Acciona SA

MAD:ANA

Earnings Call Transcript 2019-Q1

[Raimundo Fernández-Cuesta]

Good morning, ladies and gentlemen, and welcome to our first quarter results presentation for the year 2019. A summary of the key trends during the quarter. I would like to highlight the following. Firstly, the comparability of our operating figures, still affected by changes in perimeter, primarily the CSP business, which still contributed in Q1 last year, and ATLL, which makes a final contribution of only 2 months during the first quarter of this year. Secondly, with respect to the Energy division, the start of the year have seen low levels of wind and hydro generation output in Spain relative to last year and relative to what we estimate to be a normal year. The third factor to take into account to understand the operating figures for this quarter is the fact that some of our large international construction projects are more mature and, therefore, going beyond the point of peak production. These are higher EBITDA margin projects, but they also have higher capital charges. In addition, the water EPC activity, which has been very successful in securing new desalination awards, will see the ramp-up of production for these new projects in the latter part of the year, so most of the contribution will be back-end loaded.Having said this, our net income increases strongly on lower depreciation and financial charges and higher contribution from our investments that contribute via the equity accounted line. This includes expected contribution from Nordics, better performance from our energy investments, road, hospital and water concessions and construction JVs. With respect to depreciation, the reduction is the net effect, on the one hand, of assets that have lesser group perimeter such as CSP, ATLL, Trasmediterránea, as well as the full depreciation of equipment related to some of the large capital-intensive construction projects and, on the other hand, the increase in depreciation due to IFRS 16 and due to new assets in operation. In terms of future growth for the group, in energy, we have more than 600 megawatts under construction in Chile, U.S. and Australia out of the 1 gigawatt that we will be working on during 2019, representing assets to be commissioned during this year and next year. We have a total pipeline of 7.5 gigawatts, roughly 50% wind, 50% solar PV, out of which 1.6 gigawatts are in Spain, and we are expanding this pipeline. This is to be in a position to take advantage of the expected growth and good opportunities in our home market during the next decade. On the EPC side, our total backlog of civil, industrial and water EPC projects has grown during the quarter, standing at a very healthy EUR 7.5 billion, with the Water business being particularly successful in securing the awards as we just mentioned. Finally, with respect to working capital, the outflow during the first 3 months of the year is very similar to the levels seen in the same period last year. This working capital reflects, in part, the usual seasonality in the first quarter linked to the reversal of the high collections before year end that we typically see in the last quarter as well as certain one-offs. I would like to mention, in particular, a particular one-off item related to the Puerto Libertad energy project that represents around 1/3 of the working capital movement during this period. As you know, Puerto Libertad is a 405-megawatt PV plant located in Mexico that is 50% owned by ACCIONA, and it is, therefore, equity accounted. We have provided the full EPC contract and got paid by the project company in 2019 for the CapEx, and we have settled our suppliers for a significant portion of this CapEx, almost 30% of total, during Q1 2019 now that the project has been fully completed.We expect significantly better working capital figures for the full year, which we see in a range of EUR 100 million to EUR 200 million.Moving on to Slide 4. We show the key financial indicators for the first quarter of 2019. Revenues are up almost 2% despite the exit of ATLL and Trasmediterránea with growth in both the energy and infra divisions. Reported EBITDA of EUR 292 million falls by 8.8% for the reasons we have commented earlier, although on a like-for-like basis, the decline is of only 3%. We have included a slide in the appendix to this presentation to help you reconcile the reported EBITDA versus like-for-like EBITDA for the quarter, taking into account changes in perimeter as well as the first time implementation of IFRS 16.IFRS 16 has added EUR 30 million to our EBITDA in the quarter, which is in turn offset below the line by higher depreciation and, to a lesser extent, higher financial charges. So the impact in the bottom line is neutral. Also in the appendix, you will be able to see that 80% of EBITDA of the group is related to our long-term asset business, namely, our renewal generation and concession assets. 75% of our total EBITDA during the period was generated under long-term contracted assets and infrastructure management contracts. Earnings before tax and net income both grow strongly relative to last year with net income reaching EUR 73 million, up 19% year-on-year, with lower depreciation, higher equity accounted contribution and lower financial charges.Total investment is higher than in the same period last year amounting to EUR 270 million, with no disposal proceeds this quarter and no share buyback investment either. Net debt stood at EUR 4.7 billion relative to EUR 5.4 billion a year ago. In Slide 5, we provide a detail on the investment during the period, which is basically investment in new energy assets in the U.S., Mexico and Australia, and investment in property development inventories, that includes a large one-off item, which is the landmark Mesena office complex in Madrid, which is a great development opportunity for ACCIONA and which is highly likely to become the group's future global