Fomento de Construcciones y Contratas SA
MAD:FCC

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Fomento de Construcciones y Contratas SA
MAD:FCC
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Earnings Call Transcript

Earnings Call Transcript
2020-Q2

from 0
M
Miguel Coronel Granado
Director of Management Control & Capital Markets

Welcome to this earnings presentation of the FCC Group for the first half of 2020. I'm Miguel Coronel. And the results have been published. They were published first thing this morning at the CNMV. I would, first of all, like to highlight a few magnitudes.So in terms of the earnings, which went down by 6% with respect to 2019, this was due to the contraction in earnings in the different business areas. There's, of course, the effect of the measures taken to fight COVID-19. But it is true that it's been partially offset, first of all, by greater contribution from concessions because of the takeover of Cedinsa and also because of the good evolution of some areas, particularly essential activity areas.I would also like to mention the net attributable profit, which was EUR 75.9 million, was a little bit lower because of the operational development in terms of the operational profit. The other headings had quite a stable performance, except that we had higher amortizations because of the incorporation of cities and also because of the negative evolution of the exchange rate, which doesn't have an effect on the cash flow but has to be taken into account from an accounting point of view. But if we exclude this FX impact, the net profit would have only gone down by 23.3% over the period, in line with the evolution of the net operational earnings.Now if we analyze our turnover, at the consolidated level, the figure was EUR 2.8 billion, 5.7% lower than last year. As I said, all the activities reflected the effect of the measures taken by the different governments, but we should also mention the stable performance of our 2 main areas: Utilities and the Environment, where basically, there were no changes in the business perimeter. So these are figures that are quite similar year-on-year.Now if we now turn to the different geographical areas, in Spain, income contributed 60% of total, EUR 1.7 billion. That is 2.5% more than the previous year. The greatest increase came from Construction because the contracts that we signed the previous year and that we started developing amply offset the restrictions that the activity suffered, especially from mid-March to May. However, another area related with Construction, namely Cement, had a more moderate performance with respect to 2019, and it did suffer quite a bit as a result of the contraction in demand.In Spain, in the Environment, there was less activity, especially in industrial waste and some minor adjustments in some municipal services, which were readjusted because of their nonessential nature.On the other hand, in Water, there was a slight reduction in the turnover, especially for nonresidential customers and lower activity levels in technologies and networks that is maintenance work, which were also reduced, especially during the lockdown.Lastly, the contribution of concessions in Spain was strengthened because of the takeover of Cedinsa at the end of last year.Now -- and the second most important market is the U.K. market. Here, income went down by 15.8% year-on-year. We will look at this in greater detail. There's less contribution to do with the recycling and energy recovery plant in Edinburgh, which was put into operation in the second half of 2019. And then there was another impact related to lower processed waste processing volumes during the second quarter.Regarding the rest of Europe, activity did grow by 10.3%. Throughout here, there's basically construction. We secured a new contract for a highway in the Netherlands. We've done the preparatory work. We also had a good performance in Belgium and Portugal.And also in the Environment, we had an improvement in activity with respect to 2019 in Poland. Another important market in this respect is the Czech Republic, which had a reduction of 2.4%, but this was basically due to the effect of the exchange rate of the Czech koruna with respect to the euro. But in local currencies, both those 2 activities stayed quite stable.Apart from the European Union, in the Middle East and Africa -- Northern Africa rather, turnover did go down by 18.8%. Especially in the area of Construction, there were restriction measures, as you know, very strong restrictions to movement, especially in Saudi Arabia. And this affected the development of many of our projects, but in some other activities such as water management, we had higher income in terms of operation and exploitation in other markets such as the UAE and Algeria. In the other business areas in these jurisdictions, we had no significant changes.And lastly, in the Americas, turnover went down by 55.8% because of a lower pace of execution of some of our projects, especially in Panama, given the finalization in some of our contracts and because there was less progress in some of our contracts in Colombia and Ecuador. We should mention that in the U.S., revenues in the Environment grew quite significantly because of some new contracts in the south of the country, in Florida and Texas.Now if we go into the different areas of activity more in detail, in terms of the Environment, income grew or reached EUR 1.3 billion. They went down by 4.9%. As I said, we had less activity in waste management in the U.K. and also in Spain and Central Europe. In Spain, as I said before -- well, sorry, in the United States, there was also higher activity because of the commissioning of some new contracts in Texas and Florida.In Spain, unfortunately, income went down by 2.9% to EUR 822 million because of a lower activity in terms of industrial waste and some adjustments in minor municipal services in green areas or street sweeping, which had to be adjusted because people were just not moving around.The second most important market is the U.K. As I said, the turnover went down by 16.6% to EUR 298 million. As I said before, there was a lower contribution in terms of the Edinburgh recycling and energy recovery plant, which started operating in June last year. And because of this effect, this effect can explain 5% of that 16%. The rest of the fall was due to the fact that there was less movement of waste because of the lockdown.In terms of Central Europe, income fell by 3.2% to EUR 223 million. We had a bit less activity in Austria and Slovakia because of the same reasons I mentioned for Spain or the U.K. And in the Czech Republic, the depreciation of the koruna was also an important factor. But in Poland, there was a recovery of the market, which was enough to generate some more activity with respect to 2019.In the U.S., as I said before, there was an increase of 73.5% year-on-year because of new contracts. But the net -- the gross operational profit went down overall by 4.8% to EUR 214 million. And here, the new commissioning of treatment plants made it possible for the operational margin to stay quite stable at 15.4%, the same level as in 2019.Now the other area of the group, which is water treatment. Here, year-on-year income grew by 0.5% to EUR 562.4 million. We had an increase in the activity of the comprehensive water cycle, some assets that we have been incorporating in France, in Saudi Arabia. And this was able to compensate the lower activity levels in our technology and network area, which, of course, are associated to maintenance and the implementation of infrastructure concessions, especially in the international arena.Now geographically speaking, in Spain, revenues were 4.2% lower, EUR 366 million, because of lower turnovers in nonresidential customers. And also in technology and networks, some maintenance work was just maintenance work. It was just limited to what was strictly necessary because of the lockdown in the second quarter.In the international arena, in the Middle East, Africa and other minor markets, income did grow to EUR 86 million. Here, concessions increased. It was higher -- a higher activity level in water treatment plants, such as the desalinization plants in Mostaganem and other projects in Saudi Arabia and in El Cairo in Egypt.Now in Central Europe, revenues went down by 5.7% to EUR 51.5 million. This is finalization of some projects that were about to be completed, especially in the area of the Balkans, whereas the recurrent business of the integrated cycle in the Czech Republic stayed quite stable. We should also mention that our activity in France through the new company called Aqualia France, which used to be called SPIE, which we acquired last year, also made a significant contribution.In LatAm, the turnover was -- went down by 33.1%, and this was purely due to -- well the development of a water treatment plant in Colombia and another one in Ecuador, which was put into commissioning. The gross operational profit as a result of all this reached EUR 125.6 million, with greater activity -- with a greater activity level in our most significant activities. So the operational margin stayed very -- at a very similar level to last year at 22.3%.With respect to Construction, revenues in the quarter went down by 12.3%. They reached EUR 675.3 million. As I said before, the measures imposed by the different governments to the execution of projects, especially in some countries abroad, in Latin America and the Middle East. But in Spain, the pace of work was quite positive.In the Spanish market, our revenues increased by 25.8% to EUR 307.1 million. And here, we should mention the additional contribution from the refurbishing of the Real Madrid football ground or another environmental project in the center of the country.In the rest of Europe, we also made some progress, 33.2% more. In this area, we were capable or relatively capable to work quite well. The revenues were EUR 143.1 million. We move forward with projects that we had in the Irish Republic, also in the Netherlands, a highway that started being constructed and also some advances in the Haren complex in Belgium.The other side of the coin would be emerging markets, such as the Middle East and Africa, where revenues went down by 38.7% to EUR 122.7 million. Here, the measures imposed by the government were harsher and affected the development of the Riyadh underground network in Saudi Arabia. And in Latin America and in the U.S. -- well, in the Americas, in general, the turnover went down by 76.5%, because we finished the construction of the bridge over the port of Los Angeles and we also finished the second line of the Panama underground system. And also in Saudi Arabia, the lockdown measures were particularly strict, especially in the second half of the year. Now the operational earnings was EUR 17.4 million because of these measures that I mentioned and the impact that they had on the development of our projects. In terms of Cement, which is also related to Construction, revenues went down by 16.5% over the half year to EUR 173.3 million because there was a significant reduction of volumes in the 2 local markets we have, Spain and