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Edited Transcript of SCYR.MC earnings conference call or presentation 25-Jul-19 11:00am GMT

Half Year 2019 Sacyr SA Earnings Call

Madrid Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Sacyr SA earnings conference call or presentation Thursday, July 25, 2019 at 11:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Carlos Mijangos Gorozarri

Sacyr, S.A. - CFO

* Manuel Manrique Cecilia

Sacyr, S.A. - Co-Founder, Chairman, CEO & MD


Conference Call Participants


* Fernando Lafuente Seseña

Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst

* Guillermo Fernández-Gao Sánchez de Nieva

Kepler Cheuvreux, Research Division - Equity Research Analyst




Operator [1]


Good morning. I'm Manuel Manrique, Chief Executive Officer and Chairman for Sacyr. I'm accompanied as usual by Mr. Carlos Mijangos, the company's CFO. Thank you very much, dear analysts, media representatives, investors for attending this presentation of results relating to the first half of 2019 of Sacyr. We would like to thank those who are connected at the other end of the Atlantic.

Before we start discussing the results for the first half of 2019, I would like to highlight the consistency and softness of such results. Based on this report, we have already reported 6 consecutive months in which we have shown the consistency of our strategy, the growth of our profitability and revenue, reporting 2-digit increases and the softness of our business plan, but focusing on activities and markets that provide us with safety.

Such consistency enables us to advance quarter-on-quarter in building this great company with an even more concession-oriented profile. We have been talking about this profile since 2015 due to the configuration of our balance sheet and our cash flow, which are both recurrent and foreseeable. Sacyr is already what it wanted it to be.

On the Investor Day that was held on June 4, we already delivered all the relevant information to show that this goal has already been attained, and it's a reality and we are ratifying this quarter-on-quarter.

As part of this strategy, the highlights concerning results for the first half are the following. EBITDA grew by 32%, reaching EUR 315 million, out of which 77% comes from concessional asset or project with a low demand risk of only 77%. 7% or 8% is some kind of demand risk. EBITDA margin of the group, it went up, going from 13.2% last year, up to 15.7% in this first half of 2019. All in all, growing by 19%. EBIT grew by 33% and net profit by 11%, reaching EUR 80 million.

Finally, the company's operating cash flow went up by 44% from EUR 183 million in last year to -- from EUR 127 million last year to EUR 183 million this year. We have also kept on consolidating our projects in strategic markets that you are all acquainted with.

Our backlog has already surpassed EUR 42.64 billion out of which 73% takes place in the international markets. Out of that 73%, we find 82% in concessions and 87% in the case of engineering and infrastructure. Finally, revenue in the international scenario for the overall group accounts for 58%.

As you know that some of our divisions has, for the time being, a national market. In these strategic markets in the past half, we were able to be awarded some significant contracts. Like, for example, the recovery and expansion of Texas highway in the United States; in Chile, the construction of Los Vilos-La Serena highway, one airport and several hospitals; in Uruguay, the construction and concession of the Central Railway; the enlargement of the Edinburgh tramway in the United Kingdom; the new railway the Portuguese high-speed South International Corridor in Portugal, the construction and commissioning of the Quellaveco mine; and several conservation contracts for roads in Peru; and in Spain, we were awarded the contract for the cleaning of terminals 1 and 2 at the airport in Barcelona, several building projects and many other projects.

Another highlight, I would like to underscore our shareholder remuneration. We already have a regular dividend payer policy in place. In February, we paid [1 per 35] shares, accounting for EUR 0.051 per share. I've got -- and now we are about to complete another scrip dividend accounting for EUR 0.054 per share in cash. As announced at the General Shareholders Meeting, profitability for shareholders exceeded 5%.

In absolute terms, 2019 dividend -- or 2018 dividend that was paid in 2019 surpassed the one paid in 2018 charged to the 2017 fiscal period.

We also maintained our investment and asset rotation policy. We should highlight the sale of Sacyr S.A. Itínere Infraestructuras for a total amount of EUR 202 million. The rotation of 49% of its stake in 7 Chilean assets that totaled EUR 440 million, all in all.

