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Edited Transcript of FCC.MC earnings conference call or presentation 29-Apr-20 10:59am GMT

Q1 2020 Fomento de Construcciones y Contratas SA Earnings Presentation

Madrid Jun 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Fomento de Construcciones y Contratas SA earnings conference call or presentation Wednesday, April 29, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Miguel Coronel Granado

Fomento de Construcciones y Contratas, S.A. - Director of Management Control & Capital Markets

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Presentation

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Miguel Coronel Granado, Fomento de Construcciones y Contratas, S.A. - Director of Management Control & Capital Markets [1]

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Good morning. I'm Miguel Coronel, Controller and Capital Markets Manager at FCC. Welcome to this recording on the consolidated income figures for the first quarter of the fiscal year, which are released today before market opening and which show the impact of the unprecedented situation arising from the measures taken to combat the COVID-19 pandemic.

First of all, I'd like to say that ever since the pandemic started, our group has remained in constant contact with the health authorities of the countries where we do business. Not only is it key for us to protect our almost 60,000 employees and their health, we are also quite aware that we are a key operator in many essential activities, such as cleaning streets, collecting and treating waste and providing end-to-end water management services. All of these activities are critical for keeping cities running smoothly and tending to the welfare of their citizens.

With this in mind, let's take a look at the results of the first quarter and the development of the gross operating profit, which is up 5.1% to EUR 218.5 million. Utilities, by which I mean environment and water, are playing a big part of this, as is the increase in transport concessions. This operating profit figure includes a EUR 20 million provision to address the effects of COVID-19 from mid-March on. Net profits took a different direction and declined to EUR 28.1 million. This was due to 2 factors: income accounted for by the equity method was lower, just EUR 7.4 million as opposed to EUR 24.8 million the previous year; and so were exchange losses, EUR 15.5 million in the red this first quarter compared to EUR 13.6 million in the black in 2019.

If we look at income, we achieved EUR 1,485.4 million in revenue. That's up 3.3% from the first quarter of the previous year due to growth in Water and Environment, plus an increase in the contribution made by transport concessions after our acquisition of a majority holding in the Cedinsa concession group in November last year and the resulting change in our consolidation method. Construction and Cement were harder hit by the measures decreed to contain the COVID-19 health crisis since March in most of the countries where the group does business.

By geographical area, the income from Spain accounted for 58.2% of the total and was 7.8% higher than the year before. This increase arose from the development of new urban waste treatment and recovery projects, together with new municipal waste collection contracts in the Environment. In the Water area, invoicing rose slightly, offsetting the reduction in the share contributed by technology and networks. Construction area rose in both building and civil works, and they made up for the measures restricting nonessential activities in Spain since the 14th of March. Cement area, which started the year off with a more moderate rate of increase in its business, it eventually feel the effect of the measures. Its income went down due to reduced demand. Lastly, we saw an increase in the contribution from the Concessions area due to the addition of the Cedinsa subgroup, as we mentioned before.

In the international market, income dipped by 2.4%. International income accounted for 41.8% of the group's total income.

Let's turn to Europe. In the U.K., income went down by 1.3%, primarily because we had less of a contribution from the Edinburgh treatment and energy-from-waste plant after the end of its construction and the start-up of its operation in mid-2019. In the rest of the world, inside the EU, we have a major increase in the rest of Europe, 17.9%. Construction's contribution is greater with new contracts in Belgium, Ireland and the Netherlands, and we are seeing a recovery in the environment in some countries, mainly Poland. The Czech Republic registered a 4% increase, following a path very similar to what we are seeing in Environment and Water based on rate reviews, with stable volumes in the end-to-end water management business.

Outside the EU, the Middle East and Africa increased their income by 8.9% in Water with increased activity in technology and networks, plus the operational treatment plants in Saudi Arabia and Algeria. In the other business areas, Construction and Cement income registered no appreciable changes. Income in Latin America and the U.S. declined by 50.7% due mainly to the reduced contribution from Construction's projects in Panama, combined with the reduced contribution from the execution of Water's projects in Colombia and Ecuador. In the U.S., income registered an increase in Environment due to new contracts in Florida and Texas.

Now let's examine the individual business areas, starting with Environment, which accounts for the largest contribution. Environmental area reports EUR 724 million in revenues for this period. That's 3% more than in the first quarter of the year before, and this is due to the positive development of the waste collection and treatment businesses, primarily in Spain, and the increased contribution from the U.S. as new contracts come into operations.

