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Edited Transcript of HOTG.DE earnings conference call or presentation 3-Aug-20 1:30pm GMT

Half Year 2020 Hochtief AG Earnings Call

Essen Sep 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Hochtief AG earnings conference call or presentation Monday, August 3, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marcelino Fernández Verdes

HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO

* Michael Pinkney

HOCHTIEF Aktiengesellschaft - Head of Corporate Strategy

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Conference Call Participants

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* Christian Korth

HSBC, Research Division - Analyst

* Marcin Karol Wojtal

BofA Merrill Lynch, Research Division - Analyst

* Nicolas J. Mora

Morgan Stanley, Research Division - Equity Analyst

* Victor Acitores Peñafiel

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the HOCHTIEF Half Year 2020 Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Mike Pinkney. Please go ahead, sir.

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Michael Pinkney, HOCHTIEF Aktiengesellschaft - Head of Corporate Strategy [2]

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Thanks, operator. Good afternoon to everyone, and thank you for joining the HOCHTIEF first half 2020 results call. I'm Mike Pinkney, Head of Corporate Strategy, and I'm here with our Chief Executive, Marcelino Fernández; our CFO, Peter Sassenfeld; and our Head of Capital Markets, Tobias Loskamp, along with other colleagues from our senior management team. We look forward to addressing any questions you may have.

But to begin with, our CEO will run us through the key features of the numbers. Marcelino, all yours.

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [3]

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Thank you, Mike, and the team, and good afternoon to everyone. I'd like to start by publicly thanking HOCHTIEF teams in the different regions for continuing to meet the needs of our clients, while managing the uncertainty and personal impacts of the COVID crisis.

HOCHTIEF has delivered a resilient set of results for the first half of 2020 in terms of sales, profits, margins and all the backlog, notwithstanding the impact of the pandemic. The group's solid performance is a consequence of its diversification by geographies and activities, the flexibility of our businesses and their ability to adapt to changing conditions. This is supported by the robust nature of our business models and the solid positioning of our companies with a long-term local market presence.

Our group companies have continued to support government efforts to mitigate the impacts from the pandemic. In the United States, for example, Turner's position as the leading builder of health care projects has enabled it to accelerate project execution to meet the surge in hospital demand. In Australia and New Zealand, meanwhile, CIMIC has also played an important role in the community response to the pandemic by mobilizing additional resources.

Now let's look at the key highlights for the period. HOCHTIEF achieved first half sales of EUR 12 billion stable year-on-year, with a fall of just 8% in the second quarter, driven by the impact of COVID-19. Operational net profit for the 6 months was EUR 227 million. Pre-Abertis, this profit was stable year-on-year at 2-4-5, EUR 245 million, with all 3 operating divisions positively contributing.

Net cash from operating activities for the first 6 months of the year reflect seasonality and COVID-19-related impact, including the lower dividend contribution from Abertis.

Looking at the last 12 months' LTM, there was an improvement of EUR 329 million year-on-year on an underlying basis. HOCHTIEF ended June with a net debt position of EUR 365 million. Excluding the EUR 809 million cash effect during H1 of exiting BICC, the net cash position would stand at 4-4-4, EUR 444 million at the end of June 2020, and this is after investing close to EUR 300 million to acquire 2.8% of CIMIC and execute share buybacks at both HOCHTIEF and CIMIC.

HOCHTIEF finished the quarter with a strong liquidity position of EUR 6.2 billion, and Standard & Poor's reaffirmed its BBB investment-grade rating for HOCHTIEF in May 2020. The group's order book remained robust at EUR 50.2 billion, an increase year-on-year of 2%.

Cash flow. As half net cash from operating activities pre-net working capital change was stable year-on-year and had a lower Abertis dividend contribution. The movement in net working capital reflects seasonality, and the year-on-year variation is a consequence of COVID-19-related effects.

Looking at the last 12 months, HOCHTIEF delivered EUR 1.2 billion in operating cash flow. We maintained a disciplined approach through investment with mining and job-costed tunneling work driving the EUR 188 million of net operating capital expenditure compared with EUR 234 million in H1 2019. In this context, it is worth highlighting the 11% growth in PBT at CIMIC's mining division to AUD 262 million reported for the first half.