And the equity invested during this 6-month period in our concession projects amounts to EUR 141 million.

As for the capital markets, as you know, on May 8, we fully repaid the convertible bonds in the amount of -- and we issued another one -- in the amount of EUR [175] million at a 5-year term and a 3.75% annual fixed interest.

As for Panama, I would like to highlight that we completed advanced payments that were totally repaid in the amount of EUR 125 million to the Panama Canal Authority.

On June 26, and since its commissioning, the maintenance period of the third set of locks for the Panama Canal came to an end, and I should say that this was a big success. More than 6,500 vessels have sailed through the new canal, and we reported an availability rate of 99.97%.

Finally, as I mentioned, as for debt, and as already announced at the General Shareholders Meeting, we want to reduce debt we recorded in the first half of 2019, which was -- which is usually the worst in our industry. We're able to reduce our net debt recourse by 5%, and we will continue on this track. And by year-end, we expect this reduction to be very significant.

Next, more color on the results of the company and each of the divisions of the holding will be given by Mr. Carlos Mijangos.


Carlos Mijangos Gorozarri, Sacyr, S.A. - CFO [2]


If we now analyze the key financial figures, we could see that revenue went beyond EUR 2 billion with a variation of 11% EBITDA reached $350 million with a 32% increase. EBITDA margin went beyond 15.7%. Our net profit was EUR 80 million.

Also operating cash flow coming from the different business units. We reported EUR 183 million against EUR 127 million from last year, therefore, reporting a variation of 44%. As for the different business lines, Engineering and Infrastructure accounts for 44%. This is the one with the greatest contribution, followed by Services with 25%, Concessions, 21% Industrial 10%.

As for EBITDA, Sacyr Concesiones accounts for 46%; Engineering and Infrastructure, 32%; Industrial, 5%; and Services, 17%. If we take into account all Concession assets that we find across the group's divisions, 77% of EBITDA comes from these concessional assets with low risk of demand.

As for the backlog, 65% of 2/3 comes from Sacyr Concessions; 15% from Engineering and Infrastructures; 13% from Services; and 6% from Industrial. Europe accounts for 37% of such a backlog; and America -- the Americas, 40%. All in all, this can be clearly seen in the different markets where we work. We're currently working to have strategic markets from east to west. For example, in Australia, we opened a new water purification plant in Perth. We have several awards in Spain, including the high-speed train-cleaning projects, among others factors, as usual we are going to analyze these in detail. In Italy, we were awarded a new contract with a new hospital in Milan, the Edinburgh tramway in U.K. and different projects in the pipeline in Portugal. In the case of Americas and in the Pacific area as well as in the U.S., we have some major awards, coupled with other awards, which are just as important in Brazil and Uruguay.

As for net debt evolution. In December, the net debt was EUR 4.045 billion. There was a significant decrease or a reduction of [183]. Out of these operating flow, [57] corresponds to Concessions and [130] corresponds to operating flow from Concessions. As for the financial results should be deducted by EUR 139 million.

We can also serve a major investment effort by the group. EUR 655 million were invested in projects, which are currently underway for investing. Therefore, EUR 141 million in equities as well as services that invested $10 million in projects. Divestments are accounted for EUR 324 million due to the sale of Itinere, 49% of the 7 assets we had in Chile and several other adjustments due to currency adjustments.

Therefore, we count to EUR 4.443 billion in net debt. So we were able to reduce EUR 51 million in terms of net debt we report during this first half, and we intend to remain on this pathway.

Now talking about the Concession activities. I see Concessions increased its revenue by 36% due to 2 elements. On the one hand, we have a significant advanced cost by projects, which are now under construction. Then we have the Concession income. Here, we have growth at 19%, with an EBITDA margin of 63%. Like in most projects, these are projects at the initial stage. But usually, margins are between 63%, 64%. But as the years go by, they are supposed to increase. As for the backlog, it went up by 3% due to the award of this year.

