Fomento de Construcciones y Contratas, S.A. (FCC) Earnings Call Transcript

Good morning, everyone. Thank you very much to connecting to the results of 2019 FCC Group. I'm Miguel Coronel, the Capital Market and Management Control Director at the FCC Group. Well, first of all, what I would like to do is to highlight is there has been a good operating performance in all business areas. It's been very positive and sustained throughout the year as you have seen in the previous quarters. And just so -- this has also gone hand-in-hand with a reduction in the finance costs. In this case, the subsidiaries have also held a very important role. All of this has meant that the results -- attributable net profits have been 6% higher. We have achieved EUR 266.7 million, and all of this in spite of the fact that there was an adjustment carried out in the last quarter of 2019 of EUR 70 million in the book value of certain assets in the Cement area on the goodwill together with an increase of the results attributable to the minority interests, which are concentrated in the Water area. So now I'll go through all this in more detail. That's just a few brief idea of the main highlights. If we look at the income statement and then we look at the most important items, the turnover was EUR 6,276 million, which is a 4.8% increase year-on-year. This increase, as already said, was general. And what was the most significant in percentage term was the increase in Water and Cement. In the Water case, there was an increase in both our main activities, both in the integral cycle and Technology and Networks, especially for latter in the projects that are being developed internationally. In Cement, especially in Spain, there was a combined growth, both in prices and volumes throughout the year. Now if we look on a geographical dimension, the main market is Spain, which increased 6.3% to EUR 3,465.6 million and contributed 55.2% to the total. And the main area, which is Environment, had a sound performance. We have the contribution of projects that were ongoing and the one that was finalized just in the treatment and -- of waste recovery. We're trying to get new services and also increasing others, which is the organic waste. And the second activity to the contributions thing, which is Water, the increase was more moderate for this utility based on increase of invoiced volumes, which was able to -- which was to offset the Cement mix and the reduction in technology and rest. In Spain, the Construction registered a higher volume of activity, especially in building, and to a less extent, civil works and I already mentioned Cement taking into account the consolidated revenues. We have to highlight in there was a small contribution, but it is notable of income, which was 14.6 -- of this EUR 14.6 million, which corresponds to the contribution. But since the 1st of November 2019, there was the inclusion of Cedinsa Group as it became part of the consolidated group. And so as we see, this has helped all items on the income statement. Well, when we're talking about our geographical contribution, in the U.K., the revenue went down a little bit, 2.4%. This is due to the fact that the development phase has concluded and now we have the setup of one of the plants that we have, the waste energy plant in Edinburgh, Scotland. And as already said, this enters into operation halfway through the year and we'll see the specific impact of this later on. In the rest of the European markets, in several markets where we operate there, there was considerable increase in Cement of 29.8% in revenue due to a faster pace of progress of the 3 or 4 railway projects that we're carrying out in the northern part of Romania in the Construction area and also new contracts in Belgium and Ireland in the Construction business as well as sustained evolution in all the environment areas, especially in the main cluster of Austria, together with Slovakia and also Poland. In the Czech Republic, which is an important market for Water, there was an increase of 2.8%, which went hand-in-hand with the increase of the integral cycle rates. Now in outside the UE (sic) [ EU ], the Middle East and Africa market, there was a reduction of 8.8%. And here, we had a varied performance. So we had certain extensions to the Riyadh metro contract in Saudi Arabia, which is doing well and that, together with an increase of presence in Algeria because we have a water cycle contract. But despite of that, we have the effect of the end of certain contracts, as we've already mentioned in previous quarters, especially the Egypt contract in the Water area and another one that was related to Construction in the Qatar metro. In Latin America, the income -- revenues went down 8.6% and this -- for the period. So it's because -- it's due to the fact that there's been slow pace of progress of certain projects, for example, the one in Colombia and Mexico and in the Water, Construction -- and there were certain contracts that we've ended in the Panama metro, another railway project in Chile. But finally, in the U.S., the income increased 18.4%, and this is being supported by the progressive entry of the contracts as we are achieving that organic growth, especially our main focus areas where we are positioned in the areas of Florida and Texas and also more activity in the Cement business. Well, all of this and [ when you register as ] EBITDA meant that we could increase 19.1% to EUR 1,025.8 million. And as I've said, this growth has combined growth. As far as operating performance, well, we will look at it later on. But what has been very important is Construction and Environment, this has been an effect of the new accounting standard that came into effect on the 1st of January 2019, which is how we were going to enter into the book the leases. And also what's worth highlighting here as far as EBITDA is concerned, is the delta, which has been produced by Cedinsa. As you know that after we acquired additional 17% in the group in the last quarter of the year, this meant that now we have changed the consolidation method. So the equity method now went to the global consolidation. So this meant that from the 1st