It is also important to underline the seasonality of our business, and as a consequence, our cash flow evolution. If we look at our net cash from operating activities over the past 5 years, before factoring, well over 80% of our cash generation is achieved during the second half of the year. In absolute terms, HOCHTIEF has generated an average of EUR 950 million of net cash from operating activities in the second half of the year during the 2015 to 2019 period. We expect a strong cash flow performance during the rest of 2020, particularly in the fourth quarter.

The key balance sheet metrics. As of June, the group has net debt of EUR 365 million. Excluding the EUR 809 million cash effect during H1 of exiting BICC, HOCHTIEF would show a net cash position of EUR 444 million, and this is after investing close to EUR 300 million to acquire 2.8% of CIMIC, EUR 102 million; as well as share buybacks at both HOCHTIEF, EUR 105 million; and CIMIC, EUR 87 million.

Americas and Europe both show a significant improvement and a solid net cash position year-on-year. The group's liquidity position remains at EUR 6.2 billion, further supported by committed and drawn credit facilities of EUR 1.4 billion. Standard & Poor's reaffirmed its BBB investment-grade rating for HOCHTIEF in May 2020. The factoring volume has declined both year-on-year and since January, and this is also the case during Q2 in local currency terms.

Now our balance sheet remains solid, and we continue to be well positioned to actively pursue all our capital allocation options.

On Slide 7, we show some of our major recent project wins. In Europe, a joint venture with HOCHTIEF as technical leader has been awarded the contract to build the replacements of the A40 Rhine Bridge with a total volume of approx EUR 500 million. CIMIC has secured a number of important project wins, amongst which Thiess has been awarded a contract extension to continue to provide mining services at its Lake Vermont Coal Mine in Queensland. The 5-year extension will generate revenues of AUD 2.5 billion at a site where CIMIC has already been operating for 30 years. And UGL won AUD 880 million worth of new contracts and extensions for maintenance and other services. America's Turner was awarded a USD 380 million project for the Department of Transportation in Massachusetts. And Flatiron has reached an agreement with the California Department of Transportation to execute for USD 30 million of work on Highway 50.

Let's review the order book and new orders. The group's order book remained robust at over EUR 50 billion, up 2% year-on-year. Excluding the EUR 1.9 billion of orders incorporating from the acquisition of infrastructure services, Broadspectrum by CIMIC's Ventia, the order book is stable compared with the end of the first quarter. Our construction management, mining, alliance, style, contracts and services activities generate significant visibility for the group and now account for around 70% of HOCHTIEF's order book. Despite the H1 impact of COVID-19, a solid level of new orders of EUR 26.2 billion was secured during the last 12 months, whilst maintaining a disciplined bidding approach across the group. New orders in Q2 of EUR 5.8 billion represent approx 1x where done, meaning we have secured work equivalent to the level of contracts executed during the period.

Looking forward, our local teams have identified a project tender pipeline worth around EUR 600 billion of relevant projects coming to our markets in North America, Asia Pacific and Europe for 2020 and beyond, with over EUR 200 billion of PPP projects in developed markets.

Americas, which has delivered an outstanding performance during H1 2020, operational PBT increased by 9% year-on-year to EUR 168 million with a steady margin. Sales of EUR 7.6 billion were 8% higher compared with the previous year or up 6% in local currency terms, with a stable performance during the second quarter, notwithstanding the impact of the pandemic.

Americas now represents about 65% of group sales, and that division continue to deliver solid cash generation. Net cash from operating activities in H1 reflects the division's seasonal working capital variation and COVID-19 impact. Over the last 12 months, the division generated strong net cash from operating activities of about EUR 160 million, of which over EUR 200 million in Q2. The divisional net cash position at the end of June 2020 stood at EUR 1.24 billion, up EUR 77 million year-on-year. An order backlog of EUR 22.9 billion is stable compared to June 2019.

Order intake in the second quarter remained robust, on par with the work done during that period, which underlines the resilience of the Americas business. Currently, we are active on 95% of our projects, with 25% of our employees working remotely. Since March, we have implemented safety measures to allow projects to proceed and for -- to have them deemed essential. That way, projects are open and active for employees with a stringent safeguard. No active project has been shut down so far, and we are seeing signs of recovery in the construction market.

