Hochtief AG

XETRA:HOT

Earnings Call Transcript 2022-Q3

[Mike Pinkney, executive]

Thanks, operator. Good afternoon to everyone, and thank you for joining this HOCHTIEF results call for the first 9 months of '22. I'm Mike Pinkney, Head of Corporate Strategy, and I'm here with our CEO, Juan Santamaria; our CFO, Peter Sassenfeld; as well as our Head of Capital Markets, Tobias Loskamp; and other colleagues from our senior management team at HOCHTIEF. We look forward to taking your questions.

But to kick off, our CEO will run us through the key aspects of our performance during the first 9 months of the year. Juan, all yours.

[Juan Cases, executive]

Thank you, Mike and team. Good afternoon to everyone, and thank you for joining us today. So let's turn to the key highlights of these results on Slide 3. HOCHTIEF delivered a solid performance during the first 9 months of 2022 with further profit growth and increasing operating cash flows, accompanied by a firm order book, notwithstanding the challenges of the current environment.

Sales increased by 23% and to EUR 19.1 billion or 11% in FX-adjusted terms with nominal net profit rising by 21% to EUR 355 million.

Operational net profit was up EUR 59 million to EUR 381 million, an increase of 18% year-on-year. Underlying net cash from operating activities of EUR 122 million was up by EUR 43 million year-on-year driven by a solid Q3 performance.

As of September, HOCHTIEF had a net debt position of EUR 226 million after the CIMIC minority buyout.

The group's order book stands at EUR 52.8 billion and is up by around EUR 4.4 billion or 9% since December 2021.

On Slide 5, we can examine cash flow trends. During the third quarter, underlying net cash from operating activities increased by EUR 60 million compared with 2021 Q3 with a 9-month figure of EUR 122 million, also higher year-on-year. The figures are adjusted to exclude extraordinary payments for the legacy CCPP project at CIMIC in Q2 and the final payment for the legacy Chilean project at HOCHTIEF Europe in the third quarter.

Looking at the last 12 months. To eliminate seasonality, a robust EUR 800 million plus was achieved.

Net operating CapEx is ramping up, driven mainly by job-costed tunneling equipment being deployed for major projects at CIMIC. And free cash flow from operations in the last 12 months stand at a solid EUR 679 million.

On Slide 6, we can look at the cash development on the balance sheet. At the end of September 2022, HOCHTIEF had a net debt position of EUR 226 million after good dividend payments of EUR 148 million over the preceding 12 months.

Adjusting for the EUR 534 million investment in CIMIC shares, net of HOCHTIEF capital increase as well as other nonoperational items, the balance sheet would show a significant net cash position, as you can see on the chart. And our liquidity remains very robust at EUR 5 billion with substantial undrawn credit facilities.

Slide 7 shows more detail on the development of the group's orders. HOCHTIEF's order book reached EUR 52.8 billion at the end of September, an increase of 13% like-for-like in nominal terms over the last 12 months. FX movements, particularly the strength of the U.S. dollar, were a significant driver as shown.

Over half of our backlog, like 55%, is located in North America with a further 37% in the Asia Pacific region and 8% in Europe. New orders of EUR 21 billion are stable on a year-on-year comparable basis and represent 1x work done in the period.

On Slide 8, we show some of our major recent project wins, including, first, in Americas division. Turner sustained its strong position within the health care sector and was awarded among others a hospital project in Boston. A Flatiron-led consortium secured the I-105 Express Lanes project in L.A. County.

In Europe, we were awarded a contract worth almost EUR 200 million to widen the A1 in Germany. HOCHTIEF is leading a joint venture to expand the highway between the Rhine Bridge and the Leverkusen interchange in this project. Furthermore, a HOCHTIEF joint venture has secured an approximately EUR 240 million contract for the construction of a battery cell, a market segment which is seeing strong growth.

And at CIMIC, CPB Contractors' joint venture was selected by the Victorian government to deliver a major works package for the Melbourne Airport Rail project. This was appointed services provider for the Iron Bridge magnetite project in Western Australia worth around AUD 480 million over 3 years with options for a contract extension. And in Canada, Sedgman will deliver services at a gold extraction project.

Now let's look in more detail at Americas. HOCHTIEF Americas delivered a firm set of results for the first 9 months of 2022. Sales year-to-date of EUR 12.8 billion were 27% higher than the corresponding period of 2021, a 12% increase FX adjusted.