of November last year, the EBITDA from -- of the EUR 1,025.8 million, EUR 11.9 million due to the effect of the fact that Cedinsa now is part of the global consolidation method. So anyway, now let's look at a bit more detail into each of the different main business areas. So as far as the Environmental is concerned, the revenues went to EUR 2,915.2 million, which is 3.3% increase. And I've already said that we've had specific activities in waste collection and recycling, especially in the Spanish market and the Central European market, and this is a combination from the existing contracts and the ones that we are now developing. And more specifically, in the Spanish case, the revenues went up 5.8% to EUR 1,701.7 million, around 60% of the total of the area. And as I've already mentioned, we have the contribution from the development of the recycling plants in Alcal de Henares, Madrid and also, the second phase of the incinerator in the Guipúzcoa area, which was finished at the end of the previous year. And also, the new contracts we can mention, the increase of the waste -- the organic waste collection in Madrid, which is from the new contracts for our waste collection, in the city councils like Jerez de la Frontera and El Prat de Llobregat. As far as the U.K. is concerned, I already mentioned this, well, here, the turnover went down 5%, EUR 682 million. This is due to the fact that there is accounting during the development phase. It was like -- well, here, we take into account the Edinburgh recycling plant. And so therefore, there's less EUR 39 million for income in 2019 compared to 2018. So this is the difference because we were no longer in the business, right? But also, we can say the recurring business went up 12%. As far as Central Europe is concerned, the revenue went up 5.7% to EUR 466.9 million in 2019. And as already said, Austria and Hungary had increase in the volumes of street material. Also, there was a recovery after a reorganization that we have carried out and a refocusing of our business in the Poland. So this is very important for us. Finally, in the United States and other markets, there's been a growth of 20.8%. And I said here, we have the effect of the new contracts, which were in the full year, which is in Rowlett, Texas and Polk County in Florida. And as well, we have got an important contract in the Palm Beach area in North Miami for waste collection and also recyclable plant that we have in Houston, which has been going since last October. Well, with this, the EBITDA went up 11.6% to EUR 492.5 million. We have to say here that the increase in the profitability went to 16.9%, the operating margin, and that was related to all the activities, but most important is the evolution of the U.K. treatment plants and there's a joint performance of the operations in Central Europe, and we're talking about the improvement of the operations we have there. Now when we're talking about Water, well, in this area, the increase went up 6.4% compared to 2019, EUR 1,186.9 million. And as I've already previously said, there is more activity and contribution of our main business in the integral cycle. We've also had the contribution of treatment plants, the desalination plant in the North Algeria in Mostaganem, which is now starting to contribute to a limited extent, but now it's a recurrent business, is our new integral cycle business because after the acquisition in June of the French group, SPIE, and also, we had an increase in revenue due to more activity in the Latin American area. So in geographical areas in more detail. In Spain, we had revenues of EUR 804.4 million. As we said here, the performance is due to the increase of the invoiced volumes and also, this is offset lower activity in the Technology and Networks area. Normally, this has been linked to the investment plans that were associated to the agreements with concessions in use. And on the international level, starting with the Middle East and Africa and other smaller markets, the revenue went up 6.5% to EUR 113.3 million. We have a different delta that we set at the desalination plant in North Algeria, and that offset slightly less activity in the plant that was finalized in El-Alamein on the Egyptian coast. In Central Europe, well, we have subsidiary there. And the revenue went up 3.3% to EUR 111.7 million. We reviewed our tariffs during the year, which helped us and is a regulated business and that compensated the sales we do to third party of the surplus that they have the water that we get in the area, but this is a sustainable performance in general. In Latin America, as I've already said, the turnover has been affected by the development of more business in Technology and Networks that went up 84% to EUR 86.3 million. And here I want to highlight projects like the ones in Salitre in Colombia and then Bogotá and in Guaymas which is the West Coast of Mexico. In the rest of Europe, the income went up 26.9% to EUR 71.2 million, and this is the effect, as I've already said, of this concession group, SPIE, that joined the company as of June. So it became part of the perimeter -- the water perimeter in that place. EBITDA went up 13.8%, double-digit growth, to EUR 281.7 million. The operating margin also increased and it went up to 23.7%. Here, I would like to highlight, apart from the accounting effect that we've already said, there's more activity in Technology and Networks, especially related to international contracts. So now I'd like to speak about the third area, which is the Construction area. So with regards to the area itself, the Construction, where the revenue grew 3.9% to EUR 1,719.3 million. We had more contribution in the domestic market, which explains this delta. International was more moderate because there were different areas involved. In Spain, the turnover went up 9.2% to EUR 665.3 million for the contribution of new contracts, important ones related to buildings such as the redevelopment of the Real Madrid football stadium which we started halfway through last year. And there's also other less important civil works related to high-speed train structured in the southern part of the country. In the