ACS Actividades de Construccion y Servicios SA

MAD:ACS

Earnings Call Transcript 2022-Q1

[Operator]

[Technical Difficulty]

[Unknown Executive]

Good morning, and thank you for joining this first quarter results presentation. First of all, let me apologize for this initial technical problems, which have caused a delay in the presentation. As always, we will briefly analyze the key aspects of our results, which were released yesterday follow by a Q&A session as always.

First quarter key figures. Sales increased by 8.4% to EUR 6.9 billion. Sales growth is backed by a positive evolution across activities and regions, also supported by foreign currency revaluation, mainly U.S. dollar. FX adjusted sales increased by 3.5%. Backlog was solid at EUR 65.9 billion with an important volume of new awards. Like-for-like growth adjusted by FX and perimeter changes, Ventia, which is, as you know, now consolidated as a financial investment is over 7%. EBITDA reached nearly EUR 400 million, and EBIT stood at EUR 283 million, increasing by 21.6% and 38.3%, respectively. Growth and the time by the positive contribution from Abertis with traffic rates above the pre-pandemic levels and operating margins resilience in a difficult market environment, affected by cost inflation and supply chain disruptions are the centralized and flexible organization and the mitigation measures adopted have helped us to maintain our operating efficiency.

The group net profit reached EUR 136 million, growing by 59.7% in comparable terms. That is excluding the first quarter '21 contribution for Industrial Service activities sold to [ Abertis ]. As of March 31, 2021, the group had a net cash position EUR 665 million since December '21. Net cash went from EUR 2 million to EUR 665 million due to a seasonality effect of the operations, working capital and the inventory in CIMIC takeover bid. Just to update with this transaction, as of yesterday, HOCHTIEF's stake in CIMIC was over 97.5% and the automatic minority special process is in place. CIMIC shares have already been delisted from Finnish Stock Exchange market as of last week.

Geographical breakdown. After the exit of Industrial Services division, the group sales and backlog rebalanced towards its core strategic regions. The sales weight in America increased by 61%, of which 54% comes from the U.S. and 6% from Canada and the remaining 1% from Latin America. Australia represents around 19% of total sales, Europe represent 17%, still being explained in the core market of the region, representing 11% of the overall sales of the group, followed by Germany and the United Kingdom. The backlog shows a similar distribution with 51% allocated in North America, that is U.S. and Canada. Asia Pacific is mainly represented by Australian market, whose backlog was impacted by the previous changes from Ventia. Similarly, 18% of the backlog is allocated in Europe.

Net profit by activities. Construction net profit amounted to EUR 81 million, was up by 11.7%, driven by the positive performance of the HOCHTIEF and Dragados. Concessions net profit raised to EUR 16 million, driven by EUR 9 million contribution from Abertis in the period, where last year it had a negative contribution of EUR 6 million. Services net profit reached EUR 8 million, fully recovering from pre-pandemic levels. Finally, ACS headquarter accounted by EUR 31 million, which includes the real estate activities as well as contribution from the energy assets retained by ACS. Likewise, HOCHTIEF headquarter results include the positive change in value of derivatives, having no cash impact.

Overall, the group's net profit as of March 22 reached EUR 136 million, 59.7% higher year-on-year in comparable terms. This is not taking into account the contribution of Industrial Services activities in the first quarter of 2021.

Looking at the different activities. Construction, let's give some background to our operating activities. Construction sales went up by 7.9%, consolidating growth trends across regions and supported by positive FX impact. It is worth noting in the U.S. market takeoff, after a lagging phase due to the pandemic hit, the margin evolutions reflects project migration towards a more balanced risk profile. Contracts yet remain resilient. Our decentralized structure allow operating leverage activities, supports margin stability. And we have enhanced several operating measures to mitigate inflation in prices and supply chain disruptions.

Construction backlog remains solid, growing by 4.6%. FX positive impact offset the removal of [indiscernible] in 2022 after this IPO, and all-in like-for-like growth is over 7%. Concessions, EBITDA from concessions doubled to EUR 26 million, thanks to a recovery of Abertis and the high contribution from Iridium concessions under operation. Abertis average daily traffic in the first quarter of '22 rose by 15.8%. Traffic levels recovery demonstrated the ongoing improvement that began in the first half of 2021, showing positive traffic trends, evolved pre-pandemic levels. In most geographies, individual country performances as follows: France, plus 22%; Spain, plus 41%; Italy, plus 33%; Brazil, plus 13%; Chile, plus 33%; Mexico, 13%; and the U.S.A., plus 4%. This positive operating performance, driven principally by traffic recovery, offset the expiry of some concessions, such as Acesa, Invicat and Sol, enabling average net profit per PPA to reach EUR 98 million, 17% increase year-on-year. Net contribution to ACS profit accounted for EUR 9 million.