headquarters. As you can see in the slide, total investment amounted to EUR 270 million including the property development inventories. As we always highlight, these investments are basically investments for growth. All of our maintenance and operating expenditure necessary to operate and extend the useful life of the energy fleet is reflected already in EBITDA.I'd like to turn the page to the slide summarizing the cash flow movements and the net debt reconciliation. Debt during the quarter has increased from EUR 4.3 billion to EUR 4.7 billion, mainly as a result of net investment of EUR 270 million and only 1 quarter of operating cash flow coupled with our working capital outflow with our significant, seasonal and one-off components that we expect to improve in the full year to levels of a hundred to a couple of hundred million. In the chart, you can see our net debt includes EUR 500 million related to assets that are currently under construction and, therefore, do not generate any cash flow yet.In Slide 7, you can see the overview of our net debt position. We are no longer reporting the debt allocation by business given the dominance of corporate debt relative to projected at ACCIONA and the elimination of structural subordination at the division level in terms of corporate debt that, as you know, we have all upstream to the parent company. We think that allocating corporate debt to the different businesses for analytical purposes is increasingly subjective and in the context -- especially in the context of our current funding model following the radical transportation that has taken place in recent years. At the end of the day, we see ACCIONA as a single company with a single stock of debt, which is backed by all the assets and businesses of the group. With that in mind, in the charts, you can see that our total gross debt set stands at EUR 6.5 billion, and that we have EUR 1.7 billion in cash and cash equivalents. Project debt is now residual, as we mentioned, representing just over 20% of the total gross debt and is mostly related, as you know, to energy assets where we have minority partners or the local currency is not liquid or where it is expensive for us to buy back the project debt. The weight of project debt should continue to gradually decline in the future.Looking at the cost of financing, we continue to reduce the average cost of our total stock of debt, which was an average for the quarter of 3.4% relative to 3.55% on average during 2018. The average interest rate for our corporate debt during the period was 2.4%.In terms of recent refinancings, we mentioned at the last results presentation that we have signed in February a new ESG-linked EUR 500 million syndicated loan facility that could be increased in syndication. We can report that the final take was increased to EUR 675 million in a transaction that was oversubscribed at that level.We closed the deal in April and we have allowed for a long drawdown period until January next year as this refinancing transaction is mainly targeted for EMTN maturities later in the year. This new loan will extend the average life of our debt from 4.2 years as of March to 4.5 years, whilst decreasing our average cost of debt, even if marginally, which is consistent with our objective of extending average maturities without paying a premium. We continue to take advantage of our close relationship with our group of banks and the overall benign environment in the banking market, which remains highly liquid and attractive in terms of cost for ACCIONA. We continue to work, as always, on additional refinancing transactions considering different banking and capital market opportunities. In terms of fixed versus variable, we currently have 61% fixed, and with the recent syndicated loan transaction, this will increase to around 65%.I would like to move now to the overview of the business operations in detail, starting with energy infrastructures. Our renewal energy business reported EBITDA of EUR 222 million, up 1% year-on-year, which on a like-for-like basis corresponds to 9.5% growth. That is taking into account that the CSP assets still contributed during the first 3 months of the year last year and the marginal positive impact in Q1 2019 from IFRS 16 at the EBITDA level. This is a good result, but it would have been better were not for the lower-than-expected output in Spain. Relative to our budget, Spanish production was 6% lower, and relative to the previous year, it was down 70% -- 17%, that's 1-7, because of conditions in terms of wind and hydro. Last year was particularly good on hydro, as you know. And this year, volumes are very low, and it's looking like we're going to have a very dry year. We're almost 30% below the expected output for our hydro fleet in Q1.Wind is also lower than expected, 3% below budget and 13% lower than last year. We're more exposed to wind assets and, therefore, the lower wind volumes in February and March have had bigger impact on our fleet than the low hydro levels. It's also true that wind volumes tend to normalize over time. All in all, our total generation output across the fleet, domestic and international, is down by 7%, despite a higher output in our international assets and the contribution from new assets. In terms of achieved prices in Spain, blended, that is blended for regulated and nonregulated assets, these prices have increased by more than 20% on the back of average wholesale prices during the first 3 months of the year, which were EUR 55 per megawatt hour relative to EUR 48.1 per megawatt hour in Q1 last year and also on the back of our high levels of hedging in 2019 relative to where we stood in Q1. The full hedging last year meant that our achieved prices did not capture the large increase in fuel prices that took place from spring onwards, which was fueled by high carbon and commodity prices. Our higher achieved prices in Spain have basically offset the lower