conference call transcription – mario covas road ring – west segment

Conference Call Transcript Material Fact – Mário Covas Ring Road – West Segment

CCR – Companhia de Concessões Rodoviárias February 11th, 2008

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Operator: Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to the CCR conference call, to discuss the bid for Mario Covas Ring Road — West Segment. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the Company’s presentation. After the Company’s remarks are completed, there will be a question and answer session. At that time further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities litigation reform act of 1996. Forward-looking statements are based on the beliefs and assumptions of CCR management, and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of CCR and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Arthur Piotto Filho, the CFO and Investor Relations Officer at CCR. Mr. Arthur, you may begin your conference. Arthur Piotto Filho: Good afternoon. Thank you, operator. First of all, I would like to thank you all for taking the time to hear, to join us in this conference call. Today we have here — besides myself — we have Flávia Godoy, member of the Investor Relations team, as well as Michelle Michaan, that performs the same type of job. It is a pleasure for us to inform our shareholders and partners in the capital market of our achievement of yet another step towards expanding our business. The classification as the best proposal for the west segment of the road ring, something we worked hard for, and have been looking forward to for some time. We believe in CCR’s competitive advantages through the expertise acquired throughout the ten years of the Company that has been operating the concessionaires that are part of our current portfolio. With that in mind, our proposal took into consideration this expertise in operating and having a quality relationship with all communities, users, financers, and granting powers. We are confident that we will be granted access to the best credit facilities and take advantages of synergies in order to reach profitability in line with the Country’s current economic scenario. At this point in time, I would like to highlight some milestones for the Company. CCR has been telling the financial community that our policy towards bidding for new projects has everything to do to keep our capital discipline, so profitability first and then expansion next. On the other hand, this Rodoanel project represents for us one step towards the perpetuation of our business. The Company remains deeply interested in taking part of the next bid that should be out for bid in the upcoming months either in the State of São Paulo or federal roads.



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We do believe that the most relevant characteristic of Rodoanel project was the balance between the granting authorities’ requirements, the road users need, and the capital from investors. So we do believe that this is a very successful formula and it was a quite different case if we compare with the most recent auctions we have been seeing in Brazil. At this point in time I make myself available to answer any questions that you may have. Thank you. Operator, go ahead. Nick Sebrell, Morgan Stanley: Hi. I have a couple of questions. We can start out with how were your assumptions different when you constructed your bid from what ARTESP released in its viability study? And then if you could go from there to what are the returns plus leverage and unleverage that you foresee resulting from your bid; best case scenario? Arthur Piotto Filho: Sorry? Nick Sebrell: I am sorry. Did you get the question or…? Arthur Piotto Filho: Yes. I was telling you that we are talking about the three most relevant assumptions, which are: traffic, where we took into consideration at least 50% traffic increase compared with ARTESP’s figures. Their figures were outdated in approximately one year. And if you take a look in the same period, traffic performance, we have been seeing in CCR’s concessionaries in particular in those exactly with the same location as Rodoanel is located, you are going to see why we have been getting this most optimistic scenario. Another thing that I should share with you is the fact that the Rodoanel, ARTESP’s figures took into consideration a maximum tariff, or a ceiling tariff, equal to R$3 per car. And this is a particularly sensitive project for the reason that you have a highly sensitive depending on the size of your tariff. So, using our tariff — approximately R$1.17 — we get this outcome or the most appealing traffic situation. On the CAPEX assumption, we based on our previous experiences and according to one new technology we have acquired recently specially towards the maintenance of the hard pavement or the concrete pavement, we squeezed out approximately in between 30 and 40% reduction compared with ARTESP’s figures. And on the OPEX issue, we are running around 30% below ARTESP’s figures, as well. On OPEX, I would say that the most relevant assumption was the administrative and some of the operational costs we believe that due to the proximity with our two concessionaires we will able to generate that size of synergies. And I think if I correctly understood you, the second part of your question is about the internal rate of return of this project. In unleverage basis, in real figures, we expect to generate 9.3% and on leverage basis, in real figures as well, it is about 15.2%.