Looking at the service activity from sales and EBITDA, evolved positively bringing back profitability to pre-pandemic levels. In details, sales reached EUR 437 million, growing by 8.7%, coming from both domestic and international markets. Margins recovered pre-pandemic levels, raising EBITDA to EUR 24 million. The positive evolution of the backlog, which stood at EUR 2.8 billion at the end of March, is mainly coming from the U.K. activities. Clece subsidiaries, Starcare and Perfect Care growing by 61% as recent acquisition backlog have been already included. Like-for-like growth is close to 4%. Likewise, backlog in Spain rose by 2.3%, up to EUR 2.5 billion.

Let's look at the cash flow evolution. The group generated cash flow from operations before CapEx and working capital was EUR 378 million, which is 41% better than last year's same period, confirming cash conversion improvements in the last quarter within the operating companies. Working capital outflow, which amounted to EUR 953 million year-to-date is, as always, affected by the seasonal effect. Offsetting this, last 12-month variation remains part neutral, EUR 46 million. Total net investments in the period include CapEx and operating lease payments in the first 3 months of the year for EUR 79 million and the acquisition of shares and the HOCHTIEF takeover bid for CIMIC implying a cash outflow of EUR 350 million, corresponding to an 8% increase of its capital. After EUR 230 million cash outflow related to the shareholder remuneration in the first quarter and EUR 110 million impacting valuation and the cash adjustment on group net cash balance at the end of March was EUR 665 million.

Just to finish, let me highlight some of our major recent awards during the first 3 months. In Australia, mining services in Queensland for EUR 750 million, works in Sydney Metro of EUR 395 million, development of tunneling works in the Western Harbor tunnel in Sydney of EUR 50 million, design, engineering, procurement and construction in renewables and utilities sector in Queensland, EUR 296 million, and conversion of EUR 360 million power generation plant in the Hunter Power Project in New South Wales of EUR 185 million.

In North America, contract for the Orinda water treatment plant disinfection in California, EUR 267 million; 12-mile toll facility in Hidalgo County, Texas, EUR 251 million; in Latin America, similar for 2 sections of the Line 7 Metro de Santiago, EUR 153 million; in Europe, the widening of the riverbed of Svrakta River in Czech Republic, EUR 378 million; construction of the extension and remodeling Chamartin Station in Madrid, EUR 52 million; newly constructed building for an office use in Bilbao Street in Barcelona, EUR 47 million; several facility management contracts totaling EUR 46 million; and home care contracts both in Spain and U.K. amounting to EUR 41 million.

Just to wrap up, key takes away of this first quarter results. One, a positive operating performance across regions and activities consolidating recovery trend. Second, the operating margins resilience supported by organizational model, industrial and risk mitigation measures introduced to manage inflation and supply chain pressures. Third, a solid backlog underpinned by the positive momentum of order intake as well as the positive outlook from the demand increase from infrastructure development coming from stimulus packages launched by government.

I would like to briefly comment on the progress in the group's strategic plan year-to-date. As I previously said, HOCHTIEF launch takeover bid for CIMIC last February 22 -- sorry, AUD 22 per share. As yesterday, we had 97.5% stake in the company. And already, the minorities without procedure has already been initiated. Shares have been delisted in Sydney Stock Exchange. I'd also like to mention the appointment of the new CEO, Juan Santamaría, in the AGM held last Friday. Juan has spent his the entire working career at the group. After joining the house in 2002, he held various functions both national and internationally both in the concession and the construction activities. We look forward to introducing him in the coming events where you would have a chance to meet him.

Thank you very much. And then we are ready to take any questions you might have.

[Operator]

[Operator Instructions] The first question comes from Bosco Ojeda from UBS.

[Bosco Ojeda, analyst]

I would like to ask you first on the situation with inflation, raw materials, also pressure on salaries, how are you dealing with that in the different regions. And if you could give us a bit of color also towards the end of the year, where you need to adjust and you can adjust just your prices to offset these issues. Second question I would like to ask is about Abertis and whether the share stake in renegotiation between HOCHTIEF and yourself. Do you think that is still possible? And whether there are also some possibilities to reorganize Abertis following the Atlantia situation?