Let's break this down by geographical areas. In Spain, income rose by 3.2% to EUR 423.7 million. This was due to an increased contribution from expanded services and new contracts, the foremost being the segregated collection of organic waste fractions, and an increased contribution from new waste treatment plants, for example, the development of the plant in Loeches, Madrid, and the operation of the plant in Guipuzcoa. In the U.K., revenue has declined 2.4% to EUR 164.6 million due to a reduction in the income from the construction phase of the Edinburgh energy-from-waste treatment plant, which went into operation in mid-2019 and was fully operational in the first quarter of the year. In Central Europe income grew 2% to EUR 114.2 million due to a higher volume of business in the Czech Republic and Poland, which offset the reduction in services rendered to tertiary and industrial customers. Lastly, revenue in the U.S. and other markets increased an outstanding 80.7% due to the start-up of operations under new contracts, such as the waste collection contract for Palm Beach, Florida and the recycling plant in Houston.

Gross operating profit, EBITDA, rose by 11.6% to EUR 113.8 million. This was due to 2 factors: first, the fact that the Edinburgh energy-from-waste treatment plant, which construction was completed last year, is now entirely operational, as we said before; second, the enhanced performance of the incinerators in Allington, U.K. and Zisterdorf, Austria, which spent the first quarter of last year under a scheduled maintenance shutdown. Their combined impact was EUR 6.6 million. We also have the start-up of the new urban waste collection contract in Palm Beach, Florida. Altogether, the operating margin rose to 15.7% for the quarter.

Now let's discuss the Water area. Income was EUR 285.8 million, up 6.3% compared to the first quarter of the year before. In concessions and services, this arose primarily from Algeria's increased contribution and the new assets incorporated in France and Saudi Arabia. Technology and networks fell as work execution associated with concessions largely in Spain slowed down.

By geographical areas, income in Spain was EUR 187.2 million, up 1% from the first quarter of the year before. This was due to a slight peak in invoicing by concessions and rate updates, which made it possible to offset the slowdown in concession-related works execution. Internationally, Central Europe's income declined by 3% to EUR 25.7 million as technology and networks projects were completed in Montenegro and Serbia despite the rate updates and a steady volume of concession activity in the Czech Republic. In the rest of Europe, income rose by 23% to EUR 17.1 million due primarily to income from the business acquired in June 2019 in France. Income in the Middle East, Africa and others increased by an outstanding 57.9% to EUR 45 million due to the increased contribution from the Mostaganem desalination plant contract in Algeria and the companies acquired in Saudi Arabia. Technology and networks also registered a higher level of activity, thanks to the Abu Rawash contract in Egypt. In Latin America, revenue is down 26.5% due to a slowdown in the pace of execution of our technology and networks projects in Colombia and Ecuador. These projects are approaching their completion. On the other hand, the contribution from the BOT contract from Guaymas in Mexico has increased.

Gross operating profit, EBITDA, is EUR 62.2 million, up 5.6% compared to the first quarter of 2019 due to the increased contribution from concessions, mainly the new incorporations in France and Saudi Arabia. Altogether, the operating margin held steady at 21.8%.

Moving on to Construction. Income is up 1.2% in the first quarter of the year, reaching EUR 367.8 million. This is due to the increased contribution from new and existing projects, both domestic and among the European countries, mainly the Netherlands, Ireland and Belgium, which have offset the decline in activity elsewhere, especially in Latin America.

Taking things by geographical areas. In Spain, revenue increased by 27.3% to EUR 183 million due to an increased contribution from new contracts. Our foremost new contracts are for the remodeling of the Real Madrid football stadium and the Loeches environmental treatment complex. In the #2 area by income contribution, the Middle East and Africa, income declined 3.6% to EUR 98 million due to the slowdown in activity of the Riyadh metro, mainly starting in the latter half of March. In Europe and other markets, revenue grew to EUR 64.5 million. That's up 50.3% from the first quarter of the year before. This was due to the upturn in activity registered in projects already underway in the EU, such as the A9 motorway in the Netherlands and the Haren complex in Belgium. In Latin America and the U.S., revenue dropped by 70.4% in the first quarter of the year, mainly due to the completion of the Gerald Desmond Bridge in Los Angeles and Line 2 of the Panama Metro, which have not been offset by other projects in progress.

Gross operating profit, EBITDA, is EUR 20.7 million, down 8.8% from the same period of the previous year. The improvement in the Spanish market's behavior has been unable to offset the decline in international business, with a reduction of the operating margin to 5.6% as opposed to 6.2% the year before.

Now for Cement. The area reports EUR 91 million in income this first quarter of the year, down 9.6% from the previous first quarter of the year due to the reduction in invoicing in local markets in Spain and Tunisia, especially centered on the month of March, and due to a decline in exports from Spain.

