style of the suit. We have provisional injunction that eliminates any probability along the line. So we have to wait for the suits to go on. And in terms of the attractiveness comparison within the 3 modes, what do you think? Well, this is Marcos. Well, it's always very difficult to speak about the potential return on competitive processes because we will have more or less competition and this can impact the return on the project. But looking at the history of what happened so far between airports, highways and mobility, we could place mobility as the segment that could generate higher returns due to the higher complexity and risk. And therefore, what we saw in the past, a limited number of competitors. And then secondly, we could put highways because even having in the past few players for each of the projects launched, this segment historically and depending on the project, we are able to get 4, 5, 6 layers bidding for one same highway. So there is the possibility of having higher competition and lower returns. And the 3rd would be airports because when we saw the last auctions, the last bidding processes was several foreign players and the bids were very high. And this suggests that the return that the returns were not as high as expected by the market. So I think this will be the order, but it's always very difficult to foresee this. You have a large highway, a very high very large, big highway that requires more capital with a higher number of participants and sometimes you take the bid, you are win the bid with an attractive return. But obviously, we're thinking on different companies. And sometimes the return deal of another company is different from ours. So this is very strict in terms of capital. And we will be very competitive in all the bidding processes, but we will not set aside the capital gains. Now close our Q and A session. Now we would invite Ms. Marcella or Flavia, sorry, for the closing remarks. Well, on behalf of CCR, I would like to thank you for your time and interest. Please do not hesitate to contact any of us if you have further questions. Our contact information is available in our releases and on our Investor Relations website. Thank you very much. The earnings results webcast of CCR is closed. Thank you for participating and thank you for joining Chorus Call.