[Unknown Executive]

Thank you, Bosco. On the inflation protection, basically has to be in mind that the great majority of our contracts are basically inflation-protected. Turner cost trucks are fully protected from inflation. And on the large civil works, they basically have, in most cases, inflation protection clauses. So we will revise the inflation clause. Only probably about 10% will be open to it. And in the building side, again, outside of Turner, normally you get the acquisition of materials in place, the length of the construction contract in a building is significantly shorter. So you can get the acquisition prior to the beginning of the year or sometime in the beginning of the year. So we have a really, really small percentage which is exposed to inflation.

And second, in the case of Abertis, I think what -- the company is progressing very well. We have -- we talked to our partners in Atlantia. Obviously, the processes is a bit affected by the takeover offer, which requires passivity in their movement, but I don't think we would have any problem in progressing along this time. But still, we have to be patient with that process because they obviously need to address the project without -- public offer without disrupting with any transaction. But we have a pretty good dialogue with them. And the incorporation of BlackRock -- Blackstone, significantly enhanced the strength of the group. Blackstone has been also an investor in infrastructure, so they know very well the business. And we think with their presence, the shareholding structure in Abertis has been significantly improved. So we think we have high hopes in Abertis growing significantly, where all partners are prepared to invest when the openings appear.

[Operator]

The next question comes from Marcin Wojtal from Bank of America.

[Marcin Wojtal, analyst]

Yes. So firstly, on your, let's say, reinvestment firepower, I mean you received around EUR 5 billion of proceeds of Industrial Services. How much would you say can you, at this stage, still allocate to potential M&A projects? Is it as high as EUR 5 billion or it's a bit lower?

Question number two, if I may, on your dividend policy. So you recently approved like a EUR 2 dividend for 2021. I was just wondering, going forward for 2022, '23, how should we think about your dividend? Shall we assume that we are going to keep at least EUR 2? Or shall we use a 65% payout ratio on the net profit or maybe some other formula or calculation?

And question number three, if I may, what are your plans for the remaining renewable energy assets that the Zero-E portfolio. Are you already in the process of selling those assets, and do you expect progress in the next 12 months?

[Unknown Executive]

Okay. Reinvestment strategy, obviously, we have significant amount, as you said, of firepower. We are pursuing actually several transactions. Unfortunately, these things cannot be disclosed until they happen, but we have significant transactions we're looking forward. The firepower has not been diminished. So -- and we said that we would invest in concessions and also in our operating business. Obviously, some of the investment is probably -- as you can see, we've actually undertaken the takeover offer on CIMIC. But we'll continue with both the concession investments and consolidating industrial businesses simultaneously. I think both lines are open, and we have significant progress in both. I hope it will take not much time to start delivering in that respect.

Dividends, our president mentioned EUR 2, and he said his intent is to keep that. So you can take it as that we plan to maintain the 65% payout, which implies we will improve our dividend results to achieve that or that we might alter slightly. But he mentioned that his intention was to keep the EUR 2 for the immediate future. And renewable assets, basically the ones which we kept that are for sale, obviously, we have no rush. And we are looking to see whether we've got attractive investment of -- attractive investors looking at -- to buy the asset at the price we will consider is appropriate. As we say, we have no rush, although we would like to sell them at the profit price.

[Operator]

The next question comes from Joao Safara from Banco Santander.

[Joao Safara Silva, analyst]

I have 2 questions. The first regarding Abertis. If you could give us an update on the AP-7 process. I know that Atlantia stated yesterday that on March 25, they started the appeal in the Spanish Supreme Court to claim EUR 4 billion regarding the traffic risk and other compensation. I mean, my question here is that what is the expected time line for this? And if you have -- and what's your view on the outcome as well? If you could give us an update there.

And then the second question, just on the renewable assets and the other assets that have remained in the portfolio after the sale of Industrial Services. You mentioned you're not in a hurry to sell these assets, but what are the investment needs to -- I mean, for these kind of assets? Are they positive in terms of cash flow generation for the year? If you could elaborate a bit on that on what's their contribution to cash flows.

[Unknown Executive]

Question, the contribution to cash flow is very small. So basically, we will not keep them because they're a major source of cash. They operate finance and they produce some cash, but it's nothing which would change the needle. So the reason to wait and see to sell them is basically, in some cases, we're receiving already offers. In others, for instance, like some assets in Mexico, there have been some movements in the regulatory environment, which advised to wait and if that was clarified. But all of them are for sale. And as I said, no rush, but no delay if the price is appropriate.

