ACS, Actividades de Construcción y Servicios, S.A. (ACS) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining this H1 2020 results presentation. I'm here with Ángel García Altozano, Corporate General Manager; and the rest of the team. We will briefly analyze the key aspects of our results. And we then look forward to any questions you might have. I want to start by thanking all of ACS employees across the world for their commitment and support for our clients, suppliers and subcontractors through these challenging times caused by the pandemic. The ACS operating activities have been resilient with Construction and Industrial Services deemed essential in most countries during the lockdown. On the other hand, Abertis has experienced a drop in its activity due to the mobility restrictions, which has caused shortfalls in daily traffic since the second half of March. Compared to H1 '19, the reduction in the contribution to the group's net profit has been over EUR 140 million. Nevertheless, since restrictions were lifted, traffic rates are recovering significantly. On our Services activity, Clece's net profit was down by EUR 18 million compared to H1 '19 due to the significant reduction in cleaning activities and maintenance of social infrastructure that have been shut down due to activity restrictions: schools, leisure, non-essential facilities and airport transport. Meanwhile, cleaning services of critical infrastructure have been reinforced, such as hospitals and public facilities. Let us analyze the H1 key figures at the operating level. Sales slightly decreased by 2.6% to EUR 18.3 billion. The backlog stood at EUR 75.8 billion, stable year-on-year. Excluding Abertis contribution, EBITDA decreased by 6.8%, down to EUR 1.3 billion, and the movement in the margin is mainly due to the variation in the business mix, with high contribution of Turner, which has a lower risk profile. In fact, the main activities maintained their operating margins. EBIT decreased by 6.7% to EUR 859 million, in line with EBITDA evolution, excluding Abertis impact. The group's net profit reached EUR 361 million. Adjusting for Abertis, our net profit reached EUR 398 million, 5.1% lower year-over-year in comparable terms. As of June 30, 2020, the group had EUR 2.7 billion of net debt, equivalent to 1x annualized EBITDA. We will analyze the net debt evolution later on. At June end, the group had a strong liquidity position of EUR 13.5 billion, with a cash balance of EUR 8.5 billion plus EUR 5 billion of undrawn facilities. By activity, the sales breakdown. In Infrastructure, sales were practically unchanged to EUR 14 billion. Sales in North America had a positive evolution despite COVID-19. However, the Asia Pacific region was more affected by the outbreak and had a negative impact from the Aussie dollar depreciation. Industrial Services sales decreased by 6.9%. International activities grew by 12%, thanks to energy projects that have been developed in South America while Spain was affected by renewable project timing effects. Sales in Services were affected by standing restrictions due to COVID-19 outbreak, as I have previously mentioned regarding Clece. By activity, EBITDA construction -- Construction EBITDA down by 4.5% to EUR 1 billion, with margin valuation due to business mix with high contribution from construction management activities, mainly in the U.S. market. EBITDA from Concessions dropped to minus EUR 32 million, from plus EUR 144 million in the comparable period, driven by Abertis. As for Industrial Services, solid margin stability is underpinned by a flexible cost structure. And lastly, Services margin was mainly affected by the cost increasing of specific supplies for safety and labor-risk prevention. Let's look at net profit by activity. Construction's net profit slightly reduced by 3.7% to EUR 177 million and remained strong in Q2. Iridium's net profit reached EUR 20 million, EUR 14 million more than last year. Industrial Services delivered a resilient profit of EUR 206 million, down by 7% in line with the sales evolution, with a solid margin performance. The EUR 1 million contribution from Services is due to the COVID impact. Consequently, the group's net profit excluding Abertis reached EUR 398 million, 5.1% lower. As I already mentioned, Abertis decreased its contribution by EUR 141 million to minus EUR 37 million. Overall, total net profit amounted to EUR 361 million. Let's talk about Abertis H1 2020 results. On the next slide, we have the review since the beginning of the year. Average traffic performance in the first half year was minus 29% due to temporary lockdown measures. The traffic figures in the last weeks have improved significantly with some markets already in positive growth year-on-year. Comparable EBITDA was minus 31%, lower year-on-year and Abertis net profit pre PPA of EUR 134 million in H1 2020. Abertis profit contribution to ACS group was minus EUR 37 million, down on EUR 141 million year-over-year. On