production in the quarter. Our expectation for the average wholesale price in Spain for 2019 is in line with what the market is implying and, of course, the historical figures for the first quarter, so we think this is going to be EUR 56 per megawatt hour. And we are sold forward for 2019, 2.2 terawatt hours, which represent roughly 50% of our nonregulated output in Spain at prices in the vicinity of what is the expected average fuel price for the year that I just talked about.With respect to international assets, the existing portfolio improved its contribution during the quarter relative to last year on the back of higher output and better foreign exchange. The contribution from new assets adds EUR 12 million to EBITDA this quarter relative to last year. These assets are El Cortijo and Mt Gellibrand wind farms in Mexico and Australia, and also the repowering of El Cabrito wind farm in Spain, and the full consolidation of 2 small Spanish wind assets after we acquired an additional 50% stake we did not own at the end of last year.In summary, when we look at the energy infrastructure division, the drop in EBITDA this quarter due to the sale of the 6P assets is offset by the better contribution from the international assets and the contribution from new investments. The Spanish fleet broadly offsets the lower output with higher achieved prices.Moving on to Slide 9. We summarize here the performance of the civil, social and water infrastructure business. Revenues are up by 4% to 11 -- EUR 1.1 billion. This business contributed EBITDA during the quarter of EUR 63 million, down 30% including the impact of ATLL. In terms of backlog, the total backlog stands at EUR 11.1 billion. The EPC backlog has increased from EUR 7.1 billion to EUR 7.6 billion, despite the high level of revenues in the quarter, thanks to strong new awards, which were EUR 1.3 billion in total during the quarter. We would highlight one of the largest desalination projects in Saudi Arabia. It's a new award for almost EUR 400 million, which adds to the roughly EUR 540 million of desalination awards in the Middle East that we obtained in 2018.In Slide 10, we show the performance of the individual activities within civil, social and water infrastructure, and I would like to highlight a few points. EBITDA declined by EUR 6 million to EUR 38 million in the construction business. The main driver here is the lower production related to large capital-intensive civil construction projects that are now past their peak production point. These projects are high in terms of EBITDA margin, but they also carry higher depreciation charges that are, in a sense, the other side of the coin. The concessions business is affected by the sale of a concession in Brazil last year, and the water business reflects the early termination of the ATLL concession, which we delivered back to the regional government at the end of February, and thus, it does not contribute any longer to group results from the 1st of March. As you know, we have a strong disagreement with respect to the termination payment decision issued by the regional government, and we will contest it in the courts of law. Unfortunately, there's not much more we can say about this matter at this stage.Finally, the services business increases its EBITDA by close to 9%, with facility services as key driver for the better results.Moving to Slide 11. Here, you can see the results of the property and development business with negative EBITDA of EUR 6 million in the quarter. We expect returning to profit during 2019. In this first quarter, revenues have increased very significantly with the delivery of almost 240 housing units. The related profit margin was recorded in the last quarter of 2018 as a result of the year-end appraisal valuation that basically reflected the sale value of these properties that we were about to deliver to our customers. Therefore, these deliveries did not contribute to margin during the quarter. And in addition, in the first quarter, we are, from an accounting perspective, forced to account for the full impact of the annual council taxes, in Spain we call it IBI, and this has a disproportionate impact in the first quarter there. Our estimated gross asset value stands at EUR 922 million, which is related in its majority to our property development activity. Our strategy is focused on development, and our investment properties are now a residual part of our gross asset value following the disposal of properties in this last few years and the exit from the residential business via Testa. We have currently 1,400 residential units in the market in our 4 markets which are basically Spain, Mexico, Poland and Portugal. And in total, we are currently managing projects totaling 4,500 units. The breakdown of the stock of land related to these short- and medium-term projects that we'll be bringing to the market is in the slide.Moving on to Slide 12, Bestinver. EBITDA amounted to EUR 50 million, which is a good result, taking into account that we started the year with EUR 5.5 billion of funds under management after the year-end market volatility. We closed the quarter with EUR 6 billion in terms of net inflows -- well, in terms of funds under management, thanks to the net inflows and the performance of the funds themselves. Average funds during the first quarter were EUR 5.912 billion, and that's relative to the previous year, which were EUR 6.171 billion. And the numbers of clients continued to grow, which we see as a positive factor.Then Slide 13 to conclude the presentation and before the Q&A, just to summarize how we see the quarter. Basically had a slow start of the year at the EBITDA level due to lower-than-expected load factors and back-end loaded new infrastructure projects. And despite this, we have a strong bottom line growth and confidence in our full year guidance. And with this, I would like to open the Q&A session. [Operator Instructions]