Tunisia from the middle of March, and there was also less exports from both markets to their natural destinations. In local terms, in Spain, the turnover went down by 14.4%. It was EUR 109.9 million. And here, we were affected by the reduction in the level of activity that occurred in the different subsectors of construction. Although we should mention that the price evolution was reasonable and there were no changes, so no significant changes in that respect.In Tunisia, revenues went down by 7.4% to EUR 23.1 million. Here, prices also evolved in a reasonable way. The Tunisian dinar increased its value. But of course, there were lockdown measures in Tunisia as well. As I said before, exports to different markets in the first half were basically exports from Spain to the rest of Europe, but they went down by 25.6%. So the net operational profit went down by 37.6%, which was EUR 26 million because of the effect of the reduction in volumes I mentioned before. But the selling of CO2 was also no this year. Last year, we made EUR 3.2 million in EBITDA because of this reason. So if we adjusted the EBITDA for this lack of sales of CO2, the fall in EBITDA would just be 32%.Now with respect to transport concessions, here, revenues in the half year were 51.9%. They were higher than in 2019. As I said before, the variation of the -- or the change in the perimeter because of the takeover of Cedinsa was the main reason for this. If we take into account the takeover of Cedinsa from the beginning of the year, the revenues would have gone down by 35%. But here, we have the effect of the lockdown imposed from mid-March to May. In terms of the different geographies, this activity concentrates all of its business in Spain. The revenues were EUR 50.9 million, and almost 77.8% corresponds to the contribution by Cedinsa, whereas our only concession with a contribution to income abroad, which is in Mexico, stayed quite stable with respect to 2019. But the EBITDA increased to EUR 36.8 million with respect to last year.In terms of the evolution of the cash flow of -- and debt level during the first half, our debt -- financial debt stayed quite stable with respect to the close of last year at EUR 5.123 billion, whereas net consolidated debt finished at a level of EUR 3.789 billion. In terms of the cash flow, to do with operations, we need to highlight the evolution of the operational capital. Here, we applied up to EUR 308 million but we have to take into account that we reduced our nonrecourse factoring level by EUR 151 million, trying to optimize our financial cost.We also -- we should also mention the payment of taxes because last year, in this cash flow, we had an outlay of EUR 99.1 million because of an extraordinary payment that we had to make to regularize taxes for incentives that we had obtained in previous years. We have appealed this decision to the authorities. This made it possible for cash flow generation to improve to EUR 91.3 million, in spite of the fact that we have significantly reduced our nonrecourse factoring level.In terms of the investment flows, I should mention that some of these transactions are quite significant. For example, in terms of water treatment, we have executed around EUR 46 million to acquire certain concessions in the province of Almeria in Spain and some assets that we have been adding in this half year, especially in LatAm, in Mexico, Colombia and in addition in the Persian Gulf in Saudi Arabia.In terms of the Environment, we have made further investments to do with the contracts that we have for water treatment plants, and we have applied EUR 53.2 million, especially in some new plants for -- thermal plants in the U.K., Spain and some other investments in the U.S. for the assets we need to render the service. So all of this, well, led us to a cash flow of EUR 1.136 billion, which is in line with our figure in the -- over the same period last year.In terms of the structure of our financial debt, the close figure was not very different from that of last year, practically in the -- water treatment is a volume of EUR 1.2 billion. As you know, this is a market -- capital market financing and some integrated cycle projects. In the case of the Environment, they added EUR 1.3 billion also in parent company and some financing of projects in the different treatment plants that we have in different markets, especially in the U.K. and to a lesser extent in Spain. The Cement area didn't show any significant changes, but there was a progressive reduction of the level of debt as usual. And I would like to finally mention the contribution of financial debt of EUR 709.2 million coming from concessions, most of them linked to Cedinsa. The most of this affects the different concessions that we have in that activity.I don't want to run on too much. I just want to conclude my presentation by reminding you that the operational evolution of our business was heavily affected by the measures adopted to fight the pandemic. Our earnings reflect a very particular and very unusual situation. But in spite of that, we have shown that our activity has been very resilient because most of our services are essential. And this is a fundamental basis for us to keep pursuing our long-term growth and keep our long-term vision and do our best to restore growth, well-being and help beat the current crisis.That's all I had to say about the half year. You know you can get in touch with us if you have any questions, investors, shareholders, creditors. So thank you all very much. And now we can open the floor for questions. Let's begin with questions from Spain.