the 28th of April 2020, Abertis paid half of the EUR 875 million dividend. The other half payment is subject to verification by the Abertis Board of directors of COVID-19 impacts by year-end. On June 5, 2020, Abertis and GIC closed the acquisition of 72% of Red de Carreteras de Occidente, RCO, in Mexico. Abertis investment amounted to EUR 1.5 billion. The company maintains a strong liquidity position. A look at the free cash flow generation. During the first half of 2020, EBITDA amounted to EUR 1.345 billion. Dividends from affiliates, financial expenses, taxes and other operating items amounted to EUR 64 million, which includes 216 million dividends from Abertis. Thus, gross funds from operations, that is before working capital and CapEx, reached EUR 1.4 billion. And excluding the effect from Abertis dividend reduction, this figure is similar to that of H1 '19. The operating working capital variation in 6 months 2020 implies a cash outflow of EUR 1.6 billion, reflecting the characteristic seasonality of the period and the lesser use of factoring, which was reduced by EUR 215 million year-to-date. Operating CapEx of EUR 258 million plus EUR 176 million of operating lease payments. Therefore, free cash flow from operations stood at minus EUR 624 million. And then a look at the free cash flow factoring adjusted. As I said, the free cash flow generated in the first 6 months of the year accounted for minus EUR 624 million, EUR 590 million lower than in the first 6 months of '19. However, to make a comparable analysis, if we take a look at the free cash flow from activities adjusted by factoring and excluding the dividend from Abertis, it shows a variation of just EUR 63 million year-on-year, notwithstanding the COVID impact that you can see in the chart. Historically, our second half of the year shows strong cash flow performance, particularly in the last quarter due to the working capital seasonal effect in our operations. And we expect for this year a similar evolution. Let's look at the net debt evolution during the first half of 2020. At the end of '19, we had a net debt of EUR 54 million. From January to June 2020, gross funds from operations amounted to EUR 1.4 billion, as we have previously broken down. Working capital variation was EUR 1.6 billion. CapEx and operating leases reached EUR 434 million. ACS dividend payment and treasury stock acquisition amounted to EUR 453 million, and payments related to BICC reached EUR 809 million. Net project investments and other, which includes share acquisition by HOCHTIEF and CIMIC for nearly EUR 300 million, accounted for EUR 759 million. Backlog evolution. The backlog stood at EUR 75.8 billion, remaining stable versus H1 '19. Looking at the 4-year evolution, the CAGR stands at 6.8% plus. Our robust backlog remains highly diversified in terms of activities, geographies and risk profile. Our core countries showed a positive evolution of their backlogs: the U.S., stable in EUR 28 billion; Australia, plus 14% despite FX, thanks to strong order intake in contract mining and addition of new Services business; and Spain, growing 15%. Furthermore, we have a positive outlook based on the stimulus plans and green deal agreements as part of crisis response from governments. Some of them have been already announced. So the current project pipeline, including infra, PPPs and renewables, provides us confidence for the future. Some comments in regard of our selected awards for Q2 2020. We can include here the 5-year contract extensions to provide mining services at Lake Vermont Coal Mine in Queensland; the construction in the Wexner Medical Center Hospital in Ohio; a new facility for the U.S. Department of Transportation in Massachusetts; a contract to widen 53.6 lane miles of U.S. Highway 50 in Sacramento, California; several maintenance contracts in the oil and gas sector in Australia; renewal of services contracts for the municipality of Madrid; and several contracts for specialized facilities within Industrial Services. In addition, I will highlight that since the end of June, the group has seen a high number of new project awards: amongst others, a 900 megawatts super converter platform for the Borwin5 project in the North Sea; several contracts of construction and mining services in Australia, India and Chile. And so just to finish, I would like to highlight, first, the resilience of our operating activities driven by our strategy based on from geographic diversification of business model, notwithstanding COVID situation; secondly, the strong financial and liquidity position of over EUR 13.5 billion, supported by cash flow stability from core businesses; and finally, our robust backlog and attractive pipeline reinforces our leading position in the group's strategic markets and provides visibility. These strengths enable us to be confident about the future despite the current challenging times. Thank you very much, and we are now ready to take any questions you may have.