Operational activity of EUR 265 million was 9% higher Operational net profit was up 16%. The division's net cash from operating activities prefactoring in the 9-month period reflects seasonality and timing effects. The strong third quarter of EUR 132 million showed a EUR 180 million increase year-on-year, bringing the last 12 months' figure to EUR 294 million. The robust balance sheet at HOCHTIEF Americas had a September 2022 net cash position of EUR 1.6 billion, up EUR 195 million year-on-year.

At the end of the period, the order backlog remains solid at EUR 28.8 billion, up 16% year-on-year, broadly stable FX adjusted with an absolute increase of over EUR 2.7 billion since the start of 2022.

New orders secured during 9 months 2022 reached EUR 11.5 billion, up by 4% year-on-year, with work secured in the last 12 months, representing 1x work done. HOCHTIEF Americas outlook for 2022. We target an operational pretax project of EUR 350 million to EUR 370 million subject to market conditions.

On Slide 10, we have the Asia Pacific division, and we can see the positive performance of CIMIC. Revenues increased by 13% to AUD 8 billion in the first 9 months '22 driven by a growth in Australian construction and services. Net profit after tax of AUD 300 million was 5% higher year-on-year on a comparable basis.

EBITDA and NPAT margins were resilient on a like-for-like basis as companies continue to tightly manage supply chains and mitigate wet weather impacts. Underlying operating cash flow prefactoring improved by almost AUD 320 million year-on-year.

EBITDA, cash conversion prefactoring reached 87% on a last 12 months basis, rising to 102%, excluding Leighton Asia. Net debt stood at AUD 737 million, with the year-to-date movement, including the CCPP settlement payment and the AUD 112 million dividend paid to HOCHTIEF in Q3 2022.

New work of AUD 12.5 billion was secured during the first 9 months of the year, constantly exceeding AUD 10.5 billion of work done in the previous period. The period-end order book stands at AUD 29.6 billion, a 7% increase on a comparable basis since December 2021. We expect CIMIC to achieve an impact for 2022 in the range of AUD 425 billion to AUD 460 million, subject to market conditions.

And I would like to highlight that during the third quarter, a AUD 372 million offer was made by CIMIC joint venture company, Thiess, for 100% of Australian resources company, MACA. This transaction will be successfully completed in Q4 2022. A new acquisition of MACA, with its strong presence in gold and iron ore, supports Thiess' strategy to diversify its operations across commodities and services as well as geographies.

Moving on to Slide 11. Let's look at Europe, which maintained steady profit performance. Sales for the first 9 months of 2022 were EUR 927 million and at a similar level to the previous year. Operational PBT of EUR 43 million was EUR 3 million higher year-on-year with a solid margin.

Net cash from operating activities in the third quarter was close to neutral with a 9 months figure, reflecting the characteristic seasonality of the business. In both cases, after having adjusted for the final Q3 2022 cash payment, that settles legacy Chilean project arbitration decision announced in 2021. At the end of September 2022, division's balance sheet maintained a solid net cash position of EUR 600 million, up EUR 30 million year-on-year.

HOCHTIEF Europe secured new orders in the period of approximately EUR 1.1 billion with a Q3 figure around EUR 100 million higher year-on-year. New order last 12 months are equivalent to 0.9x work done.

The divisional order backlog ended September 2022 at EUR 4.3 billion with the visibility of 2.5 years. For 2022, we maintained our operational PBT guidance for Europe at EUR 45 million to EUR 65 million.

On the next slide, we summarize the performance of Abertis. Average daily traffic in 9 months 2022 was 12% higher year-on-year with individual countries showing significant traffic growth.

Operating revenues rose 17% year-on-year to EUR 3.8 billion and EBITDA by 19% to EUR 2.6 billion, both on a comparable basis. Abertis net profit in the period pre-PPA was EUR 506 million at a similar level to the 9-month period of 2021. Profit contribution from our stake in the toll road operator was EUR 53 million compared with EUR 43 million in 2021.

Abertis paid a dividend of EUR 602 million in Q2 2022, of which HOCHTIEF received its share of EUR 119 million. The expected total payout for the 3-year period 2022, 2024 is EUR 1.8 billion, including the April 2022 payment. We continue to expect that our Abertis investment will make a positive profit contribution to HOCHTIEF in 2022.

So in summary, a solid performance for HOCHTIEF in all its divisions in terms of sales, profits, cash flow and orders. Looking forward, the global economy is currently facing significant macroeconomic challenges.

HOCHTIEF is actively managing these challenges as it's well positioned for the future based on: first, our solid long-standing local positions in our key developed markets; second, our geographical and currency diversification; third, a substantially de-risk and growing order book; and fourth, the identified tender pipeline of relevant projects worth over EUR 600 billion for 2022 and beyond.

