Global Dominion Access SA

MAD:DOM

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to Dominion's results presentation. [Operator Instructions] So let's kick off of the presentation. We have Patricia Berjon, who is the Director for Corporate Development.

[Patricia Berjon, executive]

Good afternoon, everybody, and thank you very much for attending this call with the results of the first quarter of 2024. As you know, we held our AGM yesterday, where apart from approving the results of the 2023 fiscal year, we approved the renewal of the members of the Board. And we also paid out EUR 15 million in the form of dividends. And Mikel Barandiaran, our CEO, also reviewed the nonfinancial information and our performance in the area of sustainability, an information that is becoming increasingly relevant for our stakeholders. And he also took the opportunity to talk about our position, our solid position in relation to activities connected to sustainability and to the transitions of our strategic plan, that is the energy, digital and industrial transition that are transitions that are addressed by society and more particularly by our customers.

But as regards to the figures for Q1 that we published this morning before the market opened, we've seen that the quarter doesn't have major headlines as regards to the evolution of the business. So we have continuous growth in organic terms with clear improvements in terms of operational profitability. In other words, we have organic sales that compensate or are even greater than the sales that we eliminated that are very few -- they make a very low contribution towards the margin. So it shows that our current road map is suitable to gear our businesses towards the most recurrent, profitable and resilient businesses or activities, so now that we're growing organically with good profitability levels and we have decreased inorganically in activities that are less profitable.

But to correctly interpret the financial statement, we have to take into account several elements. On the one hand, we have this negative inorganic growth that we mentioned due to the restructuring of our retail business. And as you know, this meant that we closed down physical shops in 2023, which means that we have lower sales of our mobile devices reduce the sales platform, and this doesn't have any impact on the margin because these devices produce practically no profitability and the effect -- the inorganic effect has been about minus EUR 10 million.

And secondly, during Q1 of 2024, we also had to address payments of nearly EUR 90 million. And the most important one is the payment of EUR 67 million to Incus in the month of January, followed by the disbursement of EUR 12 million for the purpose of our own shares. And in particular, it was in the month of March when we bought 2.6 million shares that reach the -- cover the other 1.5 million shares acquired in 2023 -- 2022, and which will be purchased by the management team according to a plan that has been designed for a greater stake in the share capital of Dominion. So that means that part of the directors will become shareholders, which shows that they do trust the shares and they are also fully in agreement with the strategic brand of this company.

But going to the figures of the quarter. Our organic growth at constant currency of the business figure was 5.2%, whilst the total growth of the company has remained practically flat, plus 0.6%, as a consequence of the inorganic elements that I mentioned previously. And the effect of negative ForEx has been minus 1.2%.

As regard to margins, I would like to say that the operational profitability of the business is improving. And this proves that this inorganic effect does not affect the margins, but rather the strategy and the strategic plan that was presented last year is correct. I would like to remind you that our strategy consists in focusing on activities and businesses that are more profitable and reducing those activities that have lower margin profiles with investments and divestitures.

We reached an EBITDA margin over sales of 12.3%. And this means that we've gone beyond the barrier of 12% for the second consecutive quarter and we've improved compared to the profitability reported in the first quarter of 2023. Amortizations remained stable compared to the same period of the previous year, about EUR 50 million, were the main differences that result from our renting business for mobile devices and the effect of IFRS 16.

As regards to financial expenses, they have increased because of the payment commitments of this quarter that I've already mentioned. Because compared to Q1 of 2023, interest rates are higher. And in this quarter, financial expenses reached EUR 10.2 million. So this means that we have profit in continuous operations of EUR 9.3 million and an attributable net profit of EUR 7.3 million after considering the interrupted activities that refer mainly to the financial expenses of the Cerritos wind farm, which, as you know, is about to be divested.

But let's move on now to the behavior of each one of the business segments. And we're going to start off with sustainable services that maintains a weight of 70% of the Dominion sales and has reached a business figure of EUR 194 million. And organic growth in this segment has been very positive. We're talking about 6% of organic growth. And therefore, this is above the target that was established in the strategic plan.

And even so, our sales are flat compared to the same quarter of the previous year because it's in this segment where we can see this inorganic effect that I spoke about before. And we expect it to reach the halfway through the year, and that's when we will have a sales platform that compares to the one we had last year.

As regards to the contribution margins for sustainable services, this quarter, we will reach 12%. In other words, it's a margin that is 7% higher than the one reported in the same period of the previous fiscal year. And this improvement in margins is possible, thanks to that approach from the company in terms of services with higher margins and in services that are more related to environmental services and because of the decline in these activities with lower margins.

