ACS Actividades de Construccion y Servicios SA
MAD:ACS

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ACS Actividades de Construccion y Servicios SA
MAD:ACS
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Earnings Call Analysis

Q1-2024 Analysis
ACS Actividades de Construccion y Servicios SA

ACS Group's Q1 2024: Strong Growth and Future Prospects

ACS Group showed robust results in Q1 2024, with a net profit of €177 million, a 16.7% increase. The order book reached nearly €13 billion, supported by €13.2 billion in new contracts, especially in next-generation infrastructure. Turner's order intake surged 56%, making it a significant growth driver. Revenue rose by 9% to €8.7 billion. The net debt reduced by over €300 million year-on-year, ending at €1.6 billion after substantial investments. The company forecasts 8-12% net profit growth, driven by infrastructure and technological advancements.

Strong Start to the Year with Impressive Growth

The company started 2024 on a strong footing, boasting significant growth in sales, net profit, and order backlog. Sales grew by 9% to $8.7 billion, and the net profit surged by 16.7% on a comparable basis to EUR 177 million. These achievements were driven by robust performance across various segments, with Turner and Engineering & Construction (E&C) standing out as prime contributors.

Cash Flow and Debt Position: A Solid Financial Foundation

The first quarter witnessed substantial improvements in cash flow and debt reduction. Net operating cash flow enhanced by EUR 266 million compared to the previous year, reaching EUR 1.3 billion over the past 12 months. Consequently, the net debt position shrank by more than EUR 300 million year-on-year, standing at EUR 1.6 billion in March 2024. Investments amounted to EUR 1.1 billion in the quarter, including a significant cash contribution of EUR 650 million to Abertis, underlining the company's strategic allocation to growth opportunities and shareholder returns.

Order Book Expansion: A Strategic Commitment to Infrastructure

The order book reached an unprecedented level, growing by 9.5% to almost EUR 13 billion, supported by EUR 13.2 billion in new awards. This aligns with the company's strategy to lead in new-generation infrastructure projects, particularly in sectors like energy transition, sustainable mobility, and digital and technological advancements. New-generation infrastructure orders surged by 44% compared to the previous year, showcasing the company's diversification and growth potential.

Turner: A Key Driver of Growth

Turner consistently proved to be a vital growth engine with a remarkable 56% increase in order intake and 10% revenue growth year-on-year. The company's commercial strength was evident, with new orders hitting EUR 7 billion, leading to a 22% year-on-year increase in the order backlog to EUR 28.3 billion. Turner's strategic focus on advanced technologies and high-tech projects reinforced its market leadership and contributed significantly to the group's overall performance.

Focused Growth in Asia-Pacific

The Asia-Pacific operations demonstrated dynamic growth, contributing 30% of the group's profit before tax and 21% of total sales. With a 10.2% increase in sales and a 17.7% rise in net profit, this region remains a critical market for the company. The sustained EBITDA margin of 8.2% and the acquisition of an additional 10% stake in CIMIC underscore the company's commitment to strengthening its presence and performance in the region.

Engineering & Construction: Strong Operational Performance

The Engineering & Construction segment achieved a 7.8% increase in sales to EUR 2.2 billion, driven by volume growth and margin expansion. EBITDA grew by 11%, and profit before tax surged by 23.7% compared to the same quarter in 2023. The order backlog remained robust at EUR 27.7 billion, with significant contributions from sustainable mobility and transportation projects, highlighting the company's strategic investments in high-growth areas.

Infrastructure Investments and Strategic Acquisitions

The company's infrastructure division, which includes mature concessions and new greenfield projects, continued to show stable attributable net profit despite a lower contribution from the Iridium project. Recent investments include a 50% controlling interest in Skyports and significant capital allocation to Abertis, reflecting a focused approach to enhancing infrastructure capabilities. The consolidation of Abertis is expected to generate solid cash flow and sustain its dividend policy, bolstering the company's long-term financial strategy.

Guidance and Future Outlook

Looking forward, the company maintains a positive outlook with a net profit growth guidance of 8%-12% after holding costs. The EBITDA margin for Turner is anticipated to reach 3.5% by 2026, up from the current 2.7%. The firm's robust order intake and strategic investments provide confidence in achieving these targets, reinforcing its commitment to profitable growth and attractive shareholder remuneration.