Health care opportunities, along with others, in data centers and airports, are on the rise, and we are competing for all of them. The federal government is producing opportunities for the CDC and National Institute of Health as well as the U.S. Army and Navy, and we believe there will also be increased investment in education going forward.

Let's move to Asia Pacific division and the results published last week by CIMIC. CIMIC reported revenue of AUD 6.2 billion compared to AUD 7 billion in the prior year period, with the impact of COVID-19 leading to a temporary delay in the award of new work and a slowdown in revenues across our activities. The division accounts for 31% of the HOCHTIEF sales, and operating margins remained robust with net profit after-tax impact of AUD 317 million reported for the 6 -- for the first 6 months. In addition to the normal seasonality, COVID significantly impacted operating cash flow in the first half, mainly in Q2. And looking at the last 12 months, operating cash flow pre-factoring was close to AUD 1.3 billion, and the improvement of AUD 495 million year-on-year.

The group maintains a disciplined focus on capital expenditure with AUD 286 million invested in -- during H1 2020 to deliver mining operations and job-costed tunneling opportunities.

CIMIC's net debt of AUD 1.3 billion would stand at a net cash position of AUD 64 million, excluding the gross cash impact from the BICC exit, and this is after the AUD 147 million share buyback.

Total work in hand of AUD 38.1 billion includes AUD 3.1 billion of proportional contribution from Ventia's acquisition of Broadspectrum. Whilst maintaining bid discipline, total new work of AUD 4.9 billion was secured during H1 2020.

Looking forward, CIMIC indicated that, whilst monitoring the impact of COVID-19, the outlook across its core businesses remain positive. At the mining and mineral processes segment, which is comprised of our corporate mining business, Thiess, and our mineral processing company, Sedgman, the market is proven resilient. HOCHTIEF, specifically, CIMIC has signed an exclusivity agreement with a new equity investor to support the growth strategy of the business. This would allow Thiess to capitalize on the robust outlook for the remaining mining sector and provide capital for the growth of the business, while also enabling CIMIC to enhance its balance sheet strength. The process is well advanced, and CIMIC is targeting a conclusion during the coming weeks.

Numerous stimulus packages have been announced by governments in core construction and services markets, with additional opportunities coming from the strong PPP pipeline. And the group's licenses in Hong Kong have been reinstated, supporting the construction outlook in that important market after 2 years of banning the bidding.

Let's look at Europe. Europe has continued solid performance during H1 2020. Notwithstanding the COVID-19 impact, sales were up slightly compared with H1 '19 at EUR 595 million, with a year-on-year increase in Q2 of 13%. The division achieved operational PBT and net profit of EUR 26 million, with a solid contribution from the core construction businesses. HOCHTIEF Europe's net cash from operating activities reflect seasonality and COVID-19 impact as well as a solid underlying improvement of EUR 9 million year-on-year. Over the last 12 months, the division has generated net cash from operating activities of approx EUR 50 million. At the end of the period, the divisional balance sheet showed a strong net cash position of EUR 381 million, up EUR 124 million year-on-year.

New orders remain at a solid level with EUR 868 million of work secured during the 6 months. The divisional order backlog ended the period at EUR 4 billion and has increased by over EUR 200 million compared with June 2019. I would highlight that Germany now accounts for around 75% of this order book.

On the next slide, we summarized the H1 2020 performance of Abertis. Abertis average daily traffic development in the first half year 2020 saw a solid performance in January and February, followed by a strong decline in March after extensive lockdown measures were enforced by governments in key markets due to COVID-19. Since the end of April, traffic trends have been improving. Overall, average daily traffic in H1 saw a decrease of 29%, with individual country performance driven mainly by the timing and extent of lockdown measures coming into force. The overall trend remains positive in July.

Revenues were 24% lower year-on-year on a comparable basis. Lower traffic volume resulted in H1 2020 EBITDA of EUR 1.1 billion, a 31% fall on a comparable basis. Net profit pre-PPA was EUR 134 million during H1, strongly affected by the impact of lockdown measures. Post-PPA, the Abertis contribution to HOCHTIEF was minus EUR 18 million compared with plus EUR 52 million in H1 2019, meaning EUR 70 million difference year-on-year.