During October, we completed the long-term refinancing of our investment in CIMIC, which was a key element in our strategy of simplifying the group's corporate and capital structure and eliminating dividend leakage.

Another strategic imperative for HOCHTIEF is to further advance in the implementation and application of ESG principles via our sustainability 2025 plan. The most recent example is our announcement that as of 2023, we will implement a new biodiversity management action plan for all projects in environmentally sensitive areas.

To conclude then, we confirm our group guidance for 2022 of an operational net profit in the range of EUR 475 million to EUR 520 million, an increase of between 5% and 15% year-on-year, subject to market conditions.

So thank you very much to everyone for listening, and now I welcome your questions.

[Operator]

First question is from the line of Luis Prieto from Kepler Chevreux.

[Luis Prieto, analyst]

Two, this time, very brief. The first one is if you could provide more light on the decline in margins in the U.S. Sales did beautifully, but the margin figure was not comparable to previous periods. And the second question is how should we interpret the sharp drop in order intake in the U.S.? Is it a market slowdown? Is it a one-off effect that I'm ignoring? How do I look at this?

[Juan Cases, executive]

Thank you, Luis, for your question, and nice to be talking to you. I mean, first of all, we believe that right now, I mean this is just a one-off. We believe and we were quite comfortable with Americas, and we believe that it continues to perform very, very, very well.

In terms of the modest growth in profit terms, first, there's project mix and there's a timing effect on margin sales ramp up, number one. Secondly, from EBITDA perspective of -- we do have fewer -- from a revenue perspective versus the PBT, we have fewer equity-accounted joint venture projects contributing to Turner, so that impacts the difference between the margin on the PBT and the margin on the revenues. Hopefully, this answers the question. Mike, do you want to add something?

[Mike Pinkney, executive]

No, I think that's -- it's pretty much what Juan said. As you can see, the operational net profit grew by 16%, which was much closer to the sales growth. And yes, I mean, we're not concerned about any structural effect there.

In terms of new orders, I mean, basically, we believe that there's nothing -- it's not significant. There's a lot of variability in terms of new orders on a quarterly basis in Americas. So if you look over the last 3 years, we've had anywhere between sort of USD 3 billion and USD 5 billion per quarter. In Q3, it was about USD 3.3 billion. And in particular, I'd highlight that there was a significant amount of pre-construction awards for several sizable projects. So they're not in the new orders now, but they're expected to come through in the near term, so not a concern.

[Operator]

Next question is from the line of Marcin Wojtal from Bank of America.

[Marcin Wojtal, analyst]

Yes. The first one, how are you finding the acquisition of MACA by Thiess? And do you expect CIMIC to actually inject some cash into Thiess? And question number two, more broadly, how do you feel about the balance sheet of HOCHTIEF right now? Do you believe that you still have some firepower for potential new projects? Do you believe HOCHTIEF is still in the position to potentially support Abertis if they were to fire some new opportunities?

[Juan Cases, executive]

Thank you, Marcin. So starting with MACA. I mean, first of all, MACA, in my opinion, is a great acquisition by Thiess for different reasons. The first one is because it gives a huge diversification in revenue by commodities. MACA is very, very strong when it comes to iron ore, when it comes to gold, and when it comes to other minerals, while Thiess traditionally has been more strong in the coal space and other metals.

And as you know, we are trying to diversify very strongly Thiess out of coal. We have a very important objective to reduce by 2027, Thiess, to -- exposure to thermal coal below the 23% and MACA is fundamental for it.

In addition, MACA is not only contributing to the diversification of Thiess in the commodity space, but also geographically, as Thiess is mainly based in Eastern Australia, Indonesia, Mongolia and other markets like the U.S. or Canada, but we are starting to grow in those markets. And MACA provides the West of Australia at the core market, introducing around 14 new clients to Thiess. So from that perspective, it's a very important acquisition, and that's going to continue. Growing this into minerals are going to be key into the future.

In terms of the capital contribution, yes, there's going to be capital contributions from both partners both including Elliott and CIMIC into this. The total equity value of the transaction comes up to AUD 371.95 million. And the idea is that the total investment per shareholder would be 50% of it, AUD 193.5 million. That includes AUD 7.5 million transaction cost for each.

In terms of the balance sheet, Pete, Mike, do you want to?

[Mike Pinkney, executive]

Thanks, Juan. Marcin, yes, I mean, basically, as we said, we've sort of ended September in a slightly net debt position. As you know, the fourth quarter is seasonally very strong in terms of working capital inflow, and we expect that to be the case this year in 2022 as well. Last year, for instance, you saw a cash inflow of EUR 500 million plus from net working capital, and we'd expect to see a strong fourth quarter again this time around. So I think the balance sheet is solid. We continue to have our investment-grade rating by S&P. And yes, we're well positioned for any opportunities that arise.