Regarding equity, we are talking about a significant figure as well. So we began in Chile with the financial closing, of the Vespucio Oriente highway. It had around EUR 40 million. 3 major banks participated, and many other local insurance companies with a strong interest in these kind of assets.

Next, the (inaudible) highway EUR [613] million was completed in Colombia. One tranche was completed in Colombia in pesos and another one in international currencies.

Société Générale, ICO participated in this transaction as well as BlackRock or [FDNA], just to give a few examples.

Last with the Rumichaca-Pasto road in Colombia, we also completed that project. Here, we are talking about a significant contract. And then we have JP Morgan Santander as some of the entities that participated together with MetLife, OPIC and the Bank of China. So we are diversifying all of our financing streams.

We also closed the Paraguay road that connects the north and the east and the west part of the country. The amount was EUR 440 million. Goldman Sachs was a leading entity with the participation of the Inter-American Development Bank. The Antofagasta project was also completed. In this case, we see a significant appetite shown by some relevant financial entities.

So based on this, you can see that we are catching the attention of the international financial community because they really want to help us in developing our projects.

Another milestone, we commissioned the first tranche of Pedemontana-Veneta road in Italy, and we begin to see some of the early response delivered by this project.

As for contract awards, we should highlight the Los Vilos-La Serena highway in Chile. This is the concession of Road 5. This is the very first concession that was awarded by the group in 1996. And after the concession period, their contract was extended. We're talking about a total length of 140 kilometers (sic) [187 kilometers] and the backlog accounts for EUR 164 million. Then we have a concession of the Chacalluta de Arica Airport in the northern part of the country, in the desert. The backlog, in this case, amounts of EUR 203 million, and this is a 20-year term concession trend.

We hope that we can develop this project, just as successfully as before. Then we have in Uruguay the concession of Ferrocaril Central with an investment of nearly EUR 1 billion. 270 kilometers between the central part of the country and the capital city, Montevideo.

If we now talk about the Engineering and Infrastructure, there was a significant revenue increase, reaching EUR 959 million with a variation of 19%. EBITDA reached EUR 104 million and a margin of nearly 11%.

The backlog also increased significantly with some relevant awards during the first half of 2019. Some highlights concerning this 20% growth shows a national increase of nearly 50%. So we went from EUR 100 million in 2018 at EUR 168 million in 2019, showing a significant recovery of the domestic market.

However, the most important figures continue to be supported by the execution of international projects. We have those projects in Uruguay, Italy, Colombia, Peru, United Kingdom, Chile, which are our key markets. This backlog, therefore, enables us to cover 14 months -- 42 months of activity and most -- more than 50% of this backlog corresponds to the concessions at year-end. Therefore, we can obtain much better margins.

We were able to complete the maintenance work of the Panama Canal, the third set of locks, as the Chairman said, more than 6,500 vessels went through that canal with an efficiency higher than 90%. As for the main contract awards, we have several awards. In Chile, for example, the construction of the Los Vilos-La Serena highway, then also the Chacatulla de Arica Airport in Uruguay, the construction of the Ferrocaril Central. This project amounts to EUR 735 million. In the case of Peru, we have the construction of a 205-kilometer road in Áncash. In the case of the United States, we have -- we had 4 projects in Florida. Now we are going to have a project in Texas in the amount of EUR 102 million. In Edinburgh, we're talking about the enlargement of the tramway for EUR 241 million. And in Italy, we were awarded the construction of Hospital Policlinico in Milan in amount of EUR 133 million.

In Portugal, we have several relevant construction projects, for example, the construction of the railway for the corridor international (inaudible) in the amount of EUR 130.5 million and the maintenance of several railway systems.

In Qatar, we have been working for 8 years, and we have been awarded a new contract, exceeding EUR 100 million. This is another development project. And this time, we were awarded several contracts for the high speed train, the construction of

(technical difficulty)

that will link several terminals and airport, among other projects.

