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Edited Transcript of FCC.MC earnings conference call or presentation 30-Oct-19 8:00am GMT

Q3 2019 Fomento de Construcciones y Contratas SA Earnings Call

Madrid Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Fomento de Construcciones y Contratas SA earnings conference call or presentation Wednesday, October 30, 2019 at 8:00:00am 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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Conference Call Participants

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* Antonio Rodríguez Vicens

BBVA Research SA - Research Analyst

* Filipe Martins Leite

Banco Português de Investimento, S.A., Research Division - Research Analyst

* Guillermo Fernández-Gao Sánchez de Nieva

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Victor Acitores Peñafiel

Societe Generale Cross Asset Research - Equity Analyst

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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, everybody. My name is Miguel Coronel, Managing Director for Equity and Management Control in FCC. I thank you for attending this conference on the results of this year, which we have submitted to the Stock Exchange Commission.

As you have checked in the first place, I'd like to underscore the increase in the net attributable income, EUR 233 million. It's increased 32.4%. It's a great increase in comparison to last year, EUR 176 million.

I will explain the different business areas, but it's also highlighting the reduction of the financial expenses, which more than has offset the increase in minority interest, which is a result that is mainly found in Water. As I said and according to the consolidated results, the business turnover grew to EUR 5,577.9 million (sic) [EUR 4,577.9 million], which is an increase of 5.2%. Here, we have to underscore Water activities, Cement and Construction. In Water, there was a greater contribution of the international business. And in Construction, there were also projects rendering revenues which are different geographical considerations of different operating projects. And in Cement, it's because of the good demand that is sustained for the time being in Spain.

By geographic areas. In Spain, we have 55% of the total contributions. The revenues moved up 4% with EUR 2,497.9 million. The contribution of the Environment is very welcome because of new contractual agreement on street cleaning and in the new projects for water treatment plants. And there's an advancement both in volumes and in prices. And in end-to-end water management, we also have a moderate increase in consumption.

Foreign markets, I'm going to break it down now. But jointly, they all moved up 6.7%. So it's 45% of the revenues in the consolidated account.

The first market is the United Kingdom. It's our first foreign market. There was a slight decrease in revenues, 1.1%, because there was a lesser contribution because of the construction plant which is now operative in the energy from waste plant in Edinburgh. You know that the revenues have to be considered into this quarter because it's finished. And there was also the technical scheduled stop at the Allington plant. We had a small effect in the first quarter. Okay, we will see that in detail.

For the rest of Europe, we stand by the Czech Republic. There is an increase of 2.5%, especially because of the good evolution in the tariffs that we have in the end-to-end management business that we have there. With other activities from the Environment could also have a very good behavior in waste management.

In the rest of Europe, especially in the European Union countries, there was a very good growth, 35.3% growth. There was an advance of the projects we have in Romania in construction, with the railway projects and new projects that have started to build in Belgium and Portugal. And also, as I said in the beginning, because of in the same tariffs, there's good -- there's been a good evolution on the prices and the demand of the Environment with waste management resources in these European countries of the Central and Eastern Europe.

Outside the European Union, in Middle East and Africa, we have the reduction of 7.2%. As we said before, it is the basic problem in finishing off the Doha railway project in Qatar and in construction. And also the desalination plant in the Egypt, in the north part of Egypt. And this was more or less compensated but not completely with the execution of the enlargements that we're taking into account in the railway -- Riyadh railway lines in Riyadh, extensions to the Riyadh Metro in Saudi Arabia, the completion of the railway contract, the desalination plant in Egypt, so it's been on the way.

In the United States the increase go up in 9.3%; and in Latin America, 10.7%. We have some activity plans with hydraulic structures with Colombia, Ecuador and Mexico and also a greater activity of the building contracts that we have for Line 2 in Peru in the City of Lima. And going back to the United States as the last relevant market, they increased by 9.3%, as I said, with still ongoing different projects for urban waste collection in the 2 main areas, Florida and Texas, in the FCC Environmental Services. And also, there's a greater contribution because of exports in the area of Cement.