Middle East and Africa, the income fell 9.6%. And there was more activity in the electromechanic area in the Riyadh metro, but also we have the effect of the finishing off the Doha metro. So in the Europe, United States and other markets, more weight in the international, this represents 53.8% to EUR 351.7 million. And as I already mentioned, there's a greater pace in the progress of the railway works in Romania and also, we started projects such as the concession one related to the Haren Prison in Brussels or the university facilities in Dublin in Ireland. Finally, in Latin America, the turnover, like in the Middle East, there was a slight difference due to the pace of the work. So it went down 19.3% to EUR 300.8 million and -- despite the fact that we have got certain works undergoing but also the completion of the line 2 of the Panama Metro, which has not yet been offset with the new projects that we have. So with all of this, the EBITDA grew in a very important manner with 54.1%, which went over EUR 100.2 million, especially due to the combination of the performance of our portfolio projects. I just would like to say that there's been good performance in general in the international area. So the EBITDA had a margin on the income of around 6% -- 5.8%, almost 2 percentage points more than the income. Finally, the fourth most important area of the group's business, Cement. The revenues grew 10.8%, EUR 413.2 million. I've already mentioned that we've had a group combination throughout the whole year with regard to volumes and prices and also the exports that were carried out from the plants that we have in Northern Spain, and their performance is better. Specifically in the Spanish market, the turnover grew 10.9% to EUR 249.4 million, and we've had more activity due to the demand from the construction and building industries. In a smaller market, the local Tunisia market, the revenue grew 2.7% to EUR 57.9 million. And again, we had a mixed performance with higher prices as opposed to some less volume and also the effect of the adjustment of the Tunisian dinar pegged to the euro. So in the local currency, the revenue went up 8.3%. So as we said, there was a depreciation of the Tunisian dinar. With regard to exports, they went up 15.7%. We've had better dispatches from Spain, especially to certain Central, Northern European countries like Holland, Denmark and the U.K. and also to the U.S. where we managed to increase activities. So we've been able to offset the reduction in the business from our plants, cement plants, in Tunisia. With regard to EBITDA, it went up a very important 21.8% to EUR 86.4 million. And basically, this is focused on the increase of the contribution from Spain, the Tunisian market to a lesser extent and is just 15% of that increase. The sale of CO2 emission rights had less effect this year. We only sold EUR 5.8 million compared to EUR 9.4 million in the year 2018. So if we exclude the effect of the impact of emission rights in both periods, while the EBITDA is growing 21.8% would have been 31%. Here, I would like to mention what I said at the beginning of my presentation that we had a provision at the beginning of EUR 70 million to the goodwill in the area. So we would think that this area is perfectly adapted on the quarterly forecast that we do, and we always monitor the demand on the long term for Cement, and we now think this is fully adjusted. With regard to the financing structure and the generation for cash throughout the year and how this has evolved, taking into account the financing balance, well, the debt, the net consolidated debt ended with EUR 3,578.7 million. Here, the majority, and I will break it down later on, is due to the fact that Cedinsa became part of our consolidated perimeter and they added EUR 730.2 million of debt, which is project debt without recourse. And among the cash flow components, which was starting when the cash flow, the working capital reduced the use of funds to EUR 183.3 million in the period, so we've improved by 42% compared to the year 2018, and this is due to our forecast, which has been confirmed, and it's due to the fact that we have used lessened prepayments for different contracts, not only but mainly in the area of the Construction. In addition, I'd like to remind you that the operating cash flow in this heading includes an exceptional payment of EUR 92.1 million to the treasury of the total that included in -- of EUR 110.9 million, and this is related to a payment we did for tax depreciation, which is a historical one. And in the annual report on the audited data, you can say that we have presented a claim because we are in disagree with this, and we really hope this claim is successful. But this was a figure that includes the operating cash flow. But taking obviously into account this claim, we managed to progress 28.8% to EUR 630.5 million. With regards to the cash flow for the investment flows, there's been a lot of effort that's put in, in the growth investments, and they represent over EUR 260 million, and I've been mentioning this throughout my presentation. But if we see this all together, the most significant one is the purchase of the concessions group in France, SPIE, for EUR 31.7 million, the plants that we are developing in the environment, the ones in Spain, firstly, with environmental cycling complex in Loeches and Alcal de Henares and the completion of the incinerating Guipúzcoa, which has been EUR 47 million. And also in the U.K. environment, we have the development of the plant in the Lostock for EUR 43 million or the one that I already mentioned, which is related to the drop in income, which is the completion and the commissioning of the Edinburgh plant, which was EUR 22.2 million. All the investments to set up the contracts like the one in the Palm Beach area in Florida for the Environment, which is divestment of EUR 35 million. And obviously, just to talk about these growth investments, well, there was an investment of EUR 58 million to purchase additional 17% stake of Cedinsa concession, which means that we have now got over 50% -- we have 51%. So now this company stake is part of our global consolidation. There's