During the second quarter, Abertis paid half of the EUR 875 million dividend to its shareholders, meaning EUR 86 million were received by HOCHTIEF. The AGM resolved to pay the remaining amount in Q4, subject to verification of COVID-19 impact by Abertis Board of Directors. Abertis strategic plan to invest in new assets in order to perpetuate cash flows and to diversify the portfolio geographically remains on track. At the beginning of June, Abertis and GIC closed the acquisition of brownfield toll road company RCO, Red de Carreteras de Occidente, one of the largest transport operators in Mexico.

And then to conclude, shareholder remuneration continues to be a key element of the group's capital allocation strategy, along with focusing on attractive organic and strategic growth opportunities. In July, as I said, HOCHTIEF paid its shareholders a dividend for full year '19 of EUR 5.80 per share or EUR 406 million. This represents a 16% increase compared with 2018 and is in addition to the EUR 105 million return to shareholders via the buyback of 2.1% of our shares during H1 2020. So in total, shareholder remuneration stands at EUR 510 million during H1 2020.

HOCHTIEF has increased its CIMIC's pay by 2.8% via a EUR 102 million investment, and we now own over 77%. And last week, CIMIC announced it was in exclusive negotiations regarding a potential investment by Elliot for a 50% joint control stake in Thiess. The introduction of an equity partner would allow Thiess to take advantage of the robust outlook for the mining sector and provide it with capital to continue growing, whilst also enabling CIMIC to enhance its balance sheet strength. These discussions are at an advanced stage, and CMIC expect to conclude them in the coming weeks.

In terms of the business outlook, our infrastructure activities have proven resilient due to many governments have declared construction an essential industry. Stimulus packages have been announced by governments in core construction and services markets, with additional opportunities coming from the strong PPP pipeline. And the news that our bidding licenses in Hong Kong have been reinstated reaffirms our positioning in a market where we have a presence since 1975. And the outlook for the contract mining market remains robust, and the business continues to invest in its growth prospects. A few days ago, Australia's treasury said that mining investment was expected to grow by 4% in the 12 months ending June 2021, and a further 9.5% the following year, 2022.

Looking at the rest of the year, it would underline the strong second half buyers of our cash flow profile where we have generated over EUR 150 million in operational net cash on average during the last 5 years. We expect a strong cash flow performance during H2 2020, particularly in Q4.

Looking further forward, our EUR 600 billion project pipeline provides a positive long-term context for the group, further supported by the EUR 200 billion PPP pipeline. And obviously, we continue to monitor the consequences of COVID-19 on our 2020 operational and financial performance. Our strategy continues to be focused on further strengthening HOCHTIEF's position in its core markets, derisking the business, taking advantage of growth opportunities and sustaining cash-back profitability, accompanied by a rigorous risk management approach. This strategy is supported by our efforts on sustainability, where our strong performance on the environmental, social and governance fronts was, again, recently recognized with a AA ESG rating from MSCI. And the group's resilience is enhanced by our continued focus on digitalization driven by our innovation hub Nexplore and its close cooperation with our operating units, top universities and leading IT companies.

So thank you very much, everyone, for listening, and I now welcome your questions.

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Michael Pinkney, HOCHTIEF Aktiengesellschaft - Head of Corporate Strategy [4]

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Okay. Operator, we are ready for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question, we'll hear from Christian Korth with HSBC.

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Christian Korth, HSBC, Research Division - Analyst [2]

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I would like to ask what kind of result and development are you currently expecting for Abertis for the full year of 2020. Do you expect the business to provide a positive net profit for this year? And then secondly, I just wanted to ask what kind of visibility is there in the market for order awards in Australia. Do you have any visibility when this might normalize or pick up again?

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [3]

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Thank you, Christian. Well, what I can say regarding Abertis, and then as I said in my speech, I was giving some kind of hints, the idea, it looks like the Abertis toll roads traffic is growing up, is little by little going to the normality. We -- it's very difficult to foresee what is going to be the end of the year because you know that it will depend very much on the COVID second wave. We'll see. If things continue the way that they are currently, it looks like the second half of the year for Abertis is going to be comparable with the first half. If we don't have any COVID impact, and then it's going to be significantly better. But as of today, it is better, let's say, to keep the cross finger in regard of the second wave. And if the second wave is not coming, it is -- I say that expectations for the second half is going to be very good and positive.