All in all, the EBITDA had a very good behavior. It grew -- EBITDA grew to EUR 740.8 million, which is an increase of 14.7%. It's because of the different revenues generated by all the different business areas and because of the enforcement of the IFRS 16, the new international financial reporting standards on leases.

Now I'll go through the different areas. Let's start by Environment. Here, the revenues reached EUR 2,168.5 million, an increase of 3.5%. It's a positive evolution, and we have to underscore out of our main activities for collection and treatment of urban waste and especially the positive evolution in Spain, as I said before, and in the center of Europe with the new contractual agreements and the extension of other services that were already existent. In Spain, the revenues increased by 6.2%, which is EUR 1,261.5 million, more than 58% of the total because of the building and finishing of different treatment plants such as the community of the northeast of Madrid, in Alcalá de Henares, and the water treatment plant in Guipúzcoa. And also, we have to underline the new extensions of the collection of the organic fraction in Madrid and in Prat de Llobregat in Catalonia.

In the United Kingdom, our turnover went up -- went down by 3.8% -- decreased in 3.8%, EUR 517 million, because of the construction and finishing off of the treatment plant and the energy-from-waste plant in Edinburgh. Now there was also a scheduled stoppage, and there was the scheduled stop in the energy-to-waste -- energy-from waste plant in Allington. But now it's already resuming its levels of activity. It's got very good activity now.

Central Europe, we increased by 5.5%, which is EUR 347 million (sic) [EUR 347.9 million]. That's usually the so-called complex services in the center of Europe particularly in third-party customers in Austria, in Hungary and a better activity with the recovery in the Polish market, which is recovering from the poor conditions last year.

And on the other hand, the revenues for the United States and other markets increased because of the new contracts, Rowlett in Texas and the recyclable plant which is now operational in Houston.

With all these, the EBITDA result increased up to EUR 359.7 million, which is a growth of 10.9% as to last year. It was a quite harmonized growth in all business areas, and it has been offsetting different elements that we have for some headwinds like the increase in the price of fuel or the volatility on the price of secondary, primary raw materials. But all in all, the margins over the expenses went up to 16.6%.

Second area by contribution to the group, which is Water. Here, the revenues at 9 months increased by 6.7%, EUR 881.2 million. And as I said, the end-to-end water management in Spain have a very good behavior. There was also a greater contribution in our operation activities in the water treatment plant in Mostaganem in Algeria and the Czech business, which is quite solid in the Czech Republic.

In Spain, we had EUR 601.6 million revenues. There was a soft increase in the volumes sold, and they were able to offset the slight reduction in activity that we have with the water treatment plant's operations. In Technology and Networks, we kept up in Spain similar volume activities, especially linked to very repeated actions of a small size that are linked to our concessions.

In Central Europe, revenues grew by 3.2%, which is EUR 82.8 million. Mostly, our business has to do with the Czech Republic with SmVak. And after buying it over, we were able to raise the tariffs, which offset the lower volume. By the first half of the '19, there was a problem, but it's more than overcoming in Technology and Networks, which has a greater activity especially with some ongoing projects in Romania and Montenegro.

In the rest of Europe, where we have places like Italy and recently France, our revenues grew by 28.1%, which is EUR 51.5 million. We have incorporation to our global consideration group of the French group SPIE, which contributed EUR 6.9 million with a greater activity in Technology and Networks, specifically to a Sicily contract with Acque di Caltanissetta.

In LatAm, the business went more than twice of year-on-year results, EUR 62.9 million. There were different projects for a BOT business in operation in Salitre in Colombia and Guaymas in Mexico.

And now in Middle East, Africa & Others, the revenues increased 6.6% up to EUR 82 million (sic) [EUR 82.4 million] especially because of the contract we have in Algeria in Mostaganem Coast and a greater advancement in some of our plants that we have for water treatment plant, which is a large plant in Abu Rawash in Egypt, which offsets the cost of finishing this project which is currently operational in El-Alamein in Egypt, too. It's actually nearby.