And there's also been excellent behavior in the case of telecommunication service contracts, and they pay perfectly well in the last few quarters. And therefore, in this first quarter of the year, both in Latin America as well as in Europe with Germany as a success case for the company.

And then the 360 Degrees project, we reached the sale of EUR 86 million, which represents a growth of 1.5% compared to Q1 of 2023, which is 3.2% in organic terms. With regards to margins, this quarter, they stand at 18.7%. And they are somewhat more normalized, but they are far above the target established in the strategic plan for this business segment, which is 15%. This somewhat more moderate growth is charters characteristic in seasonality, the seasonality that projects have when we look at an isolated quarter. And in this case, we are dealing with a transitional quarter within the framework of renewable projects. Because as we mentioned in the call of 2023, the execution of the parks in the Dominican Republic is being closed, and we are transferring the activity towards the European market, where we will start with an execution in Italy over the next few months.

And with regards to the portfolio. On the closing date of March 2024, it stands at EUR 618 million, where renewables have remained practically stable and where most of the additions happen in the area of industrial infrastructures with projects that are about to be put into motion.

And we also have to underscore the successful execution in a record time in Chile as the design construction of a data center, a project that could not only represent a major success, but also the fact that new similar contracts will be awarded.

And finally, we have our stake in infrastructure that is still providing something about EUR 3.5 million in turnover and EUR 2.2 million in EBITDA per quarter. This is very similar to the figures reported last year because we have the same wind farms in operation because of the global integration, because of the global consolidation. And the 281 megawatts that are under construction refer to those wind farms that we said were made in 2023 in the Dominican Republic and which right now are undergoing connection process. So therefore, they are about to enter into COD.

And then we have the other wind farm in Cerritos that is also about to be connected prior to be completely divested. And with this, we've just reviewed our business and also the different elements of the financial statement. Thank you very much for your attention. And now we're going to be moving on to your questions so that we can answer them accordingly. Thank you very much.

[Operator]

Okay. We're going to start off with the questions. [Operator Instructions] Firstly, we have Enrique Parrondo from JB Capital.

[Enrique Parrondo, analyst]

Well, I have a number of questions I'll ask, 2, and then I'll join the queue again so that I don't interrupt anybody. The first one has to do with debt. I know but you don't give this information for Q2 and Q3. But do you have any estimates? Do you have any leverage ratios? Is it 1x or 2x? I'm not sure if I'm getting things right or not in this respect.

And the second question has to do with the -- for the development of renewables. So when do you expect that these projects will be arriving. Those are advanced -- those cases you have, for instance, in the Dominican Republic, when will they be included?

[Patricia Berjon, executive]

Thank you very much, Enrique. Well, that is not something that we usually give you information on in this quarter. But as we've said, there have been a number of payments for the first quarter. It's about EUR 900 million to EUR 100 million. And bearing in mind, too, that there have been no additional divestitures or any additional debt reductions.

And the thing we have to bear in mind from a positive perspective is the generation of cash, which is very healthy. As you already know, it's obvious that our debt levels will be somewhat higher than what we had on the closing date of '23. But we'll see how this changes over the year.

And in the semester, we'll give you this detailed information, and then we'll be able to talk more specifically about what the debt is like. But let's say that the dynamic is the one you already know. And that divestitures have to be made and some moments during the plan that we could have more or less debt, and we would have to focus on reducing these figures throughout the entire plan.

And then as regards to the renewables projects, what you were asking us about, I think, had to do with the connections of these projects. And the time schedule for those had already been carried out in the Dominican Republic. Was that your question?

[Enrique Parrondo, analyst]

Yes, that's correct.

[Patricia Berjon, executive]

Well, okay. Well, as I said before, we have been working on the [ Britain ] intensely throughout 2023. And right now, we have 5 projects in the Dominican Republic that have to be connected and that they are looking to it. It's not that anything has stopped, but these processes are continuing business as usual. And it's these natural bureaucratic processes that mean that they will be connected sometime during the year. And I can't really give you any date right now because bear in mind that there are going to be elections in the Dominican Republic. I think they're going to take place in the month of May. And this is something that could always produce some kind of uncertainty in relation to the specific dates. But in any case, we expect these projects to be connected in the next few months.

[Operator]

Well, let's continue now with Carlos Treviño from Santander.