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Nick Sebrell: Thank you. Mauricio Ribeiro, Citibank: I just read on the Internet that you have got a bridge financing on UBS. I was wondering if you could provide more details on the conditions and characteristics of this bridge financing and whether you have aligned the take out, what are you seeking of the long-term [inaudible]? Arthur Piotto Filho: Regarding the bridge loan, we have a firm commitment from UBS to lend us this money but for the confidentiality agreement of this instrument, I am not supposed to tell you exactly the cost of it. But it is denominated in Reais and with a CDI plus a spread. And for the take out for this bridge loan, we are expecting to get a multilateral agent loan, the traditional A and B structure that you should be aware of. And that probably will be for ten years tenor, with a bullet, the principal amortization. So, at the end of this second refinancing, we plan also to do it again, I mean after this ten-year period, we will refinance it one more time. So, this is basically a very simplistic description of our financing strategy to fund this project. Nick Sebrell, Morgan Stanley: Hi, I actually have a follow-up question, regarding what is the leverage you are assuming in terms of your equity versus debt. Arthur Piotto Filho: We are basically assuming the capital structure of 75% debt and 25% equity. Nick Sebrell: OK, and will debt be coming from BNDES or probably other source? Arthur Piotto Filho: No, debt will come either from cash from CCR or if we are able to issue some more debt. But it all depends on the market conditions. At the moment we will refinance it, I mean, at the end of the first year, which is the tenor of the bridge loan, we will refinance this loan and only at that time we will be able to tell you exactly which will be the exact leverage. For the reason that once you get involved with these multilateral agencies you are going to face a due diligence process in order to really establish in which conditions they will finance your project. And although we have been making some approach to either of these multilateral agencies, we have a very good sign and a very good estimate that we can keep the same assumptions we took in our proposal. So, we are quite comfortable with this funding strategy.



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Nick Sebrell: OK. So, I guess I could back out the assumption for funding costs. So what do you expect, what can you disclose, what your estimate funding cost is going to be? Financing costs on the debt site? Arthur Piotto Filho: Yes. The international debts will cost us around LIBOR + 250 b.p. Nick Sebrell: Thanks. Alright. Next question has to do with synergies between this and your other operations that you have, what is it, four other highways in the area? Can I think the cost synergies are obvious? You also have revenue synergies, potentially, from the geographic proximity? Arthur Piotto Filho: We did not take that into consideration. Nick Sebrell: OK. And then you mentioned, I am positive that it might have been something, that CAPEX you are looking at 30% to 40% less than what the Government stated. Is that 30% to 40% total CAPEX or that was just the paving you were talking about? Arthur Piotto Filho: No, total CAPEX. Nick Sebrell: Alright. Arthur Piotto Filho: This is based on our previous experiences running six concessionaries and also supported by our engineering share service center that has been quite qualified to identify this type of service providers. What we did in this case, really, was to squeeze these people as much as we could in order to generate the most competitive proposal we ever submitted. Nick Sebrell: OK. It does make sense. So, the CAPEX that is in the study is not necessarily required; it is not as if by winning the auction you are required to spend that money. There are other means that they monitor — road condition and what on — and as long as you satisfy road quality and the metrics they have, your level of efficiency is immaterial to them; is that right?



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Arthur Piotto Filho: Exactly. Perfect. Nick Sebrell: Alright. And in terms of how the tariffs changed later on; is it the inflation or is there a productivity factor? I could not find anything in the document. Arthur Piotto Filho: No, it is 100% IPCA inflation index with no productivity factor that should be passed on to the tariff increase. Nick Sebrell: At the close of the concession, is there any ability to roll it over or renegotiate, or does it come back for auction or something like that? Arthur Piotto Filho: No, according to the concession contract, at the end of its term we should return it to the State Government and then probably it is going to be out for auction one more time. Nick Sebrell: And at the beginning of the call — this is my last question, I promise — you mentioned expecting another auction coming up. What do you think most likely is the next auction to come to bid? Arthur Piotto Filho: The most likely should be the State roads. Here at CCR we are quite comfortable and quite confident that the State authorities were just waiting to see the outcome of this Rodoanel auction to really move ahead with the next project they intend to privatize or to transfer to private companies, which were the five State roads. Nick Sebrell: Right. Thank you very much. Maurício Ribeiro, Citibank: Can you tell me how much higher was CCR traffic in comparison to ARTESP initial traffic? Do you have this number? And also another thing that would be important for me to know is what was your assumption in terms of traffic growth? I think that ARTESP considered something like a 3.5% per year; what was CCR’s assumption on that?