been no important divestments in the period. So taking this into account and our cash flow, which means that the cash and cash equivalent balance is about EUR 1,218 million at the end of last year. With regard to the debt structure, well, here, I think what I really wanted to highlight, and I think it's very important, is if you analyze the data that we have published, while the parent company, FCC, has now got a net cash position at the end of last year was EUR 12.8 million, annual net financial debt has been transferred, which was the objective of the management to the cash-generating areas, which is where we have all this debt, which was for amount of EUR 3,591.5 million. We managed to do this in the fourth quarter. And as you know, what we did was carried out the segregation and the full separation and the financial isolation with totally autonomous transfer of the environment area with a long-term debt, so which means we now have a full optimization in the structure of the capital and in the cost for the FCC Group, which we get to the debt, according to its type, if we look at the parent company, and we're talking about gross debt without taking into account the free cash that's related to the balance sheet. So we have a gross debt with the parent company of EUR 422.3 million. The majority is related to a program that we have with the commercial paper programs, which is in the Irish stock market, and we set this up at the beginning of 2019, and it has an outstanding balance of EUR 300 million with the parent company. Obviously, gross financial debt with that without recourse for the parent company amounted to EUR 4,564.6 million, with the breakdown, the majority is concentrated, as I said, with the Water and Environment and also in the Capital Markets. And the 2 international markets are the ones where we have concentrated the majority of our work. And just as far as concessions are concerned, we have broken down the fact that this is a very good business area and we have transport utilities for a road of EUR 866 million. And again, the majority of this financial debt -- gross financial debt EUR 756.5 million corresponds to the debt for projects for the Cedinsa group, which joined us in the 1st of January last year. Together we had smaller concessions that we know or we've had historically in the group, the one in Mexico, another one in Spain. Well, I don't really want to go on too much. I would just like to repeat that the results have been very sound and robust in all areas. We have improved the results for generating cash. Environment and Water, which are 2 main areas, has still got a very sound business, and we've seen an improvement in the volumes and in revenues in 2 areas related to Construction and also that we have reported on an improved performance and contribution from the different subsidiaries on the equity method and the associated ones and they've given us better results and better profits, especially taking into account the invested capital. So all this has allowed us to be -- get more. As we say now, we have got a selective growth model and that we are focused on in different areas and activities, which is going to be the future of the potential generation of growth in the group. And also I'd like to highlight at the end, the debt part has now got a capital that has been strengthened and optimized, and you can see how our financial structure now is very clear and apply to the areas where they generate cash in a way that they have been identified, and it is in line with their profile. So I don't want to say anything more. I think I spoke about the most important things. As I said, the full audit view is now available this morning before the markets opened. Thank you very much again for your time, for your attention. And if there are any questions, well, now we can go to the Q&A session. So let's start, first of all, for any questions in Spanish.

[Operator Instructions] The first question is from Victor from Societe Generale.

Miguel, I just had a couple of questions. When you talk about Cedinsa and the assets that you have in the global consolidation, obviously, equity that you've invested in these projects or the -- in Cedinsa -- under the Cedinsa. Could you explain a little bit about what their projects are? Are they toll roads? And also when you're talking about cash flow, I think you paid EUR 97 million. I assume it's a one-off for the debt related to the bonds. But could you just confirm this? And what about CapEx you have envisaged for the next few years?

Well, the equity investments in Cedinsa, we had a stake of 37%, which has an account value or book value or -- invested capital of around EUR 25 million, and we've made additional investments of EUR 58 million to get an additional 70%. So now we have 51% of the stake. This means that as far as the equity that's been registered prior to the acquisition plus today while the investments we have now with cash flow, in total, it will be about EUR 83 million. Cedinsa, you asked, it's a parent company that has 4 concession companies, which are fully operating, and it's been going for a few years in the Barcelona area. These are concessions that they are no longer having pending development phases. And so this is a toll road that we get paid to, say, in the shadow. So the maturity date, I can't remember exactly how long they are, I have to look at that. But I think we're talking about an average maturity, the 2020 or '21 of joint maturities. Let me just confirm this. With regards -- yes, what I just said is correct. I can send it to you later about the actual maturity of each one of the 4 concessions. With regard of the payment, this is the flow of the financing operations, is that what you meant?

Well, my query, because there are 2 sections. One is positive which has got the cash flow from investment, which is EUR 158 million positive. And then you have a negative one, which is we've got financial liabilities. And you explained that the EUR 97 million is related to bonds, maybe related to pay the debt. But maybe the group had some series of penalties. I don't know. I don't know. And then the EUR 158 million...