[Carlos Javier Treviño Peinador, analyst]

Well, the first question would be how can we transform into revenues these renewable projects that you're going to be initiating in Italy? Because Patricia, you said that they will be initiated in the next few months. So they're going to join the Q2 projects? Or is there something that is going to pick up more speed in the second half of the year? That would be my question.

And the next question has to do with financial expenses because this has been a somewhat special quarter because we've had some very significant cash expenses. But what is your forecast for the next quarter? So in other words, these EUR 10 million you've had in the quarter, how many have to do with nonrecurrent issues that should not continue in the next few months?

And the third question has to do with the interrupted actions with a loss of EUR 2 million, and you told us most of them had to do with the financial expenses of the Cerritos wind farm in Mexico. And I wanted to ask you how things are going? Has any progress been made in the last 3 months as regard to the final divestiture? And then we also have the business of toll metal structures. What is the current status of that business? And do you think that the diversities will come to a close in that particular segment?

[Patricia Berjon, executive]

Carlos, well, I'll answer your questions. Thank you very much, by the way. Well, look, as far as the contribution made by the new operations in Europe and in particular, in the case of Italy with wind farms, I do think that they will start to make a contribution as from Q2 this year, but we are always going to try to adapt to the execution of these new infrastructures with divestitures from the previous ones. Because when you start with the execution process, it means that you have to start investing in those projects, and we want to regulate things properly. And as we divest in the others, what we will do is speed up the rate of execution of the following projects.

And this, in any case, let's say that if we are thinking about the global figures of the year, if we're talking about project [indiscernible] or project revenues, they shouldn't have an impact. Because in the same manner that we can adapt to the renewables operations, when we started -- if we start a little bit later with the execution of renewable infrastructures, what we will do is speed up the execution of other projects because you know that we are tremendously diversified, that we have lots of projects, and this allows us to offer security for our accounts for the global year.

You can have some quarters that are more or less intense. But from a global perspective, with regard to the year, the prospects are those that you already know. And as regards how financial expenses are going to evolve, yes, this is a quarter in which we have a bigger financial expense. Not only because of the increase in interest rates, but also because we've had these payment commitments that mean that we have debt position that is somewhat higher. And what we expect is that this will continue in the next quarters. It will be regulated, but I think that we have to wait. We have to expect financial expenses at this level in the next quarters.

As regards to interrupted operations. Well, in the case of Cerritos, those EUR 2 million have to do mainly with Cerritos still is not significant in that figure. I'd say that it's something like EUR 0.3 million. In other words, this is a nonsignificant part of the whole thing.

And I'm going to start with Telecom. And this is an operation which on the closing of the year, we put it on the back burner on standby. But in any case, this is now going to be readdressed in Q2 of this year, and let's only hope that we will make progress to in the divestiture of this activity. But as I say, it's not significant to date.

And as regards to Cerritos. Well, yes, this obviously mainly refers to financial expenses that have been brought about by the repayment of the debt in this infrastructure. Progress has been made in the connection of this wind farm. And we're talking about Mexico, and you know that things have to undergo certain processes there. And we are much, much closer to this final connection, which is a basic requirement to implement this divestiture, and it's something that we'll see in the next few months because, yes, we have made progress in Q1 this year.

[Carlos Javier Treviño Peinador, analyst]

I have 1 final question very quickly. Could you give us some specific figures for the backlog of the different segments?

[Patricia Berjon, executive]

Well, yes. The EUR 618 million of portfolio that we closed this quarter would be divided at EUR 275 million for renewables. As I said, that's pretty stable because of the lower level of turnover within this quarter. And then we have infrastructure, EUR 119 million; industrial infrastructures, EUR 154 million. Growing since we closed the year, as I said, they have been new incorporations in this segment.

[Operator]

We have the questions that have to be answered that are on the chat. If you were to leave any more questions, now is the time to do so. So I'm going to start off with the question from Miguel Rodriguez. He's asking us, what do we think about the renewables market to the slump in prices? Could this affect the business? And could this stop funding and investments?

[Patricia Berjon, executive]

Hello, Miguel. Well, I'm not an expert in the renewables segment, but I believe that you're talking about the slump in energy prices. And I think that, well, what we have to do is we have to look at the market, and we're talking about the long term. And it's not only the current specific point in time in our negotiations. Well, this is what affects us. And bear in mind our significant portfolio, where we have more than 2.5 gigas, we don't really think that this is going to affect our projects, mainly the projects will begin or the inclusion of the portfolio of these renewable projects. And this is not going to [indiscernible] the negotiations that are underway right now. And we are closely monitoring what is going on, and we've included this in our negotiations and also in those executions that we have on the way.