[Operator Instructions] The first question comes from Filipe Leite from CaixaBank, BPI.

I have 3 questions, if I may. The first one related with the EBITDA margin of Dragados. And the improvement reported in second quarter was related with some kind of provision reversal. And if you can give us the amount of that provision reversal at Dragados in second quarter of this year and also in second quarter of last year. Second question related with working capital and if you believe that it's possible to recover the entire EUR 1.6 billion outflow of the first half during the second half to reach some kind of neutrality at year-end. Because, historically, the recovery reported by you in the second half is more close to EUR 1 billion. Or if we can assume that you will end this year with some kind of working capital outflow. And last one, if you can elaborate on the reasons for the change in sale agreement of the energy assets to Galp. And is it your intention to sell the 25% stake that you will keep in the JV in the short term?

Okay. Thanks, Adrian (sic) [ Filipe ]. In light of your first question in regard of margins increases, it's something that is only due to some projects that they are going to an end. And then obviously, when you finally reach the end of the project, you can have some variations in the final results, and kind of that's what is something that is not structural. It's depending on the momentum at this moment. Fortunately, nothing to do with any reverse of provisions, but just with the business itself's performance. The second question is a good one, the recovery of the working capital. Yes, we believe that we are going, let's say, to have a strong recovery in our working capital in the second half of the year. As I said -- and if you look at the last 5 years, the working capital recovery is significantly -- for instance, just looking at the Q4 last year, we recover about EUR 1.3 billion working capital. We are aiming, let's say, to have a similar performance. If you are telling me we're going, let's say, to recover 100% of the current working capital position or not, it is very difficult, let's say, to say because we don't know exactly how the COVID will impact us in the next 2 quarters. But what is clear is that the recovery will be significantly high, and then we are confident that we can present good numbers again in working capital. And for the last question, maybe Ángel Altozano, if you...

Yes. In terms of the renewables transaction, we had an agreement with Galp that was communicated to the market, in which we are selling all our renewable assets to them, the Spanish ones. They told us in -- probably in April that they included in the transaction a financial partner with 25% stake, which, because of the COVID situation, have decided not to continue with the investments. They were able and willing to buy 35%, and we -- rather than looking for another partner, we decided to keep that 25% ourselves, which, obviously, at our -- we have a co-control situation of all the assets together with Galp. All decisions will have to be taken in agreement, and we have complete capacity to dispose of our 25% without any restriction. So basically, what we have done is temporary. We've kept this 25% stake, which can be, depending upon the market -- we will sell it sooner or later depending on how the market does. But we thought it was a very good opportunity to keep that stake because we know the asset very well, and we'll continue to develop it. So our policy of rotation of assets has not changed. So this is basically why we decided to keep it temporarily. The price and other conditions are exactly the same ones which were communicated.

Apologies for changing your name, Marcelino. I thought that you were other people. Sorry for that.

The next question comes from Bosco Ojeda from UBS.

I wanted to ask a couple of questions. First one on the operations. I was surprised to see the resiliency on some of your areas. I wanted to ask whether there's any -- you're seeing any delayed impact from the COVID situation where -- I mean how things are evolving lately. Are things getting better or you see some clients -- or key clients deteriorating? How are -- in general, how are things progressing on your core business? And also wanted to ask -- I saw your Industrial Services activity. The backlog is actually up in a tough environment. What is the driver of that? Where are you seeing the growth? And also, the margins on that extra backlog.