[Operator]

[Operator Instructions] Our first question today comes from Oscar Nájar of Santander.

[Oscar Nájar Ríos, Equity Analyst]

Oscar Nájar, Santander. I have 2 questions. The first one is regarding the guidance. Obviously, your guidance for the full year you've reiterated you are confident, as you said in the call. But it's like high single-digit growth in like-for-like terms, so let's say around 7%, and the like-for-like has been decreasing by around 3%. So the rest of the year should increase by 10% if we want to make this 7%. So how comfortable or what are the main drivers that you're expecting in Energy or Construction better margins, or property development, disposal of assets? What's behind this confidence? And the second question is regarding, as you said, the net profit is EUR 73 million, and mainly thanks to this EUR 24 million equity method that you provide that information of what are the business inside. But last year, it was just EUR 3 million. So what is driving this from EUR 3 million to EUR 24 million?

[Raimundo Fernández-Cuesta]

In terms of guidance on like-for-like growth, as you said, we started the year a bit below what we expect to be for the full year. We said high single-digit, somewhere between 5% and 10%. What we expect is -- basically, we've been affected in the first quarter, as we've been saying, by low volumes. And in the wind part, this tend to normalize. We also expect improvement from the new assets that are being commissioned on the year-on-year comparison. There are more new assets coming. And some of the last year assets should also contribute better. So energy, we should do better than this. And of course, year-on-year, when you compare, the prices are high, but we should also be continuing to benefit from the higher prices relative to the levels we achieved last year due to hedging. In the infrastructure side, we've been commenting that we expect the Water business, which has been very successful with these new desalination awards, that in the latter part of the year will pick up. And there's a significant degree of production that we should expect by year end as these projects start taking off, and that will also have the growth and the figures. And in the construction business as a whole, we expect to do better, better margin during the year and maintain the level of revenues relatively flat versus the previous year, which as you know, they've been quite high. So that hopefully answers your question on the growth. On the equity accounted, there are many things that are contributing in small amounts but all together are making this contribution increase a lot. We talked about, of course, our investments in equity accounted energy projects. We have concessions, which are hospitals, roads, also water concessions and some construction JVs. All of that is increasing. We think that these figures in the first quarter could be extrapolated to the full year. I forgot to mention, by the way, Nordex, which we also think that the results will improve. And so we think that these numbers, to a certain extent, will continue to be higher than the previous year for the rest of the year. And also going forward, this line in the P&L, I'm talking beyond 2019, should take increasing weight in ACCIONA, not only because of the expected improvement in Nordex that we think will happen and we're confident will happen, but also because we are also putting online significant investments in the Energy division, including the Puerto Libertad PV in Mexico, which is a large asset, and also Benban in Egypt, which has just been commissioned.

[Operator]

Our next question today comes from José Ruiz of Macquarie Group.

[José Javier Ruiz Fernandez, Analyst]

Just 2 questions. The first one, I think I missed this, if you have commented it in the media, but could you be more specific on the pipeline in Spain, kind of ACCIONA's response to the energy transition? And secondly, just to understand regarding ATLL compensation, are you going to receive the compensation determined by the local government? Or is that compensation slows then while the legal process goes on?

