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Edited Transcript of ACS.MC earnings conference call or presentation 29-Jul-19 4:00pm GMT

Half Year 2019 ACS Actividades de Construccion y Servicios SA Earnings Call

Madrid Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of ACS Actividades de Construccion y Servicios SA earnings conference call or presentation Monday, July 29, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ángel Manuel García Altozano

ACS, Actividades de Construcción y Servicios, S.A. - Corporate General Manager

* Florentino Pérez Rodríguez

ACS, Actividades de Construcción y Servicios, S.A. - Executive Chairman

* Marcelino Fernandez Verdes

ACS, Actividades de Construcción y Servicios, S.A. - CEO & Executive Director

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Conference Call Participants

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* Bruno Almeida Da Silva

Banco Português de Investimento, S.A., Research Division - Head of Research

* Guillermo Fernández-Gao Sánchez de Nieva

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Olivia Rosalind Peters

Macquarie Research - Analyst

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Presentation

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Unidentified Company Representative, [1]

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Good afternoon, everyone, and thank you for joining us for ACS's First Half 2019 Conference Call. And here with us Ángel Altozano, Corporate General Manager; and the rest of the team. We will briefly analyze the key aspects of our results, and we then look forward to any questions you might have.

ACS has delivered a robust performance during the first 6 months of 2019. At operating level, sales grow by 5.8% to EUR 18.8 billion. EBIDTA increased by 15.1% to EUR 1.6 billion. And EBIT by 9.7% to EUR 1.1 billion. These solid operating results drive a net profit growth of 17% to EUR 523 million. It is a EUR 104 million contribution from Abertis.

On a comparable basis, excluding the Abertis profit and assuming an unchanged stake in HOCHTIEF, our net profit rose by 4%. Operating cash flow improved by 20% year-on-year on our last 12 months basis. This includes an operating CapEx increased higher tax payments in the current period. Our net debt stood at EUR 725 million, EUR 667 million higher than 12 months ago. The main driver here is the net EUR 1.3 billion equity invested in the Abertis transaction and renewable assets since June 2018.

Lastly, on this slide, I want to underline our very strong outlook, which now stands at over EUR 76 billion, almost 10% higher year-on-year.

Sales evolution across activities and for markets. Let's take a closer look at revenues. Total sales of EUR 18.8 billion grows by 5.8% year-on-year, 3.6% adjusted for currency impact. This growth is mainly driven by an outperforming in U.S. market, which is rising by 16.6% or 9.3% FX adjusted up to EUR 7.7 billion. And also, a stronger domestic market with sales growth of over 20% up to EUR 3.0 billion and upended by renewable energy assets development. This Australian market was also positive with growth of 4.0% FX adjusted to EUR 3.5 million.

The business area. Infrastructure grew by 6.6% to EUR 14.2 billion. Industrial Services sales were 3.4% higher at EUR 3.8 billion, and (inaudible) saw a 4.2% rise with a good performance in both the domestic and international markets.

Moving to the next slide. We have EBITDA and EBIT. The Group achieved a 15% increase in EBITDA to EUR 1,621 million. The EBITDA margin stood at 8.6%. EBIT grew by almost 10% to EUR 501 million with a margin of 5.8%. The double-digit growth in EBITDA and EBIT reflects the high contribution from Abertis incorporated from June 2018 and the increased results from our activities.

The breakdown by business area is as follows: In infrastructure, EBIDTA of EUR 1.2 billion shows growth of 20%. EBIT stood at EUR 746 million, rising by 15%. If we adjust operating results with the contribution of Abertis, I give these results, growth rates are in line with higher sales with stable-underlying margins. Industrial Services, EBIDTA grows by 3.4% to EUR 413 million in line with sales while EBIT remained at EUR 356 million. And (inaudible) EBIDTA registered an increase of 7.1% to EUR 47 million.

Net profit by activities. The solid performance of the Group's operating activities has led to an increase of 17.1% in ACS net profit to EUR 523 million while activity infrastructure was 18.5% higher year-on-year at EUR 294 million, of which EUR 184 million comes from construction activities, that is, Dragados and HOCHTIEF excluding its stake in Abertis, which grew 4.6% in comparable terms, assuming an unchanged holding in HOCHTIEF. Concessions generated EUR 110 million, which reflects Iridium and the EUR 104 million Abertis contribution, both varied via ACS and varied via HOCHTIEF after deducting minorities.