As for the Service division, there was an increase of 4%. EBITDA, however, hiked to 26%. Here, we should highlight on the environment perspective that some projects, such the waste collection project in Melilla or Madrid, have made a significant contribution as well as the plane area project in Bogota. Multiservices also made a significant contribution due to the commission of fewer contracts. And there was also a significant contribution from concession as a result of the construction of Antofagasta Hospital. In the case of Water, last year, we were awarded several maintenance projects, and this is increase in both activities and margins. We were able to report a 2-digit increase in the case of EBITDA vis-à-vis sales. This is quite a significant figure.

Accounting, therefore, saw an increase that reflects the solvency of the Services division. As for the backlog, we have a 32% international, with a major percentage of its activity being performed in Spain on a recurring basis.

As for some significant awards, even though the main focus is located in Spain, we continue to focus on another international project like, for example, some home assets and service projects in the Alicante, also the waste collection projects in Cadiz.

Regarding the international business, the -- we are helping the (inaudible) project in Chile. We have some also significant project, like the clean and waste management and landscaping in mall plaza shopping centers in the amount of EUR 16 million, and the extension of maintenance and consolidation services in several highways.

In Peru, we have several corridors. And we're talking about 476 kilometers some of them correspond to the Cusco area, extending -- or running along 324 kilometers.

In Portugal, there was an urban waste recovery project that was awarded in Aveiro.

Finally, talking about Industrial, there was a reduction of 70% in terms of revenue due to the completion of some projects last year, such as the gas module in La Pampilla or the project at La Pampilla refinery. However, there are several awards showing that the second half will report positive results. We are about to complete 2 cement projects plans in Oruro in Peru, and another one in Ecuador in Chimborazo, but we continue to work in Potosi in Bolivia which offsets the other 2 plans. So here, you can see some new contracts that will enable us to accelerate the activity of the Industrial division,

Some milestones. Sacyr Industrial launched the first waste treatment plant in Australia. We are talking about a maximum capacity of 120,000 tons per year. And this project was completed within the established deadline and budget. In terms of main contract awards, in Peru, we're awarded the Quellaveco copper mine. We are entering this market -- in market and 2 hydroelectric power plants in Moquegua 1 and 2, 1 and 3 for EUR 102 million. We are talking about 13 months-term projects. In Chile, we were awarded 2 contracts for the construction of 2 wind farms, one for the 84 megawatts in the Biobio and another one for 155 megawatts in Antofagasta for EUR 28 million to EUR 33 million, respectively. In Bolivia, we are working on the construction of our pilot thermal plant, and our goal is to reach 50 megawatts each plant. In Australia, we are working on the enlargement of the (inaudible) purifying water plant in Northern Perth. And now we would like to open the floor for questions.

Sorry, just one more comment. As you can see, in 2019, Sacyr kept on growing at a profitable and sound rate as in the prior quarters, generating positive cash flows and being awarded new contracts in recognized markets.

Our integrated business model with a concession approach makes us stand out from our competitors, and this enables us to keep on increasing profitability while reducing the corporate debt with recourse.

Now we would like to open the floor for any questions of the analysts might have.


Questions and Answers


Operator [1]


Good morning, ladies and gentlemen, we are now opening the Q&A session. (Operator Instructions). The first question comes from Guillermo Fernández-Gao from Kepler Cheuvreux.


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


I have a couple of questions. First of all, I would like to know whether you could clarify the -- how much of construction in response to the concession of the Pedemontana project in order to see EBITDA -- net EBITDA in the case of that project? And then I have another question, which is more kind of an accounting question.

I thought that the equity accounted contribution that you're taking Repsol should have been EUR 37 million, EUR 38 million given your 8% take in Repsol. However, the equity accounted during this quarter was about EUR 18 million, if I'm not wrong. So I would like to know what explains that difference. And then another question. Could you please elaborate further on the evolution of cash flow with recourse during the quarter? Especially in the case of working capital with recourse because even though your inflow was about EUR 100 million due to the sale of assets in Chile, the debt we report varied by EUR 40 million. So I would like to know if there are any relevant aspects to be mentioned in that respect.


Manuel Manrique Cecilia, Sacyr, S.A. - Co-Founder, Chairman, CEO & MD [3]


Okay. As for the Pedemontana-Veneta project during the 6-month period impact on the acquisition was $185 million and $64 million on account of EBITDA. So the construction activity accounts for EUR 734 million and EUR 40 million account of EBITDA.