Visibility in regard of new work in Australia, look, you know that this COVID crisis is affecting the market with a different speed and in a different moment. And it looks like now, in Australia, in regarding the COVID impact mainly and then you can read in the news that they are suffering now in some regions, a little bit more this kind of COVID impact.

And because of that, all these stimulus packages that the Australian authorities are aiming, let's say, to go to the market, we don't know exactly what is the speed. But it looks like they're aiming, let's say, to continue with the bids. We are very proactive in bidding. You realize that now the market is a little bit, like, frozen in this regard.

I was saying in my speech that one of the things that is affecting us is actually this speed, this slowly move. But all of sudden, if the situation continues under control, the only way that the government -- and that's why the governments declared this activity as essential, they want to promote construction, they want to promote infrastructure because it's a very good way for recovery in the general economy.

And obviously, unemployment in the different regions has grown up in the last months, and the governments are aiming, let's say, to reduce this as soon as possible.

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Michael Pinkney, HOCHTIEF Aktiengesellschaft - Head of Corporate Strategy [4]

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And maybe just to add, Christian, in Australia, governments are increasingly seeking to fast track capital works projects and maintenance projects to accelerate growth, et cetera, and that's something that's happening at all levels of government in Australia.

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Operator [5]

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And next we'll move to Victor Acitores with Societe Generale.

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Victor Acitores Peñafiel, Societe Generale Cross Asset Research - Equity Analyst [6]

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I have 3 questions, 2 on CIMIC and 1 on Abertis. On Abertis is, Marcelino, if you can give us any color about the timing when the Board could decide on the payment of the second tranche of the dividend finally for the year. This is the question for Abertis.

And for CIMIC, Marcelino, could be twofolds, one in mining. I have seen outstanding performance of mining in the first half with growing margins. So I want to understand what is behind these growing margins in mining. Is that the typology of activity that you are doing is only to understand that and if those margins are sustainable? And finally, in CIMIC, if there is any update on Gorgon, if there there's any news on that.

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [7]

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Okay. Victor, thank you for your questions. Maybe we can start talking about Abertis. Abertis decision is going to be at the end of the year. I cannot say exactly precise to you when it's going to be decided because we have votes in a very, how to say, very often, frequent manner, meaning that almost every month or 1.5 months. And then once the situation is clear and once we can, let's say, see what is the performance of the traffic in some of these votes, I don't know if November, December, we will make a decision on that. By year-end is the right moment to do it because we will have the total visibility, and we want to make the right decision for that.

In regard of CIMIC Gorgon, Gorgon, you know that Gorgon is subject to several arbitration processes. And then what we have to say is that one of them, which is the one that is against Chevron in Australia, should be -- go to an end. We don't know if this month, next month, but relatively close to this. But on the other hand, I think that you are totally aware that we have 3 more -- 2 more arbitrations ongoing and 1 more legal case open in the U.S., meaning that even if this arbitration is going to an end in regard of this Chevron's Australia, still, there are a lot of room, let's say, for knowing what is going on to an end with the different arbitration processes. And this is why maybe we will have some news in some weeks in regard to the first arbitration. But the other arbitrations will continue in the coming months, and maybe we will have some visibility about when it's going to be the end of the following arbitrations next year. We'll see.

What is mining outstanding performance? EBITDA margins continue to benefit from our diversification across the markets and geographies and commodities. And then what -- one of the important things through the crisis and the crisis they have been promoting is that we are establishing efficiency cost plans across the different business units.

And this is one of the things that usually is more rewarding because very quickly, they go to the margins and they can improve our performance. But the solidity of our margins has come in because of the nature of the company. Thiess, most of the Thiess mining jobs or works are after many, many years working with the same clients, more than 15, 20, 25 years working in the same places.

And then the flexibility to adapt to the new conditions, to the new market conditions, including something similar like COVID is very big. And then the cooperation between the different parts that, for instance, in a mining place, you have to come, obviously, with your client, but you have to kind of also with the unions and you have to plan with the team of the Thiess team of the company.