Operator

[Operator Instructions] The first question is from Societe General, Victor Acitores.

V
Victor Acitores Peñafiel
Equity Analyst

Miguel, I have 3 blocks of questions. The first one refer to EBITDA. In the first quarter, you announced EUR 20 million provisions -- negative provisions because of the COVID crisis. And I wanted to ask you about the provisions in the first half because you can see that the corporate section had a very good performance in the second quarter, but I don't know how much you provision to that. Now my second question is about Cement. Last year, you performed a goodwill impairment test at the end of the year. Now this year with COVID and the evolution of the economy, are you also considering the possibility of running such a test for Cement? And for Cement, is there a possibility [ for the ] group -- well, what is the position of the group in that respect?And then I have a question about the working capital because in the past, there was a lot of noise and fear, especially the different municipalities. Now in Spain, we are going to enter very strong recession, especially after the holidays and next year. And so what is the situation of collect at Oviedo in terms of regulations. Are you protected? Or will this depend on the situation of the different local councils? What can you say about this?

M
Miguel Coronel Granado
Director of Management Control & Capital Markets

Well, Victor, thank you very much for your 3 questions. With respect to your first question, you're right. We -- the Board -- remember that we published the results of the first quarter at the end of April and the lockdown caught us all unaware. And so it was decided to include a provision of EUR 20 million, which was launched at the level of the corporation because it was all very premature. But in the second quarter, you have seen the results we had in the accumulated figure.So what did the group decided to do? Well, each activity performed its own evaluation, and it was decided that now that we have seen that the businesses performed well, we decided that it was not really necessary to keep that provision. That's why we decided to get rid of it. And that's why you see that the operational profit have a positive signal. A positive sign because it didn't really make any sense to keep that provision that we had included or the necessity measures were implemented to face the situation.In terms of the question you asked about Cement, in the short annual report accompanying the management report in the half yearly financial report, we have reviewed our impairment test for Cement, our different impairment tests for Cement. This is also published in an audited report at the end of the year, and this has been reviewed together with the auditor, and we have seen that there's some recoverable value from all the different generating units in all the assets that have a goodwill, including Cement. So we believe that there's no need -- I don't think that we -- there's no need for any adjustment, but we have reviewed this. And as I say, this is in the note Section 5 of the financial statements regarding goodwill.Now if I understood you, I think you were saying that there was some contributions for contingent capital by FCC. Yes, that was the case, and we have honored it. We did it what we -- when we had to do it. But now, there's no link. There's no contract obligation or financial obligation. Cement is fully autonomous. It's a stand-alone unit, and there's no need whatsoever or any obligation by the parent company with respect to its subsidiary. At this difficult juncture, Cement is still reducing its net financial debt semester after semester. Of course, it is still generating free cash flow, which is still using to reduce its net financial debt.With respect to your third question, what I can tell you in a very clear way is that we, until now, have not noticed any increase in the mean collection periods from our customers in Spain or abroad. Until now, customers are paying up very punctually. But I would like to mention and remind you, in terms of the sector, I think it was in 2012 that a new law was approved for the bills to be paid by public administrations because, unfortunately, public administrations in Spain didn't have a record, a public record, a centralized record to show what the debt was with their suppliers. But this changed radically with that law. And now public administrations need to have an electronic register with all their invoices and their average payment terms.In addition to that, there is an obligation that they couldn't pay after 30 days. And if they exceeded 30 plus 30 days, there would be a noncompliance procedure, which might -- could be activated by any supplier, go-to-service suppliers. So we believe that now the discipline is a lot different than it used to be and things are structurally different. But to answer your question, the mean payment or collection period now has remained very stable, and we haven't witnessed any disruption in it.