In the AP-7, I guess it's very difficult to predict the legal timetables. This is something which, if you recall last time it went to court, the judge is rather than actually give a ruling, what they say is, "Let's wait until the concession ends and then we'll decide," which is a good way to push it forward. But I think now it is online. We think -- we obviously do not know the outcome, but we have positive expectations. We think there is sound reasons. Any way you look at the outcome, we have to get some compensation. But again, nothing can be very specific because it depends very much on how the judges interpret the contract.

[Operator]

[Operator Instructions] The next question comes from Beltran Palazuelo from DLTV.

[Beltran Palazuelo Barroso, analyst]

Congratulations for the strong results. I have 2 questions. First of all, regarding Abertis, if you could put more detail on the investment opportunities that Abertis is currently analyzing. And then the second question, regarding your partner. First of all, is the -- for example, the stake that HOCHTIEF has of 20% in Abertis, is that one of the possibilities of allocating capital of ACS? And if that were to appear, who would decide the price and when would that be executed? And second of all, reading the [indiscernible] there were some articles, there was a possibility that Atlantia was willing to sell its stake in HOCHTIEF. It's not a possibility that HCH buys their stake? And then what price and what time line?

[Unknown Executive]

You're asking quite a lot of questions which, as you can understand, you will not expect an answer. But I'll try to give you as much as I can. First of all, Abertis is a company we like very much. If you recall, we funded the company some 20 years ago, 18 years ago. And we like the business. We exit it and then when we came back. We manifested that our strategy is to focus significantly in construction and concessions and the capacity to do greenfields and brownfields. I think our partners really strengthened their position with incorporation of Blackstone. I think Atlantia and Blackstone together are a stronger partner, and we think the company has opportunities to grow. Basically, we can go both greenfield and brownfield. I think in both cases, the understanding of both partners have to agree whether to go together in the project, which is the normal case. If 1 of the 2 partners do not like it, then the other has the capacity to go solo. So that will be, in our case, easier because we have the capacity to things alone. But we have quite high expectations that the Abertis will grow significantly.

You said pricing on the acquisition of Abertis is taking HOCHTIEF, obviously, and that will have to be a fair price and have to be determined by independent valuation and valuator. So nothing mysterious about it. And newspapers tell very many things about Atlantia and about ourselves and about everything, most of which are not really accurate statements or what the company said. I don't think or at least I have never heard Atlantia saying that they would like to sell their stake in Abertis. But that if that was really the case, obviously, it's a business we like. But we do not expect the Atlantia would like to sell the stake.

[Beltran Palazuelo Barroso, analyst]

Okay. Thank you very much. And maybe the last question, if I have a follow-up. Since let's say you entered the COVID, you saw a cover for a good price. Now, let's say, ACS is performing extremely well, a lot of net cash, a lot of opportunities. Abertis is performing well, but the stock is significantly undervalued from pre-COVID levels. And if you do simple math calculations, we see the stock is undervalued. Any plan, let's say, of allocating some of the cash to really buy back and really, let's say, amortize that -- the shares you repurchased but in a big way?

[Unknown Executive]

We've done that occasionally when we thought it was appropriate. So again, it's nothing that we could advertise. So we actually have performed buybacks, not the buyback than we do for the dividend, for the [indiscernible], but also buying back for cancellation. And on and off, we've done some shares. So it's a good way to compensate shareholders besides the cash dividend. But again, we have the capacity and we will exercise it, but we will not -- for the time being, we don't have any specific plans to do that.

[Operator]

The next question comes from Nicolas Mora from Morgan Stanley.

[Nicolas Mora, analyst]

So just a couple of questions for me. Coming back on Marcin's question on the firepower. So you will have spent around EUR 1 billion buying the minorities of CIMIC. I think that CIMIC will have spent a fair amount of money settling projects, cost overuns and so on. The net cash is at, what, [ EUR 675 million ] at the end of March. Obviously, it's the low point of the year with June. But where do you expect net debt to end up at the year? And more importantly, where do you feel comfortable setting that basically net cash or net debt level? Because personally, I don't get anywhere near EUR 4 billion to EUR 5 billion firepower, which more like EUR 2 billion to EUR 3 billion. So just wanted to understand a little bit between what you've done already, the cash which has come out and is due to come out especially of CIMIC by 2023, how much really you have to play with.