Earnings Call Transcript

Earnings Call Transcript
2024-Q1

from 0
Operator

Good morning and thank you for joining us in this 2024 First Quarter Results Call of ACS Group. This is Javier Crespo, Head of Investor Relations. The call will be led by our CEO, Juan Santamaría, who is accompanied by our Corporate General Manager; Ángel García Altozano, the group's Chief Financial Officer; Emilio Grande and the rest of the management team. As usual, after the presentation, we will open up for a Q&A session. And now let me pass it on to Juan.

J
Juan Cases
executive

Thank you, Javier, and thank you, everyone, for joining us. Good afternoon, and thank you for being with us today. First of all, I will start by highlighting the strong performance of the group in the first 3 months of the year with sales, net profit and backlog growing significantly on a comparable basis.

The evolution of our order book confirms our strategic commitment to new generation infrastructure projects as a driver of growth, which accounted for circa 50% of our new quarterly record, quarter in date of EUR 13.2 billion. Turner, with an increase of 56% in order intake and 10% in revenue confirms itself as one of the main growth engines in our group. Meanwhile, ACS continues focus on derisking while making progress on its strategic investment objectives and maintaining an attractive shareholder remuneration.

Moving now to the Q1 financial overview. The group posted a net profit of EUR 177 million, representing a 16.7% increase on a comparable basis. On a reported basis, net profit growth in the period was 8.4%. I would like to note that the Q1 2023 figures are presented on a pro forma basis in order to have a like-for-like comparison. This means that the 288 contribution has been adjusted to the equity method, and profits from Ventia have been considered as nonrecurrent.

In terms of cash generation, the group saw a strong quarter with an improvement of EUR 266 million in net operating cash flow when compared to the Q1 2023 figure. On a last 12 months basis, we delivered a net operating cash flow of EUR 1.3 billion. This is a strong performance with the usual seasonality of the first quarter of the year, resulted in a net debt position at the end of March 2024 of EUR 1.6 billion after allocating $1.1 billion to investments and shareholder remuneration in the first quarter. This includes $650 million of cash contribution to Abertis.

The resulting net debt position represents a reduction of more than $300 million year-on-year. From a backlog perspective, the first quarter has been very positive. The order book grew by 9.5% to almost EUR 13 billion, a record in the company's history supported by an outstanding EUR 13.2 billion of new awards in the period. This backlog figure is the result of the group's decision to position itself as a leading company in building infrastructure, customer sectors such as energy transition, sustainable mobility and projects related to the digital and technological space are driving our growth in terms of backlog and also greenfield investment opportunities.

Last 12 months order intake in generation infrastructure reached over EUR 19.8 billion, 42.7% higher than the prior year confirming the group's diversification drive. In fact, the growth of the backlog related to new generation infrastructure in Q1, '24 reached almost 44%.

Let's look now in greater detail into the consolidated results for the period. Revenues reached $8.7 billion, up 9% FX adjusted. Turner is the largest contributor to the revenue growth of the group with 10% growth year-on-year. EBITDA grew by 7.2% FX adjusted. EBITDA margins at Turner and E&C increased and seemingly remained stable like-for-like. The consolidated EBITDA margin was impacted by lower EBITDA contribution from infrastructure.

Profit before tax reached EUR 280 million, of which 39% came from Turner, 28% came from CIMIC. So overall integrated solutions contributed with 67%.

On the next slide, we have the breakdown of profit by business line in company. As you can see, net attributable profit grew at 16% or 16.7% EBITDA adjusted. On the back of a strong operational performance grew at 16% or 16.7% adjusted on the back of a strong operational performance across integrated solutions and E&C. Together with the earnings accretion coming from the further acquisition of minorities over the last 12 months.

Headquarters on our businesses remained broadly stable overall. Turning to the cash flow performance for the quarter. I would like to highlight a few aspects. Number one, the better performance of working capital evolution compared to the first quarter of 2023 by EUR 181 million. And two, the lower level of CapEx as growth is coming from less capital-intensive business associated with integrated solutions. As a result, cash flow in the first quarter of the year, impacted by the usual seasonality improved by EUR 266 million compared to the same period in 2023.