By geographical areas, in Spain, revenue is down 10.1% to EUR 55 million due to the gradual decline in demand in the construction market, which could not be offset despite good price development. In the local market of Tunisia, income is up 2.3% to EUR 13.2 million. Price revisions and the appreciation of the Tunisian dinar have offset the reduction in volume. Lastly, income from exports to various markets, largely in Europe, are down 14.2% due to the decline in shipments from Spain, mainly to Europe, despite the increase in shipments from Tunisia.

Gross operating profit is down 35.6% to EUR 9.6 million, primarily because of the volume reductions I mentioned before. Sales of CO2 rights in the first quarter of the year were 0 as opposed to EUR 0.8 million in the same period of the year before.

Lastly, let's look at transport concessions. Income from the area came to EUR 31.7 million in the first quarter of the fiscal year as compared to EUR 7.5 million in 2019. The difference is due largely to the change in our perimeter of consolidation caused by the income brought in by the Cedinsa subgroup after we took control of a majority position there on the 1st of November last year. Cedinsa has been fully consolidating ever since.

By geographical areas, practically all transport concessions business is located in Spain, reported EUR 31.2 million in income, 79.2% of which comes from the Cedinsa subgroup. The tunnel of Coatzacoalcos, concession in Mexico, reported no major changes with respect to the first quarter of last year. EBITDA grew to EUR 24.5 million as opposed to EUR 3.6 million last year with a 77.3% margin over revenue.

Let's see how cash flow and indebtedness developed during the first quarter of 2020. Gross financial debt came to EUR 5,064.4 million, that's similar to the level at the close of 2019. Consolidated net debt came to EUR 3,717.9 million, a slight EUR 139.2 million increase over the figure for December 2019.

Breaking the cash flow down into its components, we'll start with the operating cash flow. Let's look at the development of working capital. The application of funds has been reduced to EUR 217.1 million in this period due to our having spent the progress payments on a number of contracts now well advanced in the Construction area and due to seasonal behavior by our suppliers, which will tend to revert in later quarters. In investing cash flow, in investment payments, the principal item in the Water area is the acquisition of 51% of 2 Saudi Arabian companies, Qatarat and Haaisco, which joint sale price was EUR 16.1 million, plus EUR 6.3 million for Colombia. This also included the effect of ongoing growth investments which in this quarter centered more on the Environmental area. The development of treatment plants in Spain and the U.K. together accounted for over EUR 21 million. There have been no significant divestments in this quarter.

All in all, with this kind of development, the balance for cash and cash equivalents at the close of the first quarter of 2020 was EUR 1,346.5 million. That closely resembles the balance at the close of 2019, which was EUR 1,408.2 million.

As a consequence of the measures put in place to combat the COVID-19 pandemic, in addition to a sharp drop in business activity, there's been a temporary disruption of financial markets. For these reasons, the monetary authorities for various jurisdictions have taken some important and unconventional measures to prevent the financial health of the productive structure from worsening.

The total amount of cash, cash equivalents and lines of credit available for the FCC Group at the close of the first quarter of this fiscal year came to EUR 1,749.8 million as compared to EUR 682.2 million in short-term debt, maturing in less than 12 months for the same date. That makes for a volume more than 2.5x the size of the amount maturing by or before the 31st of March 2021. The itemized data are to be found under cash and available lines of credit in the Director's Report.

Let's talk about the structure of the group's debt. The vast majority of the net financial debt, nearly 90% of it, lies in the group's various utilities. So nearly all the debt is without recourse to the listed parent company.

Before I finish, I'd like to say that in the Director's Report that comes with the published quarterly documents and in each section of the business areas, a heading is included showing the development of the main operating figures for March 2020 in isolation, together with a comparison to the figures for the same month of the year before. If you look at this, you can see the impact of the extraordinary business restriction measures most of the governments of the countries where the group does business have implemented since mid-March to combat the COVID-19 pandemic. I'd like to emphasize that at the current publication date of this report, there is a lot of uncertainty, especially about how and when these measures will be maintained, changed or gradually relaxed. So the evidence these figures can offer about the impact on the development of operations in the group's various business areas for the fiscal year as a whole is extremely limited.

In conclusion, regarding the behavior of our operations, these first quarter results show what our group is all about, the essential necessity of a good part of our activities and our unwavering commitment to our customers, employees, shareholders and society in general. That is especially so in such unusual times as these, when we rely on our solid operation and financial base to form one of the many vectors of recovery and a way for us to make our unique contribution to help us all return to growth and general social well-being.

That's about it with regard to my comments on the leading developments in this quarter. I'd like to remind you that while the technical restrictions currently in place don't allow us to hold our usual question-and-answer period, our digital channel for investors, debt holders and shareholders is still open and available to you all. Thank you. Good day.