So all in all, EBITDA grew by 11.2%, which reaches EUR 207 million. We've increased our EBITDA with a greater profitability, revenues in water cycles. And there was also a great contribution because of the volume in Technology and Networks earnings, the same as in Environment. The EBITDA reached a profitability of 23.5%, 5 points more on a year-on-year result.

Third area of activity by relevance, which is Construction. The revenues also grew 6.8% up to September, EUR 1,218.6 million, but there's many projects combined into this amount. The greater contribution comes from foreign trade in the international area, especially in some select countries where we are strongly positioned in the European Union because of the exchange rate, dollar-euro, which has advanced about 70% year-on-year. And we have hedged our contract to the exchange rates, so they had a slight effect.

In Spain, the market has showed a moderate increase, 1.7%, which is EUR 447.8 million. This was seeing an increase in our portfolio contracts. There was an increase in construction for civil works, but still the portfolio has not made itself fully visible, but it's a double-digit increase for the future prospects.

Middle East and Africa. Here, there is a problem. There's a decrease by 6.7%. We do not completely offset the completion of the Doha railway contract in Qatar. It has a problem for geographic problems, but we've advanced by 80% of the construction of the 3 railway networks for Dubai.

And Latin America. Our business turnover grew by this third semester similar to what we had last year, EUR 247.2 million. Especially the main driver has been Line 2 of the metro in Lima in Peru and the Toyo Tunnel in Colombia.

And we have to mention, as I said before, the outcome in Europe together with the United States and the other markets. It's included more or less in the same chapter in the report. It's increased 76.5%, 213.6% (sic) [EUR 213.6 million]. With other countries, the Haren complex in Belgium, many plants in Ireland and Dublin and especially the great activity of the 3 railway lines that we are building in the north of Romania.

So the EBITDA grew 70.2%, which is quite striking, EUR 73.7 million, as I said, which is the result of the good running of the projects ongoing and the contribution of some finished projects that gave rise to an operational margin of reaching 6%, which is a gain of 2.3 points in comparison to last year.

Cement. This is one of our largest activity areas. The revenues grew 13.9%, which is EUR 315.8 million. There was good behavior with volumes, sales and prices in Spain and also because of the increase in exports.

Spain is our main market, and they increased 13.4%, EUR 190.3 million. And there was a quite harmonic growth by the different business areas in volume and in price.

In the case of Tunisia, the market locally were stable, so we kept the revenue stable because, of course, our consolidation is in euros. So it's EUR 49 million (sic) [EUR 41 million]. There was a mixed increase. Some went down by volume. But we also have the problem of the value of the Tunisian dinar, which has gone down by 8.6%. So the -- in euros, it grew by 10%. So all in all, it's stable.

The exports to different markets, mostly Europe, have had a positive behavior, European markets, mostly the United Kingdom. So they increased by 23.5%. But there's also increase in exports we have taken to United States or Costa Rica.

So all in all, EBITDA grew by 16.2%, EUR 66.7 million. It's the price, volume effect, as I mentioned, with the usual leveraging behavior for Cement activity. And we -- the selling of our CO2 rights was EUR 5.6 million, which is less than the EUR 9 million last year. But if we exclude the impact of the selling of rights, the EBITDA would have increased even more. It would have been 26.5%.

So we have seen the 9 months on operational levels to -- from the main areas. And now let's break down into detail for the cash flow and our debt or indebtedness. The net financial debt grew by (sic) [to] EUR 4,235.6 million, which is almost stable. It only increased by 2.5% year-on-year. And the net -- the consolidated net debt reached EUR 3,000 million, which is 11.5% more.

Different components into the cash flow. Once again, we have to underscore the evolution of the operational capital because it's been slightly lower, but it's still up to EUR 363 million this year, which is 19% less year-on-year. And this is explained because there is a rate -- a greater change in the contract as to which they are associated. So it grows less in construction areas and the advancement area that we have in the treatment plants projects in the area of environment, mostly in Spain.