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Arthur Piotto Filho: I think this project has a profile that if we just take a snapshot of the first year you are going to be incurring on an error; if you take any conclusion onwards based just on this figure or this initial conclusion for the reason that we have a very relevant issue that might be in place by the year 2010, which is the beginning of operations of the south stretch of Rodoanel. Just this issue will aggregate approximately 20% more traffic, which means 20% more revenues. I think, on an average, the figure I mentioned before, which was the 50% greater than the ARTESP figures, better represents the difference between CCR’s assumptions and ARTESP’s assumption. Maurício Ribeiro: How about the ongoing growth? Arthur Piotto Filho: We took in our proposal 1.2 GDP as elasticity. The reason for that has everything to do with the most recent traffic performances that we have been observing on ViaOeste and AutoBan concessionaries, which is quite close to the Rodoanel. Maurício Ribeiro: And what GDP have you considered? Because, in the long term, GDP is sometimes difficult to define, so mainly you have to make an assumption there. Arthur Piotto Filho: The GDP assumption the Company worked with is exactly the same one the Central Bank usually discloses, which this year, by the way, should be around 4.5%. Maurício Ribeiro: And you worked as if 4.5% would be a constant growth during the next 30 years? Or did you change this going forward? Arthur Piotto Filho: No, unfortunately I cannot anticipate much of traffic study information to you but, at the moment, our proposal really reached the market; the moment ARTESP made it public you are going to see that there is one detail of the project, a deceleration trend that should be observed as well. So, this is exactly the same pattern every traffic study the Company has ever performed indicated. We do not just apply 1.2 GDP for the entire 30-year period. Maurício Ribeiro: Thank you. Luiz Pinho, Schroders: I would just like to shed some light on the possibility of selling stake to other investors.



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Arthur Piotto Filho: I could not understand your… Luiz Pinho: OK. I will repeat: I just would like you to shed some light on the possibility of selling stake to other investors. Arthur Piotto Filho: This is something that the Company has been working into for a while. Since the federal roads auction, the Company has been in conversations with some international infrastructure funds or pension funds in order to establish sort of partnerships for these projects. And I believe that, right now, after we were indicated the best proposal for the Rodoanel project, I believe the Company is more than ever close to this agreement. We have an understanding of more than 90% probability that will be signed of, that where the Company will get some extra profitability out of the project because this is exactly the characteristics of this partnership. So, I would say that on top of those figures, as returns, I mentioned before, this is something that our shareholders must benefit from. So, this is something that unfortunately now I am not in a position to share with you for the reason that we should first wait for the Company be really awarded this concessionaire and first of all closing this agreement or this partnership and be sure that we can really sign to our investors that this is one more upside that we should be entitled to get. Luiz Pinho: OK. I do not know if you can release this information but this additional upside, would it be like selling this stake at the premium, you get a higher price, or would you have other specific shareholder agreements, mechanisms that would provide upside later? Arthur Piotto Filho: No, this type of mechanism that we are talking about here works in a way that CCR will be entitled to get out of the project sort of operational fee or management fee or anything you can name it that works this way. So, this is something that — or we can call it a sponsor fee, something like that — it is clearly one additional profitability that CCR will be entitled to generate. And I think this partnership will also provide us a sort of a financial flexibility to bid for the remaining projects we are waiting, which are exactly the state roads here in São Paulo or federal roads towards the year end, or even the train link between the inner region of São Paulo city to the Guarulhos airport. There are other projects that the Company is proactively working on and we do believe that keeping our financial flexibility at this point is a very smart move to do. Luiz Pinho: OK. Thanks.



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Operator: There are no more questions at this time. This concludes the question and answer session at this time. I would like to turn the floor back to Mr. Arthur Piotto Filho for any closing remarks. Arthur Piotto Filho: Thank you, operator. One more time, I would like to thank you all for joining us today. The other executives at CCR and I still remain available to clarify any new doubts you might have. Please, do not hesitate to contact us; we are available to take your questions at any time. Thank you very much. Operator: Thank you. This thus concludes today’s presentation. You may disconnect your lines at this time, and have a wonderful day.

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conference call transcription – mario covas road ring – west segment

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