If we look at the last 12 months, the group generated a very solid EUR 1.3 billion, up by more than EUR 500 million year-on-year. Our net debt position as of March 2024 stood at EUR 1.6 billion, showing a reduction of more than EUR 300 million versus March 2023. The proceed from the outstanding last 12 months' net operating cash flow of EUR 1.3 billion have been allocated for the investments of EUR 379 million in increasing optician holding and the total shareholder remuneration of EUR 743 million, including ACS and minorities.

Net equity divestments and M&A of $706 million, including the partial 288 divestment to Abertis is offset by the EUR 650 million equity cash injection in Abertis. During the quarter, in addition to the investment in Abertis already mentioned, we devoted EUR 262 million to remunerate our shareholders. and EUR 213 million for net equity investments and M&A. Overall, we deployed EUR 1.1 billion of capital in the first quarter of the year. This capital allocation, together with the usual seasonality of the quarter, extend the variation in the net debt position when compared to the cash position as of December 2023.

Our balance sheet position remains firm. In November 2023, S&P confirmed the company's investment growth rating. Our commitment to investment growth rating is a key principle of our financial policy. As you can see on Slide 7, our order backlog stands at EUR 77.9 billion, up 9.5% FX adjusted or EUR 6.6 billion on the back of EUR 13.2 billion of new orders. This is a consequence for spotted to grow new generation infrastructure market.

Close to 50% of new orders confirm this segment. The book-to-bill ratio, a leading indicator of our future growth stands at 1.2x. This provide us with confidence to deliver our ambitious targets for the coming years. This is also reflected in the current backlog visibility of 25.7 months. On the other hand, we keep derisking of our order book with lower risk contracts, which currently account for around 85% of the total versus the 65% in 2017.

On the next slide, you can see a selection of [indiscernible]. I'm not going to name them all, but let me highlight the significant number of new data center projects signed recently in the U.S., Poland and the Philippines. Also, in the Energy Transition segment, we have been very active with new contracts in the spread in North America with significant awards in renewable energy generation, by the restorage in transmission lines.

In Canada, we have been awarded the new New Île D’Orléans with construction project in Quebec. In here in Madrid, we won the Atocha transfer station project, an underground railway complex, which will connect the high-speed terminals of Atocha and Chamartin.

I will also highlight the Royal Prince Alfred Hospital project win in Sydney. [indiscernible] is an important growth area for the group, which is reinforced by Turner's #1 position in the sector in North America. Let's move now to a more in-depth look at each of the 4 key segments of the new reporting structure. As you know, this is the first quarter in which we disclose our operating and financial performance under the new structure. In the appendix that included further detail on how do we work going forward, including the level of disclosure by quarter.

Let's start with terms, which represent 46% of our sales and has an outstanding EBITDA conversion into cash flow. It is a very solid business model with a low-risk profile and high free cash flow generation. Turner has been able to capitalize very quickly on the growing business momentum in our sector in the United States, especially in all areas related to advanced technologies.

Our U.S. market leadership position supports our strategic objectives of taking this model to Europe as explained on earlier occasions. If we look at the operating figures, they represent a combination of growth and profitability improvement. As you can see in the slide, sales grew by 10% with a positive performance across segments, particularly from high-tech projects, which grew 13% and biopharma healthcare in indication by 16%.

EBITDA and PBT improved year-on-year, reflecting a higher contribution from high return segments. We're starting to deliver and the margin increase expected a turn towards our target of 3.5% in 2026 currently at 2.7%, up 20 basis points year-on-year, supported by a successful strategy on advanced technology project opportunities and source new supply chain solutions.

Turner's commercial strength is demonstrated by its new orders of EUR 7 billion, which grew 56% up in the quarter. As a result of this good commercial momentum, its backlog reached EUR 28.3 billion, growing by 22% year-on-year, a sustained growth trend in the last year.

Let's move now to our Asia Pacific operations, which represents circa 30% of the group's PBT or 21% of total sales seemingly 12% in this fast growing [indiscernible]. The Asia Pacific market is currently very dynamic with an increasing number of energy transmission and sustainable mobility projects. This is reflected in the solid evolution of all financial indicators from sales up 10.2% to a net profit of 17.7% on a comparable basis.