Besides the cash flow, the current cash flow, we have to remind you once again that during the first 6 months, we have an exceptional payment because of accounts payable to the Tax National Administration. There was a payment linked to the historical amortization of acquisitions undertaken by the group by the first decade, and it's a historic payment. But we have appealed because we disagree, of course, so we will see.

And I have to mention these enlargement investments for the French group on SPIE for end-to-end water management business for EUR 31.7 million and all the other capital invested into water plant treatments in Environment, which is EUR 46 million. And we also bought the shares for the [Society Co Jerez], Aquajerez, which is EUR 28.9 million. But though the other relevant investments have had an impact on the cash flow for the rest of the year, it's quite stable. So all in all, the cash flow closed at September at EUR 1,052.2 million as of the 30th of this September.

So our indebtedness, the net debt has closed with very similar figures. There weren't much changes as to the different items. With resource (sic) [recourse], the net debt is about EUR 1,513 million. We have 2 credit tools for short- and long-term financing. Nothing to mention again. And without recourse, it still prevails. It's 60 point percent (sic) [68%] of the total, as you can see, [2007 -- 2,222.6 million]. Then in the report, you will have the detail of the different areas of activity, nothing worth mentioning.

So in conclusion, the results of these months, as we said in other presentations, are showing the recurrence trend without any exceptional effects to be mentioned on the profits of the group. We have the potential coming to fruition, which is the effect that we have seen of all our actions and initiatives financially and operationally in the group. And we have there an activity base which has solid growth and profitable.

Thank you very much. Nothing else to say about this past 9 months. Thanks again for your attention. We have many results in this quarter.

And now there are, if any, questions and answers. We think we start with the questions in Spanish, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question by Guillermo Fernández-Gao, Kepler Cheuvreux.

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

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Four questions. I did have a couple of them. The margins on the main business areas for Environment and Water, third quarter, there's been a very significant increase in Environment. You had 15.4% on EBITDA and now 19% in the Q3. And in Water, you had 22.6%, and now 25.1%. Just to ask you, do you think the increase is sustainable, or perhaps this 19% and 25% are just particularly high and short lasting?

And the Environment in Spain, the business area of Environment in Spain, what are the prospects to the future? Short or medium term, we will open more water treatment plants, and therefore, you will need a greater CapEx. And finally, you mentioned that you rise up to EUR 370 million about the first 9 months. Do you think most of these will be recovered seasonally more or less by the fourth quarter?

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Miguel Coronel Granado, Fomento de Construcciones y Contratas, S.A. - Director of Management Control & Capital Markets [3]

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As to my first question -- the first question, the behavior of these margins, I mentioned, have to do both for Environment and Water in the combination of the contribution between the different activities. Let me see. Some are more dominant in the different business areas. I'll explain. It's the effect, as I said, of the IFRS 12, the accounting standards for operational leases. In the case of Environment, it has to do mostly that concerning the activity of the Edinburgh plant, there was a greater contribution for -- during the development plant. It was about EUR 70 million last year, okay, during the construction and finalizing. And this year, this disappears. And it runs into operations from May to June, and therefore, it is considered as under a different chapter. There's little activity for revenues. It doesn't contribute much to EBITDA. But then afterwards, when it runs into operations, it contributes more. This last part of the year, there was a small production that was finally allocated to a different end in the United Kingdom that has had a differential effect. But for Environment, in general, if the projects under development don't have a great amount, most of them are recurrent activities. Treatment plants are more active in the capitalization. Then when they go to operations, they have a better margin.

And in Water, more or less are the same. The end-to-end water management business that you have offers a better margin. These portfolios have much higher revenues and the concessions are long term. So we have the participation of SPIE in France in the -- to consolidate the results, very little contribution. But Algeria had a greater contribution. And I also mentioned that in my presentation. More than majority, they are globally consolidated. So the -- taking into account of these large desalination plants on the north of Algeria has increased in the '19 quarter reported. So the contribution of Water is greater than Technology and Networks. So it has a very, very recurrent component into the margins that you mentioned into the third semester.

