Fomento de Construcciones y Contratas SA

MAD:FCC

Earnings Call Transcript 2019-Q1

[Miguel Coronel Granado, Director of Management Control & Capital Markets]

[Interpreted] Good morning, everyone. My name is Miguel Coronel, Market Director in the group. I'd like to thank you for your presence in this results presentation of the first quarter of the year. First, let me mention the most relevant numbers. The net profit has reached over EUR 72 million. It's a great increase compared to the same time last year. The 2 main factors that have contributed to this growth have been the good evolution of financial results; financial costs were reduced significantly. You may have seen that the interannual debt has been reduced dramatically, and the equity method companies have also behaved quite well. If you want, we can look at the P&L account line-by-line, turnover, almost EUR 38 million, 7.9% growth. Good behavior of all the main activities of the group, especially those that have to do with the investment cycle, Construction and Cement, which behaved very well because of the projects we have underway and the behavior of the Spanish Iberian market. In more detail, looking at different geographic groups. In Spain, 55.5 is the total number. This increase is due to a series of factors. In Environmental Services, we have more new projects and improvement of ongoing projects. In Water, both consumption and rates have improved, and we also have more projects and demand. Internationally, we've also seen an increase in revenues, 7.7% improvement. So this accounts for 44% of the total. And if we look at other countries. The European area, with the exception of the U.K., where due to some planned actions in treatment plants where there was a small pullback, in general, there's been good behavior. With the progress of contracts in Belgium and Portugal, same in Romania in Construction and good demand in Environmental Services. In Latin America, we had good behavior of Water, networks to be operated later on. In Peru, we also have more activity in Line 2 of the Lima Metro. We've also started new waste collection contracts, and we also had benefited from the exchange rate with an interannual difference of 8.2%. EBITDA has increased by 4.1%. Apart from the good evolution that I mentioned in revenues, we also see the impact of a IFRS 16 regulation. Here, the net operating profit in the first quarter of the year has not been benefited or has not benefited from CO2 rights sales, something that did happen in the first quarter last year. And we also have the impact of environment in the U.K. Now let's look at each business area at a time. In Environment, our revenue, EUR 700-and-some million, 3.5% better than last year. In terms of geographies. In Spain, revenues, EUR 410.5 million, 7.6% improvement. We were awarded contracts we didn't have before, [ La Gorunia Cuenca ] for example, in the area of urban environmental services. Also, other services were expanded such as in Madrid and new treatment plants had been developed and come into operations, Loeches and others in Madrid and the second phase of the integral treatment plant in Guipúzcoa. In the U.K., we see that there's been a reduction of 3.8% in the turnover. This is something we had already planned. We stop the functioning of the Allington plant every few years for maintenance purposes. In this case, well, the contribution was very small. There's also something else in the U.K., which is there's been very little development in the Edinburgh plant. It's an energy revalorization plant, and it was completed in the fourth quarter last year. So we have flat contribution even though we hope this plant will come into operation soon, sometime during the month of May. If we take into account those 2 effects, well, if things haven't been like this, we would have had an improvement in revenues in the U.K. of 4.4%. In another case, we have a positive impact of decontamination contracts in the Czech Republic and a positive underlying business, more volume in Austria and in Hungary. That's for Central Europe. In the U.S. and other markets, there's been a 17.4% drop in revenues. This is due to other markets, not so much the U.S. because a contract for urban solid waste was not renewed in the city of Cairo in Egypt. But in the U.S., as I've said before, we've had positive growth mainly because we've added contracts like Rowlett in Texas, a recyclable plant near Houston. Even though the environment was not particularly favorable, but in general, in the U.S. market, in constant currency terms, there's been good growth. EBITDA has fallen 2.2% down to EUR 200 million. This was due to the technical maintenance stop, which concluded in Allington. If we were to adjust this effect in our EBITDA, EBITDA would have grown 4.8% in the area. So slightly above the growth in revenues of 3.5%. Let's go to the other area where revenues grew up to EUR 268.9 million. If we look at geographical areas, in Spain, 1.1%. As I said, before, there's been a positive evolution of consumption and rates. We've had a quarter with slightly more favorable climate conditions compared to last year, and there's also been an improvement in network activity. As far as our international business. In Central Europe, EUR 25.5 million. In the Czech Republic, our Water program has gone very well. There's been better contribution in some projects that we have underway in the Balkans. Italy and Portugal are less important markets, but even though they're comprehensive contracts, they're also quite good. We have one in Italy, one in Portugal, which are concessions. In Lat Am, even though the contribution was high, I remind you of the contracts we have in Colombia, Ecuador and the desalination plant in Guaymas in Northeast Mexico. In MENA, we've also seen an improvement, Middle East and North Africa. This is due to the El Alamein plant in Egypt. EBITDA improved, reaching EUR 58.9 million. It's a combination of a good evolution in development, networks, technologies and the very sound behavior of concessions. So we were able to close with a 20-some percent growth. Now let's go to Construction. Our revenues improved. There's been good contracting numbers. We can talk about it if you want. Also, good execution of the different international works. In Spain, for example, growth was similar to that of the rest of the areas, EUR 147.3 million. There's been a slight improvement in building, development and some civil works. So it's all very balanced. As far as the secondary in terms of contribution, in Middle East and North Africa, there's been a decline because of a Doha underground closing down and also we concluded 2 control towers in northern Algeria. But since we have the metro Riyadh in Saudi Arabia, the civil works and the industrial facilities work, that makes up for the loss of the other businesses. And we also have a lot of work in Peru and Panama. As I said, previously, we have ongoing works that are moving in the EU such as the Haren complex, et cetera, apart from the railway lines in Romania. EBITDA in the area grew 37.6% reaching EUR 2.7 million. The evolution has been quite positive. And for that reason, our margin has exceeded 6%, an improvement of 120 basis points compared to the same period last year. Now talking about the main business areas of the group. In Cement, we've seen improvements of 20-some percent, over EUR 61 million led by the good evolution of the business in Spain and in spite of a lesser contribution of Tunisia due to the exchange rate problem with the depreciation of the Tunisian dinar. Our revenues grew 25.9% in this other areas, especially it's the increase in volumes, prices went up moderately in different regions. And there's also been more activity in exports, which is one of the management area that we've tried to focus on to improve the results in the area. In the Tunisian market, at a local level, revenues in euros -- consolidated in euros fell slightly. Even though the prices were good, the depreciation of the Tunisian dinar had an impact on this, losing 12% of its value against the euro. When it comes to revenues from exports, we see a 30.4% improvement due to exports from Spain to other European markets but we've also opened up some other markets such as Costa Rica and the U.S. EBITDA fell by 18%, down to EUR 14-point-some million, but remember the fact that there's no contribution of CO2 rights sale. We only sold EUR 0.8 million during the quarter compared to EUR 6.8 million in the same quarter last year. So if we just adjust the different contribution of CO2 rights, our EBITDA would have been very much in line with our 22.7% growth in revenues. Now I will tell you briefly what's been the evolution of our debt and cash flow. Gross financial debt remained more or less the same as last year, over EUR 4 billion. Net financial debt, EUR 2.8 billion, a 4.2% increase. As far as cash flow components which has led to this variation both in gross and net debt, we have the seasonal variation in working capital especially in Construction where we still have a seasonal effect, payments to third parties and the use of -- the consumption of some things. This would change because this is something that happened mainly in the first quarter. I mentioned Environmental Services. There are some ongoing investments in treatment plants, and this had a combined effect greater than EUR 30 million. So there wasn't much variation in cash. Well, as far as the components of debt, no great variations. Headline debt stayed at very small levels, EUR 846 million. This is very much related to the contracts that we have in Environmental Services. Financial debt that is not headline debt, dominates 69% at the end of the quarter, distributed between Water, different concessional contracts, debt without recourse and Cement. So these are the most important things about the quarter. Again, I want to say that this first quarter is a good -- gives you a good idea of the capacity to generate recurrent revenues for the group. You've seen all the actions we've undertaken at an operational and financial level. And I believe this gives us a good basis to obtain a good profitability during the year. We want to grow especially in some areas such as Environmental Services. I don't want to take any longer. These are my comments. And now let's go move on to questions from the floor -- from the room. Let's start with questions in Spanish.