EBITDA margin has been sustained at 8.2%. As announced, the group recently acquired additional 10% of this through CIMIC for AUD 340 million bringing our stake to 60%. The company will be fully consolidated starting in 2024, and will contribute with approximately EUR 1 billion of EBITDA. The company's key figures can be found at the end of this presentation.

Further on this, I would like to highlight how it's portfolio has rapidly evolved towards critical minerals such as lithium, vanadium, potash and [indiscernible]. We now move to Engineering & Construction segment, with EUR 2.2 billion of sales, up 7.8% is adjusted. EBITDA was 11% higher due to the combination of volume growth and margin expansion and PBT grew by [indiscernible].

The order backlog continued to grow at 4.4% rate year-on-year, currently standing at EUR 27.7 billion, with a strong contribution by sustainable mobility and transportation. Order intake in the quarter reached EUR 3.3 billion. Over the next couple of slides, you can see a breakdown of the contribution between the different companies that comprise the E&C segment. The [indiscernible] shows sales growth of 3.1% in the first quarter to nearly EUR 1.4 billion.

EBITDA increased to EUR 73 million with an improvement in the operating margin. Profit before tax of EUR 28 million is up 23.7% compared to the first quarter of 2023. The backlog has remained stable at EUR 16.5 billion, with a strong focus on transportation and sustainable mobility and with that North America representing 67% of the total.

Turning to Hochtief Engineering and Construction activity. We see a strong sales growth in the quarter up 17% year-on-year to over EUR 811 million, particularly driven by outperformance in the U.S. market. At the EBITDA level, growth was 21% with stable margins. In the last 12 months, EUR 5.7 billion of new work was secured, up 37% year-on-year, reflected in the 14% increase in the order backlog to EUR 11.2 billion.

Infrastructure is a division in which we have grouped our investments in mature concessions through Abertis as well as our investments in new greenfield projects. The reported results for Q1 2023 has been adjusted to show a like-for-like comparison with the 288 por data being accounted for by the equity method.

Attributable net profit contribution remains more or less stable with lower number from Iridium driven by the smaller participation in 288. In terms of new investments, Iridium reached an agreement to acquire 50% controlling interest in Skyports, a global leader in the development and operation of verticals. The total investment in our infrastructure platform in the period amounted to circa EUR 100 million plus EUR 650 million of cash contribution in Abertis.

We have detailed our greenfield investment spread in the recent held Capital Markets Day, and we will be directing our capital allocation strategy accordingly. As you know, our 50% stake in Abertis is consolidated by the equity method. Sales reached EUR 1.5 billion, 14% growth and EBITDA increased by 15% to EUR 1.1 billion.

Operationally, the assets have shown a solid performance with average traffic growth of 1.4%, an average 4.1% decrease in tariffs. Trends traffic metrics were soft at the start of the year but are recovering since February. The growth achieved in Mexico is outstanding with 17% growth in both revenues and EBITDA, worth noting that Mexico is one of the main beneficiaries of the insuring policy of large U.S. corporations. Spain from growth is not worth with a 19% increase in traffic, supported by the timing of Easter.

Net profit contribution was diluted by the recent acquisitions and the impact of higher minorities. Corporate activity has been very intense and Abertis during these first 3 months of the year. The company acquired 100% of the Autovía Camino in Spain for EUR 110 million.

In addition, Intervias extension of the Brazilian interbase motorway has been [indiscernible] and agreed. The maturity of which has been extended for 8 more years. Regarding the Abertis balance sheet, net debt has been reduced by EUR 1.1 billion. The EUR 1.3 billion equity injection agreed to strengthen its capital structure was approved and paid in by the shareholders.

The annual dividend of $600 million has been approved and will be paid in the second quarter of the year. As expected in our Capital Markets Day held in April, we expect Abertis current portfolio to generate strong cash flow to deliver and sustain its current dividend policy. In addition, significant extension and M&A opportunities lie ahead of us, which will further contribute to the growth of the business, the maintenance of the current investment grade rating and attractive level of shareholder remuneration.