[Operator]

Next question is from the line of Christoph Dolleschal from HSBC.

[Christoph Dolleschal, analyst]

I have another follow-up question on the sales growth, both at the margins in the U.S. and Asia Pacific. So basically, when I strip out the foreign exchange effect, the Americas was up around about 25% in the third quarter. Asia Pac was up 20%. You said it's mix, but could you kindly elaborate a bit further? So how much, for example, was eaten away by inflation?

I know that you have little risk in the projects themselves as price increases are usually passed on, but I think there is generally some risk left. And also in the presentation, you stated, more generally, that you have still 60% projects that are not defined as low-risk projects. So I would just like to know why it is so difficult to basically translate that sales increase into also the margins?

[Juan Cases, executive]

Sure. So I don't think inflation is playing a big part of it due to the nature of the contracts of Turner. I mean, basically, as I said before, there's a lot of -- and there's a reduction in the joint ventures that typically are accounted on an equity accounting basis. And that means that, typically, when we do account on -- through the joint ventures, they are not giving us revenue, but they are giving us the PBT. As that reduces, obviously, the margins changes. And I think that's the main reason in the case of Turner.

In the U.S., we are not, I mean, we're not seeing any issue, any challenge. Actually, the contracts at Turner, half are quite solid from a risk perspective, and we're not anticipating any major issue.

When it comes to Asia, the FX are a little bit different. One is explained through the Ventia deconsolidation, a part of that. There's also, from a Thiess perspective, I mean, bad weather has affected significantly Thiess in this quarter, but more importantly in the first 9 months, and I think that's driving a big part of that. And you know that we -- I mean, [ upon already ] has priority over the dividends and impact of these processes. So we do whatever impact has Thiess that comes straight to CIMIC. So I would say that those are the main impacts in the margin.

[Operator]

[Operator Instructions] Next question is from the line of Graham Hunt from Jefferies.

[Graham Hunt, analyst]

Maybe just two questions from me. One on -- going back into the U.S. I don't know if there's any color, extra color that you can give on maybe the relative strength and weakness across some of the end markets that you're in the U.S. in the last quarter.

And then just second question on your guidance. You obviously maintained that for the full year, despite seeing probably stronger FX tailwinds than you must have been expecting, is that just conservatism on your part? Or are you seeing sort of an underlying softening in the environment, which is driving that maintenance?

[Juan Cases, executive]

Thank you, Graham. So starting with Turner. I mean, Turner is quite diversified in infrastructure, in building infrastructure. And if you go right now through the order book of Turner, there's an important part, currently around 20% of data centers. And in fact, Turner is one of the few, if not the only company working for the 4 major tech companies, Meta, Google, Amazon and Microsoft.

There's also an important part of a health care business in the portfolio, the backlog, and there's plenty of opportunities in that space, both in hospitals and pharmaceutical. And there's been a huge investment right now in North America.

On the commercial front, new offices have decreased in North America. However, renovations and fit-out are increasing because as the new reality over remote work gets imposed, everyone has the need to change the way they do business, and that's driving a lot of the renovations in building.

There's an important part of sports and aviation segments which Turner is in a very good position. There's work in education, especially with some of the big universities in the U.S. There's a lot of manufacturing coming into the U.S. part of -- because part of the globalization that is happening in the world and putting America First plan. And a lot of the, not only general industrial manufacturing, but battery manufacturing is coming to the U.S., including support in the semiconductors domestic growth.

So Turner is very well positioned in all those segments in the high-end space. And what -- I mean, part of our strategy is to continue consolidating Turner into those areas, especially at infrastructure coming at the back of the 5G development and also manufacturing. But also we're trying to see there's opportunities in business areas around the operation of some of that infrastructure. But that's something that we're just considering at this stage.

In terms of guidance, are we -- I mean, I think that we have explained before we're talking about the margins, the impact in Asia Pacific and the U.S. So yes, there has been an increase in revenue, but there has been also some impacts on the PBT that I did explain before. I think we are being, I'm not sure if realistic or conservative, but I think we're reflecting, right now, pretty much in the books what is happening in the market, and I did explain before. But it's not -- I mean, I think we're comfortable keeping the guidance at this stage.

[Operator]

We have a follow-up question from the line of Luis Prieto from Kepler Chevreux.