[Operator]

[Interpreted] [Operator Instructions] First question will be asked by Guillermo.

[Unknown Analyst]

[Interpreted] Miguel, let me ask a question. What do you think has been the impact of the IFRS 16 standard both in terms of EBITDA and in terms of debt? You said something about the results without quantifying, but at the debt level, you didn't say anything, the impact on net debt of IFRS 16. And that margin was more than 6%. Do you think it's sustainable? And I was also surprised by renewable assets. Could you give us an indication of what could be the contribution of those assets? Could you please remind us what's the book value of the equity invested in those assets?

[Miguel Coronel Granado, Director of Management Control & Capital Markets]

[Interpreted] As far as the IFRS, we published the results this morning. On item 5, we explained what's been the impact both in terms of current assets and noncurrent assets of complying with IFRS 16. It's over EUR 400 million. We excluded in one of these points, we think it's something that is not a financial debt, neither is this counterpart. It doesn't have anything to do with that. The impact has been EUR 15 million for the whole period. As far as energy, we have an adjustment in value because of a good positive evolution of our share in the subgroup of renewable energy. The impact was about EUR 9 million during the period. As far as the equity method is concerned, I'm talking off the top of my head. I don't have the report of 2016, but it's something around EUR 18 million. In December last year, it was like that now. It's gone up because of our 49% political share, although in reality, 75% share. We refinanced, we extended the maturity of energy projects, both solar and wind projects, so the evolution in the first quarter has been very positive. We cannot say it's going to be fully recurrent, but we're very happy with the evolution in contrast with the accounting costs we [ had ].As for Construction, the evolution of margin, 6.2%. We understand -- or 6.3%, sorry. Is it going to be sustainable or not? Well, we've said several times that a 5% level is good for us. What matters to us is conversion into cash and risk control. With just 1 quarter, it's difficult to extrapolate, but it's around those levels. I think that's within the target we have for the group.