In Slide 17, we have further information on a geographical basis to help understand the evolution of the portfolio in Abertis. Let's move now to greenfield equity investments, where we expect to generate significant long-term value for ACS shareholders. Our current investment portfolio is comprised of nearly 100 projects globally across the transport, social, digital, energy and mobility sector. The current book value stands at EUR 1.9 billion with an estimated fair value of EUR 2.7 billion. To conclude the review of the first quarter results, I would like to underline the highlight [indiscernible] operating performance. 16% growth in comparable net income and improving cash generation performance as well as an intense investment activity.

Furthermore, the strong level of order intake during the quarter supports our earnings growth forecast for this year, as well as providing visibility on the company's long-term outlook. And looking forward, I would like to underline this guidelines, which we serve at the Capital Markets Day. Our main focus is to achieve a profitable growth combined with attractive shareholder remuneration.

This profitable growth would translate into solid and recurring consideration, which in turn will allow us to continue investing in new infrastructure opportunities where there is no operating activities and promoting the integration and collaboration between group companies. This approach is already delivering synergies and supporting our profitable growth. Thank you very much for your attention.

Now I'm looking forward to take your questions.

Operator

[Operator Instructions] The first question comes from Luix Prieto from Kepler Cheuvreux.

L
Luis Prieto
analyst

Good afternoon, Juan and team. I had three questions, if I could. The first one is regarding what the current stake in Hochtief would be at the end of the quarter? And if you could shed light on to the share buyback activity over the same period for the first quarter.

The second question is regarding financial investments and disposals of EUR 863 million, I understand EUR 650 million is about business capital increase. What is the rest, if you could, again, shed light on this? And the final one is if you could give us some update on [indiscernible] operating performance and its disposal process.

J
Juan Cases
executive

Luis. So our current percentage or ACS is taking is 76.2%. And if we adjust for treasury stock, it comes up to 78.73%. Regarding the next one out of the EUR 863 million, EUR 650 million is Abertis, and there's EUR 162 million of JV investments basically in Flatiron. The [indiscernible] acquisition was 13% and we have infra investments of around EUR 31 million. And this is mainly renewable opportunities. And then again that this is it.

And then Clece, so Clece, we're still -- so we have different proposals on Clece and we are evaluating right now. I mean, we haven't reached any decisions yet. If there was any decision or plan to move forward we'll let you know.

L
Luis Prieto
analyst

And regarding Clece, there hasn't been anything operationally in the quarter worth noting. We should assume there's performed in line with past.

J
Juan Cases
executive

Our performance in line, very flat.

Operator

The next question comes from Graham Hunt from Jefferies.

G
Graham Hunt
analyst

Maybe one on data centers. One of the pushbacks often get is power capacity, grid capacity in terms of the strong demand we're seeing there to meet the demand you're seeing on the data center side. I'm interested to know, given ACS sort of end-to-end capability, whether there's -- you're having conversations with your customers in terms of enabling both the data center side and the power supply side.

And if there's something sort of smart that you're doing there that your competitors can't just be interested if you could talk to that opportunity? And then second question, just a short one. Given the strength that you've seen in turn and the order intake, is there any upside scope to that 3.5% margin target that you spoke to at the CMD in 2024?

J
Juan Cases
executive

Thank you so much, Graham. So let me start with data center. So I mean power, water, fiber and the data center per say comes hand in hand, right? Nowadays, you cannot think of data centers without talking about all of that, plus the relationship with potential hyperscale or the [indiscernible] strategy. So that all of that parts for -- its part of the data center strategy. And basically, that's what gives us the confidence that it's a good market for us because at the end of the day, the equation and again comes from putting all of that together.

I mean, there's a very important part of permitting as well. because obviously, a certain point can have the connection, can have the energy, but not be able to achieve the permits or vice versa, right? So all of that is being looked in parallel. Out of the -- in the last 4 years, we have developed 140 data centers, 140, okay? And most of the projects have included the energy connection itself, right?

So it's very, very rare to see that data center in isolation. So our strategy in terms of construction continues to provide a lot of value to our clients. But more importantly, our strategy in terms of potential investments, they cover the same. The other thing that is important, and I think that it's also answering the question is, because of all that energy demand and the water consumption, et cetera, the sustainability is getting more and more -- is becoming or is taking center stage because of the big footprint that is needed.