[Luis Prieto, analyst]

Juan, apologies for the follow-up question. I just wanted to check the view how we should think about share buybacks going forward given the current situation with the shareholder structure, et cetera.

[Juan Cases, executive]

So I mean, we haven't made any decision. We always consider a different option, but at this stage, there's no decision about buybacks. And if that was to change, we would announce. We always keep the options open.

[Operator]

Next question is from the line of Joao Safara from Banco Santander.

[Joao Safara Silva, analyst]

Three detailed questions. The first one, it's a follow-up on what you mentioned regarding the margins in the U.S. Just wanted to understand if -- I mean if this is something that has changed in terms of the way the lower contribution from joint ventures in the U.S., is this something that we will continue to see going forward?

Just a little bit to understand what has changed there or if there is any impact in terms of mix as well. You've mentioned that, for example, I mean the work of new office have decreased and this has been replaced by innovation. Just wondering if there's an impact in terms of mix there, if you could give a bit of color on that.

And then the other question on the -- well, the impact of Leighton Asia in CIMIC results, in the cash flows. When should we expect this to normalize? I mean the last 12 months is still a negative impact to your cash flows. When are we likely to see the Leighton Asia not impacting negatively to the CIMIC results?

And then the last one just to clarify. I recall on the Chile litigation, you mentioned the EUR 146 million cash impact, and now, in your release, implicitly, it's EUR 111 million impact. Just wondering if there's still something that is coming in or just that the impact in the end turned out to be lower than you expected.

[Juan Cases, executive]

Okay. Thank you, Joao. Starting with the first one on the margins in the U.S.A. I think it's a difficult answer in the sense that, I mean, right now, yes, it happens that in Q3 over the first 9 months, we had a lower contribution from JVs and that reflects the way that reflect in the P&L. Is that going to happen or not? At the end of the day, Turner decides to move forward in JVs or alone, depending on the project, depending on the strategy. It's difficult to answer.

The important thing is at the end of the day, Turner continues to grow, is very well positioned to perform and deliver new infrastructure projects in North America and a very good market, and it has a very solid performance. So it's -- I think that's a key in the case of Turner. The main idea is how we continue to grow Turner, not only on the infrastructure space, but if there's opportunities for PPPs and other developments.

On the second part on the offices, it's -- I think that Turner -- one of the good things of Turner is that they continue diversifying, as I said before, into new sectors. So the decrease in commercial office space hasn't really affected them because that has been happening over the last years, and they've been able to diversify into new sectors in a very good way.

I wouldn't see, right now, the renovation of offices at something that is replacing commercial in general. Commercial in general was replaced by data centers, by hospitals, by batteries, by manufacturing. I think that now the renovation is a new opportunity. So I don't see as a replacement of our previous sector. I see it as a new opportunity as we move forward to add to the current backlog. So I think I see that as a positive.

When it comes to Leighton Asia, for sure in 2023, for sure. I don't know in 2022. And the reason why I'm saying this is that there's 2 things contributing to Leighton Asia cash flow. The first one is the unwinding of the projects in Hong Kong as they finish and the fact that Leighton Asia hasn't been able to win major projects over the last years. So we are not being able to neutralize the unwinding with advanced payments. That's number one.

Number two is the settlements on some reconciliation of accounts in each one of the projects. So I believe that there will be new projects coming in potentially at the end of 2022. And I believe that there should be settlements coming up at the end of '22 when it comes to the mediations on the projects. But it's [ risky ] to say or to represent, if that's going to really happen in November, December.

It will definitely happen -- if it doesn't happen in Q4 this year, will happen at the beginning of 2023. But definitely at some stage, Leighton Asia will start performing from a cash flow perspective, and that's going very soon.

And when it comes to the Chilean litigation, I'm going to ask Mike to answer that question.

[Mike Pinkney, executive]

Thanks, Juan. Joao, so yes, the final Chile settlement was better than expected. So as you said, EUR 111 million versus the EUR 146 million cash flow effect that we'd announced back, well, a year ago now, November 21. So the important thing here is that, yes, it was a bit better. There are no further liabilities in relation to the project. And yes, there were some FX variations as well there, but that's now behind us.

[Operator]

There are no further questions at this time, and I would like to hand back to Mike Pinkney for closing comments. Please go ahead.

[Mike Pinkney, executive]

Okay. Well, thanks very much to everyone for joining us for this call. And we'll look forward to following up of IR Investor Relations department with any further detailed questions you have. And we'll, of course, speak to you in February with our full year results.

[Unknown Executive]

Thank you, guys. Bye-bye.

[Juan Cases, executive]

Thank you, Mike. And thank you, everyone, for your time today.