[Operator]

[Interpreted] The next question by [ Ana Cuerco ] from BBVA.

[Unknown Analyst]

[Interpreted] I wanted to ask about the statement of Felix Parra in the newspaper Expansión where he spoke about the ambition of the group of Aqualia reaching EUR 500 million in the next 4 years. Do you think it's an ambitious target? In what geographies do you intend to grow? And how are you going to achieve this goal?

[Miguel Coronel Granado, Director of Management Control & Capital Markets]

[Interpreted] Aqualia has some long-term objective. We have concessions. They're recurrent ones. So you can think about long contracts. As you know, the Water area we're talking about, more than EUR 15 million. So it's only natural that it should set itself long-term goals. The goals, the objectives may be ambitious and that's only natural. Otherwise, it wouldn't be a challenge for the teams that work on them. I'm not going to quantify or give you any figures because same-store dynamics. But in the Water business, as you know, there is very little private management, only 7%, 8% at a global level. Our General Manager for Water understands this. He knows that water stress is increasing because of climate change because of the circular economy, concentration of the population in urban areas, especially in emerging countries. The pillars are clear, we want to strengthen our presence where we're already leaders such as Spain. We want to take advantage of opportunities here. We also have a very good presence in the Czech market, and we have 10, 15 selected geographies for Water where we have concessions and BOTs. Geographies where there's a need for investment, water stress and there's a need to close some gaps in the provision of services. So we will try to take advantage of any opportunity that comes to us. Colombia, Ecuador, Middle East, there's [ repair ] of the Persian Gulf. In the case of Abu Dhabi contracts or Oman, those are the markets where we want to grow. So there are great opportunities. Because their quality in spite of their size, it's 1 of the 4 main operators in the water market. So I think we have good opportunities. But then you have to take advantage of them. But yes, we have great hopes that we'll be successful growing in a selected and controlled way.

[Operator]

[Interpreted] The next question will be asked by Filipe Leite from Caixabank.

[Filipe Martins Leite, Research Analyst]

[Interpreted] Miguel, I have 2 additional questions. The first one is could you quantify the working capital and investment numbers and also factoring at the end of the quarter? The second one has to do with cement -- Portland Cement and the decision of the court that requires that FCC pay more to its minority shareholders. At what point does this matter? Have you already provisioned for that potentially additional payments?

[Miguel Coronel Granado, Director of Management Control & Capital Markets]

[Interpreted] The variation in working capital has been EUR 189 million, less than last year where we exceeded EUR 220 million. As for factoring, we closed with EUR 189 million, very similar to what we had in net [ alemana ]. I don't know if there's anything else you wanted to know about cash flow. Sorry, sorry, investments. Net investments. EUR 92 million in the period. As for Portland Cement, there was a sentence, a ruling in the first 2 instance, which is not firm. We've already said that we accept it, but we don't share it, so we will appeal to the Supreme Court because we think the arguments are not reasonable. It's important to say that this ruling wants that the price of last year is recalculated, but they don't talk about any alternative price as was stated in some media. They just said there was a conflict of interest at Banco Santander, which was the appraising institution -- the valuation institution. We don't agree with that. And therefore, whilst we don't share those criteria, we believe that the price-setting process was good and independent. We hope that our appeal would succeed. So we haven't provisioned any numbers.

[Operator]

[Interpreted][Operator Instructions] Next question, Pepa Chapa from Fidentiis.

[Pepa Chapa, Senior Construction and Real Estate Analyst]

[Interpreted] Miguel, I have a question about the Allington plant and its maintenance stop. How long is it going to last? And do you think it's going to finish soon so that the contribution will go back to last year?

[Miguel Coronel Granado, Director of Management Control & Capital Markets]

[Interpreted] Now yes, that maintenance is over. It took only 45 days. It happened according to plan. So we do hope that during the rest of the year, with the joint activities of the U.K. and other markets we'll be able to catch up for the effect of this halt during the first quarter.

[Operator]

[Interpreted] Ladies and gentlemen, no more questions. The floor goes back to you.

[Miguel Coronel Granado, Director of Management Control & Capital Markets]

[Interpreted] Well, it seems there are no more questions. Thank you very much, everyone. As you know, we're available to help you with any other doubt you may have or any other questions. Good morning.[Statements in English on this transcript were spoken by an interpreter present on the live call.]