The cooperation is very fluid and is very easy. And everybody wants, let's say, to continue performing in a way that they can increase the production. And because of this kind of trend in mining moment, if you can increase production, then productivity is increasing, margins are increasing and does is Thiess.

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

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Okay. Only one question, Marcelino, if I may. Regarding Gorgon, you need the 3 arbitrage process that you mentioned to be sold in order to collect any cash flows. For example, if Australia comes with a positive outcome, you can then collect cash flows independently what the others are going to come.

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [9]

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The short answer, Victor, is yes. Every arbitration will be a result. And depending on such a result, if it is a positive result for us, it will impact us in cash collection, yes.

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Victor Acitores Peñafiel, Societe Generale Cross Asset Research - Equity Analyst [10]

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Okay. And only to understand. Is it much bigger in terms of the Gorgon total Australia or the others?

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [11]

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Well, there are arbitration processes that they are ongoing. And then obviously, it's preferable right now not to give any more detail on that, okay, Victor?

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Victor Acitores Peñafiel, Societe Generale Cross Asset Research - Equity Analyst [12]

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Okay. Perfect.

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Operator [13]

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(Operator Instructions) Next, we'll move to Marcin Wojtal with Bank of America.

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Marcin Karol Wojtal, BofA Merrill Lynch, Research Division - Analyst [14]

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So I just wanted to ask for a bit more detail on the outlook for your U.S. business and, in particular, the exposure to U.S. infrastructure. So where are you at the moment most positive? Is it for federal government stimulus? Or is it for increased spending at state level? Or is it perhaps concessions in the U.S.? And how do you see profitability for your U.S. business and specifically Flatiron evolving from here?

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [15]

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Thank you. I think I explained a little bit in my speech about what are the potential market opportunities that we have in regard of, let's say, Turner, meaning that is relatively clear. I don't think -- it is not necessarily to repeat then in regard of all the different health care and the different activities. This is something that Turner is bidding and is competing. And we are very positive, as I said, to continue, let's say, producing in the same level that we've been doing in the first 6 months.

Regarding Flatiron, you know that this year is a year that specifically is a special year because of elections in the U.S. And obviously, at the different states, they have different plans. There are not ongoing a lot of PPP processes, but Flatiron now is based on the local construction places where Flatiron, historically speaking, has had a lot of footprint and been successful in getting new projects size, $200 million, $300 million, $400 million, and most of them without needing, let's say, to be in a joint venture, which is also an advantage. If Flatiron is having a big project in which -- for instance, airports, I said also that Turner was aiming, let's say, new jobs in airports sometimes. What we are doing is just making a joint venture between Turner and Flatiron in order to be much more efficient because you have these airport extensions that took kind of work, civil and building, and then the combination is very good and efficient to us. We are not foreseeing for this year any big PPP projects coming in, but we are very happy with the way that Flatiron is performing and growing up its order book, as I explained. And well, it's a safe way for continued producing and growing our margins in that market.

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Michael Pinkney, HOCHTIEF Aktiengesellschaft - Head of Corporate Strategy [16]

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And maybe just to add, as Marcelino said, the signs of recovery in education, health care, transport and data centers. And if you look in the presentation, you can see the breakdown of the order backlog on Slide 22. And there, you can see the proportion, health care, education, plus transport and data centers, we don't split out individually. But basically, those 4 together represent around 50%. And you can see, if you look at the presentation a year ago that, that proportion has increased by a few percentage points.

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Marcin Karol Wojtal, BofA Merrill Lynch, Research Division - Analyst [17]

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Okay. Well, this is great. And one more question on CIMIC, if I can. So originally, when you announced the provision on BICC, I think you originally guided for a certain cash out. But then you said that the final cash out should be actually a little bit lower because there should be some positive tax impact, some repayment of taxes, if I understand it correctly. So could you clarify, is there any recovery of that initial cash out still to come before the end of 2020 or what we see right now in net debt is pretty much the final impact of that BICC provision?