As for the impact on how we account for Repsol, well, Repsol should be applied an 8% to the account of refunds. Therefore, we will be talking about EUR 90 million. However, this would increase the accounting value by [74]. So therefore, we decided to apply a EUR 25 million impairment in order to come in the same level as in the previous quarter, because we believe that there is no relevant situation that enables us to increase or reduce their value. So we decided to stay within that value range, and we found that this was a prudent approach to take.

As for your final question concerning the operating cash flow. If we go to the page or the slide on net debt out of EUR 183 million, EUR 56 million correspond to the business area and 130 million corresponds to concessions. Here we should highlight 2 elements. On the one hand, as for operating cash flow in the case of operations, we have several projects especially the Antofagasta project, where all availability payments are concentrated in March and September. So we have peaks in March and September in terms of inflows. Regarding other operational areas, we should highlight that in the case of Engineering and Infrastructures, EUR 25 million was reported by working capital. But this month, we had to offset this due to the commissioning of several other projects. And that's why it's virtually

(technical difficulty)

even though we were able to reduce the net debt, we still have a long way to go. The some invoices where we say July, therefore, in the third quarter, this will be totally normalized.


Operator [4]


(Operator Instructions) The next question comes from (inaudible) Bank MPI.


Unidentified Analyst, [5]


I have 2 questions. This first question, actually, it's a clarification I would like to have. As for net debt with recourse. I would like to know whether you are keeping the target of 15% until year-end, which would mean [a quality] of more than EUR 100 million for the second half of 2019. And second, I would like to know when you expect the next decision to be issued by the court on the Panama Canal case.


Manuel Manrique Cecilia, Sacyr, S.A. - Co-Founder, Chairman, CEO & MD [6]


Well, as for the reduction of the corporate debt, at the General Shareholders Meeting, I announced that. Now I would like to ratify that such a decrease would be very significant. It's very difficult to quantify to which extent at this point. However, we can say that it's going to be a significant reduction. As for the Panama Canal case resolution, we believe that within 1 year's time, at most, the situation will be solved or at least, the first arbitration pursuing will be solved because this is not the highest in terms of the amount involved but in terms of its substance because -- so this will -- that award will actually have an impact on the subsequent awards. So we believe that in the second quarter of 2020, a final decision will be issued as for the [average days]. Perhaps it will not be the most significant in terms of ultimate amount, but it will somehow influence the subsequent awards.


Operator [7]


The next question is by Fernando Lafuente from Alantra Equities.


Fernando Lafuente Seseña, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [8]


I have one quick question. As for traditional construction, margins for the Pedemontana project has been quite good because it's about 5% in the first half of 2019. What about the evolution of these margin in the second half of 2019? Do you think that, that margin can be sustained over time? The second question is concerned with the sale of assets. The -- I'm talking about the potential competition sales in Spain and whether you believe that such sales will contribute to reducing your net debt before year-end.


Manuel Manrique Cecilia, Sacyr, S.A. - Co-Founder, Chairman, CEO & MD [9]


As for the margin of the construction division, we are about 5%. This is a sub margin that can be sustained over time. If we can increase it or not before the year-end -- the closing of the year, it will depend on how the projects evolve.

But we are reporting steady and sound margin. So we expect this to be sustainable over time. As for the sale of assets, the group has many assets which are very appealing for certain investors. It is true that right now, we are trying to see whether are any party is keen of formalizing this transaction.

You know that this takes time. We're analyzing these opportunities. And if we can find the right conditions for both parties, we will move on with the transaction. Otherwise, these asset will stay in our portfolio, and its value will increase over time.

Next question, please.


Operator [10]


There are no further questions in the conference call.


Manuel Manrique Cecilia, Sacyr, S.A. - Co-Founder, Chairman, CEO & MD [11]


If there are no further questions, we would like to thank you all for attending the session and for your interest, and we'll see you all until the next presentation of Sacyr. Thank you.

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