Okay. One of the things for the Industrial Services backlog is that due to the COVID, the construction of the renewable portfolio has been slowed down a bit. And this is why we would have a bit lower backlog if the normal rate of production had been what was anticipated. It is now being recuperated and has resumed. But obviously, there was 2 or 3 months which has seen the slowdown in production activity. But other than that, there's quite a lot of activity, of energy projects in Latin America. Brazil is probably the main country, and this is why the backlog is kept pretty much as it was.

Bosco, yes, in regard to this resilient performance, it is true. You know that our main activities in the markets that we operate and work are considered as essential activities during these lockdown periods. And the performance has been really good, not exactly the same. We are performing in Europe relatively, let's say, in a good position, even, for instance, in Germany, growing up and in other countries. And obviously, in North America, depending on the business, civil and the building business, Turner, having extraordinary good performance, and you can see in the numbers also. And Australia with, let's say, a good also performance in mining -- extraordinary good performance in mining. There is a trend in mining that you realize -- that we want, let's say, to take advantage of the current market opportunities by increasing our participation and CapEx, et cetera. And also Construction, you realize that in the last 3, 4 weeks, again, we are having a lot of new projects on board. In the second quarter, some of these -- the works were postponed. Now they are starting again to do that. Even -- we explained also in our HOCHTIEF conference call that some of the activities that were stopped for 2 years in Hong Kong, because of the [ large expenses ], again, we are starting, let's say, to be in Hong Kong, meaning that it's also good news for us, for -- starting growing up because, after 2 years, you can see that there is a kind of, let's say, lowering in our order book. That will be back. And this will help us in continuing -- let's say, keeping this kind of resilient positions. It is clear that being resilient doesn't mean that we will grow up significantly, but it's clear that we are keeping a position that is really good under the current circumstances that we believe the performance of the company is really resilient and in some cases, outstanding.

[Operator Instructions] The next question comes from Nicolas Mora from Morgan Stanley.

Just a couple of questions from me. First, just coming back on Industrial Services and the backlog. Was there just a switch between Spain and international on orders? Because there's a giant leap forward in backlog in Spain, which is not actually totally explained by lower revenues. I mean it's up EUR 1.2 billion year-on-year, up EUR 1 billion versus last quarter. Just wondering if you had actually booked a new -- potentially, a new solar PV contract. You were just shuffling contracts between different regions. And on Construction, just trying to understand a little bit the phasing of profit recognition throughout the year. So Q1 and Q2 were very good margin-wise. But should we expect a more normal, let's say, third and fourth quarter, which should better reflect basically the overall environment, which is still a bit tough, with quite a lot of uncertainty around COVID? And I'm talking especially around Dragados USA. And very last point, if I may, just on the different disposal processes you have out there, so -- whether with Galp, whether Thiess in Australia, whether with potentially other assets. I mean where are you going to put this money to work? Are you just thinking about capital structure? Are you just thinking about now lowering factoring, cleaning up the balance sheet to give the market what it wants, which is a cleaner picture on debt? Or are you looking for new ways to put that money to work?

To start with the Industrial Services activity. Basically, the growth is being -- from the new renewable projects which we are incorporating in the last couple of months. Those have been mostly in Spain. If you look at backlog in Industrial Services, at year-end, we have -- 74% of the order book was outside of Spain. And now it's only 64%. We've increased 10% in the order book that's coming from renewables in Spain.