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [18]

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Okay. Thank you for your question. Let us -- I said that in my speech, I was thinking that one of the purposes of this transaction was obviously to take advantage of the market growing opportunities, and this is clear. And on the other hand, I think I said that I want to, let's say, to strengthen our balance sheet as much as possible.

What is in this transaction, and you know that we are now just in the final stages, we declared that in the coming weeks, we expect to reach an agreement, and this is going to be very beneficial to our balance sheet to CMIC in many ways. Well, debt position, obviously, the debt position damage because of the BICC transaction, we will get a special recovery.

And -- well, obviously, balance sheet will be strengthened also. The equity position is going to be significantly better. If there is a financial gain, this financial gain, obviously, can offset any financial loss, and this is something that will depend on the closing. But obviously, all these kind of things are much more because if you realize, I was telling that the idea of that transaction is a joint control, meaning that, obviously, you have, let's say, to look at the balance sheets all in all.

And then looking at them, you can imagine the different look that the balance sheet will have once the transaction is completed. But let's wait. And once we have the closing, we will let you know, all of you, the market, what are the big numbers of such a transaction.

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Operator [19]

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(Operator Instructions) And we'll hear from Nicolas Mora with Morgan Stanley.

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Nicolas J. Mora, Morgan Stanley, Research Division - Equity Analyst [20]

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Just a couple for me. Coming back on CIMIC and the Thiess deal. I mean, the market, at least in Australia, does not seem to have really like the deal. I mean, are you surprised by that reaction? I mean, what's -- what have you heard in terms of main pushback because nobody knows about the value? And as you said, joint control should crystallize a lot of capital gains out of this and be able to sort out your balance sheet once and for all. So just wondering what basically Australians know and where these guys have been basically so negative on the deal.

And the second part on -- again, on CIMIC and on Australia. Considering this delay on order intake and tenders out there, should we expect to see a continued pressure on top line, actually, both in Australia and in Hong Kong because it will take you time to rack up new orders there well into 2021? And could that put pressure on margins as well in terms of negative operating leverage?

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [21]

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Thank you very much for your questions. Well, we are not speculating about if the numbers have been here or there. You know that we started with the idea of just taking advantage of the market mining opportunities. Just a year ago that we want, let's say, to start, let's say, increasing our CapEx. And for that, we were looking for a solution, and one of the solution was to look for a partner. And you can imagine that if we are making such a proposal and we are about closing the deal, we believe that this is going to be a good news, but no speculations. I know that you would like to know exactly what are the numbers. You can look at the numbers here and there. But sometimes, even these speculations are based on very big helicopter view. I was saying in my speech, and then you remember that I was saying that Thiess and Sedgman, that the companies that they are in the mining sector in CIMIC, well, I was -- wanted, let's say, to tell all of you that Sedgman has nothing to do with this deal. It's only Thiess, which is one of the things that obviously will help, say, in order, let's say, to have a better approach to the value of the company.

But knowing the balance sheet, knowing exactly what are the new orders, knowing the performance of the company, well, you can understand that the company's value is going to be a value that should be according to such a way and knowing what is coming. We are not now, how can I say, judging if the market is saying this or saying that. We want to close the deal. We want to offer the market the final numbers when we close the deal. And then we will see what is the market reaction. But I was advancing all of you today that we expect that our balance sheet is going to be strengthened significantly in many different ways. And I consider that this is going to be a positive transaction. We will keep 100% of Sedgman with us, and we will share this 50% of Thiess with our partners. This is in regard of Thiess. Then I don't see any negative view in regard of the deal because for looking at something that could be seen as a negative, then it's necessary to know what is going to be the deal.

Second thing that you are asking about the order intake, in my speech also, what I said is that the new orders are coming to the market. And there is a kind of, let's say, delay on that, but it doesn't mean that there is no market. There is a significant market in Australia. And if you realize our order book, it's outstanding, it's outstanding.

No matter if there is some delays, we continue having an outstanding order book. The pipeline, as you can see in our presentation, the CIMIC's pipeline grew up 17% year-on-year, and this is coming to the market. We don't know if it will come in the next 2 quarters or in the next 3 quarters or in the next 4 quarters or little by little, but it's coming.

It is true also that, as I said, also, the recovery of our licenses in Hong Kong, we consider a very, very good news because we've been working in that market very, very successfully, very comfortable for many years. We have the teams there. We kept the teams there through these 2 years because we want, let's say, to continue and working there.