So we are pretty much incorporating new cooling technologies. We have developed our own IP, especially for -- I mean that includes [indiscernible] growing technologies and our liquids but also more efficient data centers precisely to cover that. But anyway, at the end of the day, the important thing is that from energy perspective, we've worked from renewables, we're working more [indiscernible] energy and we do have also expertise in one of the areas of the future, which is nuclear.

And there's already a lot of conversations around nuclear energy associated to the big 1 gigawatt plus data centers that we are talking to the clients, but we're also working on the more efficient data centers. I hope I was not too long in the answer.

And then regarding the 3.5% target, we still keep the target for 2026. We are currently -- we finished 2023 at 2.6%. We are at 2.7%. We expect to finish the year by 3% and continue to raise to 3.5% by 2026.

G
Graham Hunt
analyst

And just very quick on that PowerPoint. I guess the point was whether that offers you an incremental upside opportunity given the capabilities within your platform. But I think you answered that.

J
Juan Cases
executive

Yes, yes absolutely that in short, yes.

Operator

The next question comes from Victor Acitores from Bernstein.

U
Unknown Analyst

I have three questions. The first one is that I have seen in today some client spots, some confusion on the net profit guidance that has been, let's say, restated with the Capital Market Day. It's only you can clarify how that applies with the holding cost only to clarification for some of the clients that are confused on that.

The second is that yesterday, [indiscernible] announced that have finally present debit for the Georgia projects, [indiscernible] to clarify or state that you also have done with your consortia? And finally, regarding capital allocation, on the Capital Market Day, they mentioned the future potential setup of vehicle could be something that could be analyzed on ATS, these type of vehicle in order to allocate money.

J
Juan Cases
executive

Thank you, Victor. So a strong net profit guidance. So the 8% to 12% is after holding cost and it's referred is EUR 600 million operational that we in the ordinary business. Regarding the Georgia 400, we did submit our tender last week.

I mean, we are waiting to hear from the clients. So we cannot -- I mean, it's all of that is subject to confidentiality, but we don't have any further info. And regarding [indiscernible] well, these vehicles -- I mean, our [indiscernible] states is to focus on other growth that the market is going to bring. And we went through all that in the Capital Markets Day, whether -- I mean, around data centers, around external mobility, renewables, potentially hydrogen, potential critical minerals in addition to all the most -- I mean the highways and the [indiscernible] et cetera, especially in North America.

So that's our focus. If at some mistake -- so basically, I mean if we -- if we at some stage, we are thinking on a vehicle. I mean, that can always be a possibility. But it's not on the table right now. We prefer to continue growing, and then we'll see.

Operator

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

M
Marcin Wojtal
analyst

Firstly, do you have any update for us on the SH-288 concession impacts and the potential termination -- have you had any dialogue with the grantor. And is there anything that you would like to perhaps share on that topic with the market?

And my second question, if I may, relates to your operating cash flow, which improved by about EUR 250 million year-on-year, I think we saw yesterday that in Hochtief, they had pretty flat performance, only slight improvement. So can you explain where did the improvement come from? Was it Dragados working capital? Was there something else that allowed you to improve the cash flow year-on-year.

J
Juan Cases
executive

Okay. Thank you, Marcin. Regarding SH-288, we continued conversations. At this state, all the conversations are confidential. So we cannot -- we are not allowed to disclose any detail. But basically, no change versus the last time we spoke in the Capital Markets Day, which is I mean the two for all part, one is the information path and they are wanting for the conversations throughout this minimum a 6 months period.

And again, as soon as we do have any further info on the evolution of those conversations, we will let you know. Regarding the operating cash flow, basically has been the performance of Dragados, which is going -- which is going well. This year, I mean, Dragados net cash flow came down to EUR 220 million versus last year, which was EUR 369 million, and that's the main -- yes, versus the working capital of last year.

So yes, that's the main thing. So that it -- sorry, EUR 220 million versus EUR 369 million net operating cash flow and this year EUR 207 million versus EUR 360 million last year. So basically an improvement whatsoever.

Operator

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

U
Unknown Executive

All right. Thank you very much, everyone, for joining us here today. And yes, thanks for your participation.

J
Juan Cases
executive

Thank you, everyone.

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