In the CapEx side, remember what figures we were mentioning, where they went to maintain it or sustain it. I think that to the end of the year, we shall keep up the level of activity we mentioned. The figures I mentioned until now in Spain are an investment at 9 months of EUR 46 million. And as to the remaining period to the end of the year, we'll be, proportionally speaking, similar, okay? The investment volume will be on the same trend for the last quarter of the year. We don't plan to change this, and we're more or less expecting what we planned in CapEx and in growth.

And finally, you asked me the evolution of the working capital at 9 months. Well, we have consumed less than what we have last year in 2018. The evolution of the year-on-year, it's complicated. We'll improve it, but I don't dare to say any figures. There will be a small recovery at the end of the year. It will always be better than the 9 months, but it would be risky to venture a guess, okay? I can't give you a figure, but there will be an additional improvement.

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Operator [4]

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Filipe Leite, CaixaBank BPI.

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Filipe Martins Leite, Banco Português de Investimento, S.A., Research Division - Research Analyst [5]

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Two questions. Could you quantify the amount by the end of the year? And can you tell us about the news that FCC is divesting itself from a minority participation or stakes in the Environment?

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Miguel Coronel Granado, Fomento de Construcciones y Contratas, S.A. - Director of Management Control & Capital Markets [6]

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Filipe, the factoring level as of 30 of September, EUR 226 million. Very similar to what we had at 6 months and last December last year, EUR 240 million as of 2018. In the Environment, sorry, we have no comments on the matter. I'm sorry. If there was anything, we will report by the relevant channels. But so far, we have nothing to report on what is said on the media. We never comment on the media.

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Operator [7]

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Next question, Victor Acitores, Societe Generale.

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Victor Acitores Peñafiel, Societe Generale Cross Asset Research - Equity Analyst [8]

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I had 2 questions. First, confirm the data that you gave us on working capital, 3.6 at 9 months. What was last year's amount? Because I couldn't hear it. And The Economist says today that the group may be purchasing a participation into transportation assets in Catalonia. Can you confirm? Or it's just in media, you can't confirm?

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Miguel Coronel Granado, Fomento de Construcciones y Contratas, S.A. - Director of Management Control & Capital Markets [9]

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Victor, I confirm the working capital figures. We closed off with EUR 363 million for 9 months. Year-on-year last year, it's a drop by 19%, so it was EUR 448 million last year and the absorption of capital at 9 months 2018. And as to Cedinsa and what was published in the media, I confirm you that, yes, we're in an advanced phase of the bargaining process, but it's not complete yet. Of course, there's still some topics under discussion. And when the time is due and it is appropriate, we will officially communicate to the rest of the market, okay, and we shall report on it.

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Operator [10]

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Antonio Rodríguez from BBVA Bank.

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Antonio Rodríguez Vicens, BBVA Research SA - Research Analyst [11]

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Miguel, just a clarification. I think you said that Environment, you were releasing a provision that impacted on the EBITDA. How much was it? And did it take place in the third quarter?

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Miguel Coronel Granado, Fomento de Construcciones y Contratas, S.A. - Director of Management Control & Capital Markets [12]

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Antonio, yes, I did say so. The release of this provision has taken place in this third quarter, more or less EUR 5,000 million. It came from a historical provision from a pension fund society coming from the small company in the U.K. devoted to urban waste collection, okay? So that's the amount and the nature of the release of that provision, okay?

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Operator [13]

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There are no more questions for today's conference.

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Miguel Coronel Granado, Fomento de Construcciones y Contratas, S.A. - Director of Management Control & Capital Markets [14]

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Okay. Well, thank you once again for your attention. Of course, there's an open line of communication with market management. Any queries or doubts, I'm fully available, of course. Good morning.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]