Industrial Services also increased its profit contribution to EUR 221 million, up 3.5%. The EUR 19 million from Services was 12.3% higher. And then we have EUR 12 million in costs overheads.

Cash flow generation. On the last 12 months basis, net debt increased by EUR 667 million driven by last year's Abertis acquisition and a significant increase in renewable energy investments, which, altogether, implied a net equity investment of over EUR 1.3 billion. Cash flow from operations before working capital and CapEx amounted to EUR 2.7 billion. This includes the EUR 432 million from the Abertis dividend received in May. Operating working capital variation imply a cash outflow of EUR 65 million. A net operating CapEx amounted to EUR 562 million, EUR 200 million higher than the prior period. Net investments project and financial resulted in a cash outflow of EUR 1.8 billion, which includes, among others, the acquisition of Abertis and the sale of 23.86% stake in HOCHTIEF as well as the net investments in renewals. Our shareholder remuneration was EUR 736 million corresponding to ACS shareholders and HOCHTIEF and CIMIC minorities.

Net debt evolution. Then let's look at the net debt evolution during the first half. At the end of '18, we had a net cash position of EUR 3 million. From January to June of 2019, cash flow from operations before working capital and CapEx amounted to EUR 1.6 billion. This includes the EUR 432 million Abertis dividend, which more than offset higher tax payments during the period. The regional cash outflow from working capital is characteristic during the first half of the year.

In this period, the operating working capital variation was around EUR 180 million higher than in the prior period. However, if adjusted by factoring, variation was significantly better than the previous year as we will see in a minute. Working CapEx of EUR 279 million was EUR 20 million more than last year, underlying with the growth showed by contracts mining and the most capital-intensive activity.

Net investments financial and projects implied a cash outflow of EUR 645 million, of which EUR 610 million correspond to renewable energy assets we are developing in Spain through Zero-E. Just to remind you that by the end of November, this year, we will have approached 1.1 gigawatt already installed and connected to the grid.

A look on the working capital evolution in more detail. We can see that although there was a high cash outflow from operating working capital during the first half of the year, if we adjust for factoring in these figures, about EUR 30 million better than the prior year.

As you aware, the Group just as known for constructing as an operational tool, which allows it to more efficiently manage cash flows and match revenues and costs along the year while mitigating the impact on cash flow from the seasonality of the businesses. We started to implement our factoring strategy in Spain several decades ago and introduced it internationally via HOCHTIEF in 2015, rolling it out across the Group.

So as planned last week in the HOCHTIEF results call, the increase during 2018 was driven merely by CIMIC allowing the company to effectively manage the strong growth in mining revenues in recent years to last 25% year-on-year last 12 months with higher capital requirements, and the transition towards the greater use of Alliance style contracts. This Alliance style contracts a similar to cost-plus contracts, in which work is performed and payment is received afterwards. This compared with traditional Alliance style contract where the contractor normally receives an advanced payment at the start of the project, which has consumed as the project is executed.

In addition to this, we have completed several significant projects across the Group, leading to a lower proportion of advanced or mobilization payments. I also want to underline the seasonality of our business. Construction has a strong second half based due in part to the timing of client payments.

As you can see on the right side of the slide, the average cash inflow working capital in the last 4 years, it has been around EUR 1.2 billion, while the working capital variation adjusted for factoring has averaged a cash inflow of EUR 900 million. This drives the strong cash generation seen during the second half of the year.

Backlog trend. Looking in more detail at the backlog, we can see the positive long-term trend, which underpins a solid outlook for our Group. The compound annual growth rate stands at 7.1% since 2015. The book-to-bill ratio has been over 1x even in a period of rising revenues and currently stand at 1.16x. The total backlogs at the end of June was EUR 76.5 billion, rising by 9.5% year-on-year. This growth is supported by the strong provisional activity, which you can see in the bottom chart of the slide with a 9% increase in the order intake.

Looking at the Group's main strategic regions. The backlog in the U.S. stood at over EUR 28 billion, growing by 21% year-on-year. And the Australia order book of EUR 18 billion increased 8%.

I wanted to highlight the evolution of the breakdown of the Group's backlog. With an increasing proportion of lower-risk projects coming from construction management, Alliance style and PPP contracts as well as a high contribution from infra and mining services.

Looking forward, we have a strong project pipeline, which our teams have identified for PPP in infra projects, which currently amounts to EUR 230 billion and over 80.2 gigawatt in renewable assets, which gave us a high level of visibility for the future.