And second question, just more on the operations. What are you seeing from your clients right now, especially in the U.S. and in Spain, for example, in terms of project tenders, an appetite for resetting, let's say, project costs and inflation expectations higher. Do you feel there's wiggle room for you to pick up some of the order intake and start inverting a little bit the margin trend, especially in the U.S.?

[Unknown Executive]

Okay. In terms of cash, basically, the amount of debt that we have at the end of the process, it will depend very much on how much we invest. So we are obviously in the middle of the investment analysis. So depending upon what do we do, the outcome will be that. We don't have any problem with -- having there between 1 and 2x EBITDA, which is what we've been having in the past. So I don't think that will be a problem. In terms of project costs, the inflationary pressures and the disruption of the supply chain is an [ animal ] we have to cope with. It's a typical of our industry probably now more than in normal times. As I told before, 80%, 85% of our contracts are inflation-protected. The biggest portion of that is Turner, which is because of the structure of cost plus, does not have any inflation pressures. But we are trying -- in the large contracts, in most cases, we're getting inflation protection. And in some others, mostly in the building side, in the -- because of the length of the operation is smaller, we try to do that with tactical searches in other materials and this is the way we have to find it.

Don't forget that we have a fairly wide organization but very decentralized. So the operations are managed locally, which allows you a significant improvement in order to manage the acquisition cost and the logistics of that. So we do not have centralized purchasing for all the company because that will be a killer. But basically, we think we're able to cope with the inflation costs, obviously, better than the average, but still is something that we have to keep a watch on.

[Nicolas Mora, analyst]

Okay. And if I may, just on -- last one on Abertis. There's been a fair amount of press in Spain about potential interest on U.S. assets, Greek assets around assets. This is all brownfield. Are you talking also about the opportunity to do greenfields? So that was the initial objectives as 4, 5 years ago when you acquired Abertis with Atlantia without much change so far. You really feel these guys are ready to put more money into Abertis at these levels?

[Unknown Executive]

Yes. I think as I said, we think the Abertis shareholding has strengthened. Also despite in the past years, we have not pursued many greenfields with Abertis, our understanding is that when we pursue a greenfield, we have to talk to our partners and see if they like it. If they like it, we will do it together. If they don't like it, we're going to do it solo. I guess also, it is important to say that the partner, Atlantia, in the past years has gone through a very difficult period with the [indiscernible] situation. So they were not in the best position to actually take a risk they were not familiar with. Now the situation has really improved. And also with a partner which is familiar with infrastructure, we think it is very likely that they would like to participate in greenfields as well. But this will be on a project-to-project basis.

[Operator]

The next question comes from [ Terry Malone ] from BNP Paribas Exane.

[Unknown Analyst]

Two questions for me. One on construction, actually. How much revenue could grow this year in total and by geography? And what about margins for this year? And again, total and by geography.

[Unknown Executive]

Is that it?

[Unknown Analyst]

Yes.

[Unknown Executive]

Okay. Well, you've seen we've grown in construction around 8% in sales. Volumes have -- in some cases, EBIT margin has improved slightly. EBITDA has leaked a little bit, but that was because we had less equipment. We start construction a bit more, and that is why we have higher cost in construction. We did less work with their own equipment. That's why the amortization was lower. And that is why although EBITDA -- group EBITDA, EBIT margin grew more, and that was precisely because we have a higher percentage of own work rather than subcontract -- sorry, subcontract work rather than own work, which removed the amortization cost.

But basically, we think margins -- we do not expect any significant variation from them. Obviously, it is our job to push for margin improvement in all markets. But I think the only reason for margins to improve is because, in some markets, there is significant growth. And with an increased work, the competition tends to be least hungry and margins can be slightly better. But we do not project this even margin improvement in construction.

[Unknown Analyst]

And just to clarify, you mean no margin improvement compared to last year 2021?

[Unknown Executive]

Yes.

[Operator]

Ladies and gentlemen, there are no more questions. Dear speakers, back to you.

[Unknown Executive]

I guess, basically, as we've said, we have a quite high expectations. If we look with the present performance of the business, we think we can get -- net profit would get around the EUR 600 million if things go as their plan. And on top of that, we are working on additional transactions, which can add an additional profit. So we are very optimistic for the outcome of the year. Thank you very much. And if you have any further questions, you can call us and we are available to you. Thank you.