[Raimundo Fernández-Cuesta]

Give me just a moment. Yes. With respect to the pipeline in Spain, we have 1.6 gigawatts at the moment that we are, I would say, bringing back to life that we preserve that through the regulatory crisis and now we're bringing it back. A lot of that is permitted. We have a significant component as well of PV, although more wind than PV. We're trying to beef up to reach 2 gigawatts in order to be ready because we are positive about the outlook for the Spanish regulatory framework and the outlook for the market in terms of opportunities to invest over the next decade. So again, we're just getting ready to have that opportunity to invest. In terms of ATLL compensation, I guess you're talking about the proposal of the settlement that the regional government has issued, which is in the order of EUR 55 million, that as we have mentioned, highly disagree with that figure, and you know the type of figures that we're thinking in terms of settlement payment according to the contract and the foregone profit plus damages that we have in mind. But this figure, this is likely to be, in different ways, cashed in over the course of, I think, over the next 12 months or so. So that will be short term. And the rest, we will need to wait for the courts.

[Operator]

Our next question today comes from Manuel Palomo of Exane.

[Manuel Palomo, Analyst of Utilities]

Manuel Palomo from Exane. First of all, I'd like to have a bit more of clarification in terms of ATLL contribution. If I look at the annex today, I think that it was in the region of EUR 11 million. However, when I look at the Water EBITDA is EUR 10 million. So I wonder whether you are booking this EBITDA in Water. And if so, why the Water EBITDA has been negative? And correct me if I'm wrong with my figures. And the second one that I wanted to ask is just a clarification in terms of the equity accounted earnings and the guidance that you've given. When you say that this growth could be extrapolated, it means that you're expecting pretty much EUR 24 million, EUR 25 million per quarter, hence, EUR 100 million by the year end?

[Raimundo Fernández-Cuesta]

Yes. Starting with the question on Water, yes, I think you have a decline roughly EUR 90 million, and you have I think a gap in the contribution from ATLL, which is around half of that. The other half in the decline in the Water business, as we've been saying already since the last part of last year, is basically reflecting the, I would call it, the impasse between the end of some large desalination projects we also had in Middle East, Qatar in particular, and the pickup of the new projects. So you now -- I mean, this is a business that can be a bit more volatile because of the size of the projects. And these are going to be, as we've been saying throughout the presentation, back-end loaded, so this is reflecting again that load in activity. With respect to the other question, which I think was extrapolating, I don't think we can be that precise on exactly what the figure we think is going to be for the last year, but I think you can expect a very significant increase and some extrapolation of what you see in the first quarter. That's as much as we can say.

[Operator]

[Operator Instructions] We have a follow-up question from Manuel Palomo of Exane.

[Manuel Palomo, Analyst of Utilities]

I've got another question -- well, 2 questions, actually. One is about the other big [indiscernible] that we've seen below the EBITDA is these revalued assets. I would like to -- you to please give us a bit more of color on what assets have been revalued in the quarter. And the second one is it's true that you have enjoyed very positive prices in Spain in the Q1. However, it's also true that you didn't need to pay the generation tax. Do you have any -- could you give us a figure of what would have been that generation tax for the first quarter?

[Raimundo Fernández-Cuesta]

Okay, Manuel. In terms of this line of revalued assets to the P&L below the operating profit line, this basically reflects a minority of PPA contracts that we have to mark-to-market in -- because of how they are structured. So this is for a few -- I think it's 2 or 3 assets in the Americas, and depending on how power prices go, then we have to adjust the fair value of these contracts. Normally, when I think is when power prices go lower, then the value of the PPA increases. So that's providing a little bit of a swing in the P&L this quarter. With respect to generation tax, I don't think I have the number at hand, but what we do is we provision the generation tax for the first quarter and the last quarter of last year because that's when the state is going to be adjusted in the regulatory incentive, so we are provisioning that and reflecting it. But the figure, I don't have at hand. Sorry.

[Operator]

We have an additional question from José Ruiz of Macquarie Group.

[José Javier Ruiz Fernandez, Analyst]

A follow-up on my previous question on the pipeline in Spain. Maybe it's a little bit early but could you specify how is going to be your coverage strategy for this additional 1.6 gigas. Are you going to go more retail? Or are you thinking about PPAs? What is your strategy?

[Raimundo Fernández-Cuesta]

I'm afraid, José, it's very difficult to say at the moment. The regulation, I mean, is not being defined. We just want to be ready. We have the pipeline, the financial capacity and the people to just to be ready and take the opportunity. But again, the situation for the next 10 years, we just know there's going to be a lot of investment, and we just want to be there. But in terms of how we're going to do it, it's too early to say.

[Operator]

[Operator Instructions] We have no further questions on the line.

[Raimundo Fernández-Cuesta]

Okay. So if there are no further questions, I thank you for your attention. We look forward to speaking to you soon. Take care.