Operator

The next question comes from Filipe Leite from CaixaBank.

F
Filipe Martins Leite
Research Analyst

Miguel, I have 2 questions related with Construction. Do you think that you may go back to your normal margins of 5% in the third quarter? Do you think the recovery will take longer? And are there still works that are still paralyzed because of the COVID crisis?

M
Miguel Coronel Granado
Director of Management Control & Capital Markets

Thank you. Well, as far as Construction is concerned, when works are paralyzed or frozen, what is involved is an act of God, right? It's something that we can -- that nobody can do anything about and which can -- is not attributable to the developer. So in this regard, what we have is the conviction. And of course, we need to review the schedules with the customers because, of course, there will be disruptions in the execution times because of the pandemic. So we hope that if -- as we adjust our calendars, we hope that we can go back to our normal margins. When is this going to be possible? Well, when we are fully convinced that we have a visibility of the future. I can't really assure that this will happen in the third or the fourth quarter. In the Construction area, we have followed a very conservative policy.Now linking up with your second question, it is true that there are some markets such as Saudi Arabia or Panama, where the supply chain and the activity have not recovered fully. We are waiting to see what the authorities say. We still haven't been able to go back to a normal production cycle. That's why we are going to be extremely cautious in terms of how we take stock of things and how we manage our projects. So I can't really be more specific. But going back to your first question, yes, we believe we will be able to resume our previous margins and go ahead with our projects. And our customers are fully committed with going on with the works as soon as the health care authorities allow this to happen.

Operator

[Operator Instructions] The next question comes from Antonio RodrĂ­guez from BBVA.

A
Antonio RodrĂ­guez Vicens
Research Analyst

Miguel, I have a couple of questions. You speak about the factoring variation in the first half. Could you give us the exact figures about the variation in the first quarter in terms of factoring?And in terms of Construction, apparently, contracts went quite well, right? Has this been the case? Or am I mistaken? What is your take? And what is your impression about the second half?

M
Miguel Coronel Granado
Director of Management Control & Capital Markets

Antonio, well, off the top of my head, I don't have that information, but I can send it to you. There was a slight reduction in the first quarter as compared with December, but I don't have the figures in my head. I can't give you the exact figure, but I can let you have it later on. There's been a reduction, but the most significant fall happened between April and June. With respect to Construction, well, yes, you are making the right interpretation. We've had a -- the new A9 highway in the Netherlands for EUR 850 million, apart from -- together with our sister company in Mexico, we have a project for the execution of the Maya Train compared to EUR 350 million. So this has made it possible for us not to be impacted in terms of the execution of projects.In terms of the future, what we hope is that the next few quarters, well, we'll have to see how the reconstruction fund is distributed. We have some water infrastructure activities, environmental infrastructures and transport infrastructures. So Europe -- the European Union says that they want a clear guideline for investments and reforms. And some of our activities are performed in areas which are very important: Waste management, maintenance of certain transport systems. So we hope we can implement all of that and mobilize those European funds.Levels of activity in general are very low, especially in the domestic market, which, for us, accounts for half of our production and 1/3 of our Construction portfolio. So our bases is already small. So any activation will be more than welcome, but we'll see what happens. We'll just have to wait and see. We'll see what public authorities do, but we are quite positive in this respect. Our portfolio is increasing in a very conservative way, and we hope that projects can be reactivated as soon as possible in a gradual manner.

Operator

[Operator Instructions] We don't have any further questions. And so I'll give back the floor to the speaker.

M
Miguel Coronel Granado
Director of Management Control & Capital Markets

Okay. Thank you very much, one and all. I want to wish you a happy summer holiday. You know that we are available on the usual channels. And if there's any question that you want to ask, do not hesitate to get in touch with us. Thank you.[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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