A strong order intake in H1 '19. Let's look at our major project wins during the half year 2019, which include the current River Rail of PPP project, a new 10-kilometer metro line in the capital, Brisbane, for EUR 1.7 billion; the expansion of the I-64 tunnel in the Hampton Roads region to begin for over EUR 1.2 billion; a project at Euston Station for the new high speed railway in London for over EUR 1 billion; a diamond contract mining at Botswana for EUR 744 million; construction of a water pollution treatment plant in L.A., U.S.A., for EUR 557 million; and a PPP for delivery and maintenance of a new regional rail fleet and construction for new maintenance facility in New South Wales, Australia, for EUR 457 million.

And so to summarize, we have delivered a solid set of results with a positive operating performance across our activities. And a significant increase in net profit accompanied by solid cash flow generation and rate level of visibility and stability. This has driven a more effective risk profile across the group. Our robust backlog reinforces our leadership position in our strategic markets. And we have a significant purchase pipeline approaching EUR 600 billion for the remainder of 2019 and beyond. Furthermore, the EUR 230 billion PPP pipeline provides the group with excellent growth opportunities.

In conclusion, we are confident to meet our 2019 full year targets, which have a value of 5% top line growth and 10% net income growth, meaning over EUR 1 billion of net profit. I thank you very much.

And now we are ready to answer any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Guillermo Fernández-Gao from Kepler Cheuvreux.

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Guillermo Fernández-Gao Sánchez de Nieva, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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First one would be if you could give us an update on the -- given by Bremen processes on your -- both on your energy concessions and portfolio and also in the infrastructure portfolio because we have seen, I mean, press headlines on both possibilities on divestments being advanced in both assets.

And second one would be whether you could give us an update on the situation on Mexico for Industrial Services, which seems to be like the weaker link of your -- of all your results with, I mean, material decrease of revenues made there.

And the last one would be whether you would be thinking on increasing your HOCHTIEF stake as an option on your capital-allocation policy?

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Florentino Pérez Rodríguez, ACS, Actividades de Construcción y Servicios, S.A. - Executive Chairman [3]

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Okay. Thank you, Guillermo. In reference to the divestments, in the end, concessions assets in the Zero-E process, we have a dual-track approach with a possibility of 2 ways: placing an IPO in the market or doing an M&A deal. It's not clear yet, which -- the outcome. If we choose the upside, which provides a higher value for the shareholders. So this is something which is not important to us as yet. It'll be known later on, and I assume that we have it, we'll make a distinction.

So in terms of the infra divestments, it's a first which is ongoing. I don't think it is going to take too long, but probably, it will be before the end of the summer, we have to prepare earlier probably later than a week in early September.

In Mexico, what we think for us is a very important market, the political situation, they're changing their Prime Minister, has actually slowed down the overall economic activities there. For our Industrial Services activity, the Pemex and the Comisión Federal [de Electricidad] in the past. In the last couple of years, we divested towards the private sector as well. Well, we probably have now 50% of the activity within private sector.

And with the funding that we can get in a few months, the big economic activity of Mexico where possible, I think, we will recover because it is very strong market with a large population and have a clearly revenue investment, which is also benefiting the U.S. economy. So we think it is likely to recover, although now we see as a loan situation. And then...

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Marcelino Fernandez Verdes, ACS, Actividades de Construcción y Servicios, S.A. - CEO & Executive Director [4]

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Yes. Guillermo, it's me, Marcelino. The rest of your question regarding of HOCHTIEF, of course, it's one option. And it's -- of course, it's an option that we are analyzing. You know that we are very focused on our capital allocation opportunities. And including everything remuneration for our shareholders, strategic investments. And originally, we are analyzing also this possibility, and this is one of the chances that we have.

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Operator [5]

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(Operator Instructions) The next question comes from Bruno Silva from CaixaBank BPI.

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Bruno Almeida Da Silva, Banco Português de Investimento, S.A., Research Division - Head of Research [6]

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Just one question regarding the evolution in this quarter of a Dragados' EBITDA...

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Ángel Manuel García Altozano, ACS, Actividades de Construcción y Servicios, S.A. - Corporate General Manager [7]

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Could you speak up a little bit?