[Operator]

Okay. We're going to continue with a question from Juan Peña. He's asking us about financial expenses. Is it reasonable to estimate financial expenses of something like EUR 40 million in the year as a function of what we've observed in Q1?

[Patricia Berjon, executive]

Well, Juan, as I was mentioning to Carlos before, what I would do is make an estimate of financial expenses according to what we have seen in Q1. So as from half of the year, when we have more visibility, and once we know what our debt position is like and once we know what the interest rates, we will be able to give you an estimate for the data for the year. But this is the only thing we can give you for the time being.

[Operator]

[ Leticia Martirena ] is asking, when do you think you'll be selling the Cerritos farm?

[Patricia Berjon, executive]

Well, it's the same as what I mentioned to Carlos, it's something that will take place in the next few months. And this depends on the final connection progress that's been made, and it's getting closer and closer.

[Operator]

And Miguel Medina is asking about the construction of projects in Italy. Does this mean that we are about to reach an agreement with a European partner for renewables?

[Patricia Berjon, executive]

Without a doubt, yes, we are getting closer to the agreement with a European partner. And well, we would like this agreement to be reached as quickly as possible. And we know that these executions will be coming along in 2024, and they are starting in Q2 this year.

[Operator]

Enrique Parrondo from JB Capital has raised his hand again, so you have the floor again, sir.

[Enrique Parrondo, analyst]

Enrique Parrondo. Well, I have another 2 questions, and 1 of them is do you think that you will be able to launch any guidelines in the short term like you did, for instance, in 2023? Or do you think that this should be aligned with the guidance you gave for 2023, 2026?

And the second one, just to understand the mathematics of the buyback of shares and the remuneration to management. Well, perhaps we should -- this should be like an OpEx item. Or is there going to be a buyback by the interested parties? And at what prices? And perhaps we can -- is this going to be execution process? Or is there going to be some kind of discount premium for those people?

[Patricia Berjon, executive]

Well, Enrique, as regards the guidance. Well, we're not going to be delivering a specific guidance for the year. And we gave the specific guidance for 2023 because when we presented the plan, it was May, and there was visibility. And it seemed that it did make sense for us to establish the guidance for the entire plan in 2 segments: for 2023, and for '24 to '26. In those regards, in '24, we stuck to that guidance. In other words, we maintain the guidance of the plan with these compound growth rates of 5% in terms of turnover, 7% in EBITDA and 9% as regards operating cash flow or free cash flow.

And right now, we are not going to be giving any details. But as regards to the buyback program, the share buyback program. Well, these shares are already in the company's portfolio, self-portfolio. Because, well, they were bought -- they bought 2.6 million shares in March, and there were other purchases within the program of 1% that was carried out between the end of '22 and the early months of '23 is 4.1 million shares that are going to be bought by these directors of the company.

And the terms or the prices in which this acquisition will take place. Well, we will give you all the necessary information once this takes place. And well, it depends on when this happens, the premium will be higher or lower relative to the listed price. But in any case, it is a program. It is a program to reward the commitment of our directors so that this talent could be associated with the company and to the strategic objectives we've set ourselves for the next 4 years.

And what we want to do is we want our directors to form part of the company as shareholders, and we want them to benefit from the revaluation of the share because we expect that the share will evolve perfectly well, and this will show the fundamental aspects of the company and would also reflect the work that these directors are currently carrying out within the company.

[Operator]

Okay. We're going back to the chat, and we have another question from Miguel Medina. If you want to ask any more questions, this will be the time to do so before we finish. He's asking us about Cerritos. And what he understood is that in the call of 2023, trials will be carried out in March '24. But apparently, this has not taken place. Is that correct? They're not carrying out any trials there?

[Patricia Berjon, executive]

Well, I can't remember the details for the call when we closed the year, but I don't really think that we committed ourselves to get in stand by March 2024 because it's very difficult to give you an exact date. Although we do believe that it was in the first part of the year, I think that this is something that we did mention, but I cannot really tell you in which phase of the connection it is or if we reached the trial stage or not. I'm sorry, Miguel, my apologies. But I'm sorry, I don't have that -- those details.

So there are no more questions. And with this, we will conclude the presentation. Thank you all very much for participating. Thank you all very much, and I hope to see you again in the half year call. Thank you. Goodbye. Bye-bye.

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