And we believe that the final resolution was going to support our view. And now we are more than ready, say, to take an advantage. Now we are involved in more than 5 bidding processes that started last weeks. And we are starting, again, let's say, to bid on that process. We're not going to be successful or not, it's a question of, as you know, being successful in getting new projects.

But statistically speaking, we have a rate, and this rate will come to us. And I believe that this is going to reinforce, if not significantly this year's sales, next year for sure. I'm totally sure.

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Nicolas J. Mora, Morgan Stanley, Research Division - Equity Analyst [22]

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Okay. And if I may one -- last one on contract mining. The latest renewal in contracts, the AUD 2.5 billion, are these contracts being renewed on continuously better terms, higher yearly revenues, which is what we've seen over the past 2, 3 years in terms of renewal? Or are we seeing some form of flatlining in terms of conditions?

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [23]

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But -- look, we've been working there for 13 years in a row and extending contracts. And obviously, these extensions are coming because we are offering them competitive prices and because we are having our profits back, and this is the way. We are not -- in a way -- when you've been working for 13 years and then you have an extension of 5 more years, meaning that everybody should be happy with extension, and I believe that is the case.

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Michael Pinkney, HOCHTIEF Aktiengesellschaft - Head of Corporate Strategy [24]

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And Nicolas, it's Mike here. Maybe just to add that in the CIMIC conference call, the company underlined that they're generating about 75% of their cash during the second half of the year, if you look at the last 5 years, pre any factoring impact. And in absolute number, that translates into AUD 760 million. So their indication there was that, obviously, there's a strong seasonality, and that the outlook remains positive.

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Operator [25]

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And next, we'll hear from Christian Korth with HSBC.

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Christian Korth, HSBC, Research Division - Analyst [26]

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Just one follow-up. There's lots of talks in Europe about these recovery funds and behind those, which partly seem to be quite unspecific as of now. But do you have any expectation if these might support your business in Europe in one or more countries, presumably Germany? And if so, is there any visibility in how far they could be supportive?

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [27]

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Look, this -- I think, in total, in global, these stimulus packages are good. But you realize that now what they are looking in at the government level is, first, what are the conditions; secondly, what are the distributions, how they should apply it and how the European Union is going, let's say, to give to the different countries, the different rules.

They need, let's say, to follow up in order, let's say, to have or to give -- or to have access to these funds. We will come very soon because you know that the governments are working proactively. They need, let's say, to recover the economies. Now if we look back these days and then you look at the GDP numbers in the different European countries, well, big losses, disaster, 18%, 12%, 15%.

And I think that all the countries are aiming as soon as possible, let's say, to use these funds for pushing up the economies. And one of the ways that, as I said, and that's why it's considered as an essential activity, is construction, is infrastructure. And I'm very sure that they will come to us very soon.

We don't know if in 2 or 3 months, but very, very soon because you know that the unemployment has been affected also seriously in different countries. And for -- in order to establish unemployment, these activities are very intensive in employment. And I have no doubt that they will come to us sooner than later.

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Michael Pinkney, HOCHTIEF Aktiengesellschaft - Head of Corporate Strategy [28]

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And maybe, Christian, just to sort of underline. Again, the Europe business is performing very well. Second quarter sales were actually up double digit, 13% or so. And as Marcelino mentioned earlier, Germany now accounts for around 75% of the order book. I think that's the highest proportion for some time. And obviously, we're present elsewhere in Europe as well, but the outlook there is solid as well, I think.

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Operator [29]

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(Operator Instructions) And there are no further questions. That will conclude today's call. We thank you for your participation.

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Michael Pinkney, HOCHTIEF Aktiengesellschaft - Head of Corporate Strategy [30]

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Okay. That's great. Thanks.

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Marcelino Fernández Verdes, HOCHTIEF Aktiengesellschaft - Chairman of the Executive Board & CEO [31]

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Well, if no more questions, thanks again to everyone. And I hope that you and your families stay safe in these challenging times, and look forward to talking to you again later this year. Thank you.

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Operator [32]

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And that will conclude today's call. We thank you for your participation.