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Bruno Almeida Da Silva, Banco Português de Investimento, S.A., Research Division - Head of Research [8]

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Yes. I only have one question about Dragados' evolution in the quarter. It appears to have been a material slow down, particularly at the EBITDA level. Just wonder what are the reasons behind that? And if we could expect to recovery towards the year-end. I'm not sure if it is related with domestic market or not with elections or not. Any further color on that would be appreciated.

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Ángel Manuel García Altozano, ACS, Actividades de Construcción y Servicios, S.A. - Corporate General Manager [9]

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Okay. Thank you, Bruno. Well, you'll realize that I've explain a little bit about seasonality. And obviously, we look a little bit more in the evolution of the quarters, you realize that there is a lot -- more volatility on that. But we are on track for reaching our targets for the second half of the year in Dragados.

Particularly in Dragados, we are in a very positive evolution. And what we believe is practically to realize, we can see that in the second half that we are presenting a flat evolution, but this is -- we are targeting (inaudible) to get there. And what are the important things I'm trying to say to explain to all of you and to the market is like -- the second half of the year, traditionally speaking, and when we were analyzing in order to give to you more clarity about factoring everything. We were analyzing the second half of the previous year's and the first half of the previous year's behavior is totally different. And we've reached conclusions that we shared with all of you, and the short answer would be that, yes, we are on track for reaching our targets by the end of the year in Dragados, too.

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Bruno Almeida Da Silva, Banco Português de Investimento, S.A., Research Division - Head of Research [10]

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Okay. And so just a quick follow-up. What the target would be regarding the full year on Dragados? I didn't quite follow.

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Ángel Manuel García Altozano, ACS, Actividades de Construcción y Servicios, S.A. - Corporate General Manager [11]

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We are not providing any specific targets in our companies. But as you realize, the company's performing well slightly in some items and increasing in our order book tremendously. There is a significant variation in -- over 18%. And what I was telling you is that we see that we can't recover in the second half of the year all the impact that the seasonality is having in the current -- in the first half of the year. We are positive on that.

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Operator [12]

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(Operator Instructions) The next question comes from Olivia Peters with Macquarie.

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Olivia Rosalind Peters, Macquarie Research - Analyst [13]

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I just have one question.

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Ángel Manuel García Altozano, ACS, Actividades de Construcción y Servicios, S.A. - Corporate General Manager [14]

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Could you speak up a bit please?

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Olivia Rosalind Peters, Macquarie Research - Analyst [15]

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Better? Fantastic. I just have one question for you. Just on your Industrial Services business. I can see obviously that you've -- that the DNA is up in that business, yet net profit is basically up -- the margin there is flat year-on-year, whilst the EBIT margin is actually down. I'm just wondering if you could comment a bit on the moving parts there to give us a better understanding of what is actually going on at the underlying business?

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Florentino Pérez Rodríguez, ACS, Actividades de Construcción y Servicios, S.A. - Executive Chairman [16]

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Okay. Yes. The amortization in the Industrial Service activity has increased significantly because now they are consolidating the electric-generating assets of DOE, which obviously have a significant amortization charge, which is something we didn't have last year.

So this is -- although we have assets held for sale, but a significant amortization charge against -- to the P&L. So that is the reason why this actually reveals EBITDA margins because of the increasing amortization. As you see basically, the EBIDTA improved 3.4%, and EBIT basically was flat with 0.2%. And this is because amortization increased from EUR 39 million to EUR 59 million. So it was about EUR 20 million increased because of amortization of the electricity assets.

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Olivia Rosalind Peters, Macquarie Research - Analyst [17]

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Okay. And how is it that net profit also increased 3.5%? Did you refinance debt? Is it a tax issue?

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Florentino Pérez Rodríguez, ACS, Actividades de Construcción y Servicios, S.A. - Executive Chairman [18]

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Well, basically, each place has a different structure. But basically, the rough number is 35-65 of financing, about 2/3 in debt to 1/3 in equity.

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Operator [19]

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(Operator Instructions) There are no further questions. So I now give back to floor to the speaker.

We have no more questions in the conference, so speakers you have the floor.

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Ángel Manuel García Altozano, ACS, Actividades de Construcción y Servicios, S.A. - Corporate General Manager [20]

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(foreign language) Thank you very much to all of you, and we will see you in the next conference call in the third quarter Q3 results. Thank you very much.

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Florentino Pérez Rodríguez, ACS, Actividades de Construcción y Servicios, S.A. - Executive Chairman [21]

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Thank you.