Nicolas, regarding your comment on margins, you said Dragados, right? We can, let's say, give a general estimation, not only for Dragados but for construction activities. It is true that in the first 2 quarters, due to the situation, we were just looking at how to improve our cost situation by savings, some restructuring, how to be more efficient. And we've been implementing most of these measures through these 6 months, and we will continue doing this for the remaining of the year. And we expect, let's say, to continue having a similar range of margins based on that. Obviously, on the savings, that -- obviously, you know that usually, typically, with this kind of restructuring, kind of savings that are more structural than other things, it takes time. The time is coming, and we believe that the market is ready for that. We don't see any extraordinary different framework for competition. The competition continues being really stable and in an orderly manner, meaning that our risk management approach to new contracts continues being very prudent and with -- following the same criteria that we have been doing in the last years. And we feel confident that we can, let's say, continue keeping this kind of good performance. How can it affect us, the COVID measures in the different places? If some of the projects are going to have a shutdown or something like that, it's very difficult to predict right now. What I can say is that we've been managing such situations and just looking for solutions with our clients. And obviously, if there are some places that -- because of the corona, there are some places that are going to shut down, this could, let's say, influence the performance of the business, but not at the margins levels because, later on, you will have usually a discussion with your clients in regards to how to recover these costs that are not because of you and because of the situation. This is in regard of these margins. And then one more explanation in regard of these transactions. Well, I was saying that the trend currently in the mining market, it's very positive. It's a positive trend. The market is growing there. The needs of increasing CapEx is -- was making us to think that it could be good. Let's say, I mean, you know that we've been trying, let's say, to do this to increase our stake and the participation in the mining field because it's a very, very solid activity, and we are just looking for sharing this with other partners. You know that now, currently, we are in a process of, let's say, trying to do this, and we'll see in the next week if we can go to an end. And one of the purpose of this is -- or the second one is obviously to reinforce our balance sheet and to look at, as usually, in our capital allocation structure. We will continue seeing what is more interesting for us. But what is first is to finish this transaction. And once we finish the transaction, we will know exactly what is the position and how can we take advantage of such a position.

Okay. And if I may, just coming back on Construction. We've seen over the past few years a certain adjustment in margin in Q3, Q4 at Dragados. This is not something you would expect this year? That's the first question. And then on the situation post Thiess in Australia disposal, partial disposal, again, is it -- we've seen you making an effort cutting factoring, which the market doesn't like or fails to understand. I mean is this top of the agenda or you've got -- again, you've got better ideas or since you're keeping some of the renewables on the balance sheet, you will need that flexibility to keep going? It seems options are maybe -- options on more M&A or return to shareholders are dwindling a little bit.

Okay. Yes, the first question, it's very difficult to answer exactly if the seasonality in margins is going to be similar or not in a short period of time because, right now, even including the COVID impact, even -- it's worse. Usually, what is happening is that you have -- in a normal way, you are recirculating projects, where you -- meaning projects are coming out. And then because of that, then you have this kind of, apparently, seasonality in the margins. Introducing also the COVID impact, it's much more difficult, let's say, to predict it. What is clear is that if you look a little bit more longer, the margins will -- more or less will keep stable in this regard.

In related terms -- sorry. We just look at margins in accumulated terms, not quarterly.

Yes, not looking at margins quarterly. But that's why it's very difficult, let's say, to look at this in regards of your question. The second question, look, we are always aiming to do -- to create value for our shareholders, and this transaction is focused exactly on that. And then the total issue is that once we have the transaction cleared, finished and closed, then we will give to you, to the market all the necessary information. I will explain to you exactly how can we take advantage of everything in the transaction, the market, the mining, et cetera. And we are very positive on that. Let's wait. I'm asking you for waiting not so long. Let's wait. And once we have exactly what is coming in, we will let you know.

The next question comes from Fernando Lafuente from Alantra Equities.

Two quick ones for me, please. The first one is on the treasury shares. Just announced the cancellation of 4 million shares. I understand they are extra to the compensation from the scrip, right? Any -- if it is correct, how should we think of -- or should we consider that there could be more cancellations on top of the scrip or it's just a one-off? And the second question is on your dividend, the dividend that will be paid to ACS holders, thinking ahead of this year. Last year, you paid the 65% payout. Should we think of the dividend for 2020 to be calculated at payout terms or it's more an absolute figure? Or what are your feelings on the dividend for this year, please?

Okay. Yes. First of all, the cancellation of the 4-plus million shares is not related to the scrip. It's a one-off calculation. And then the dividend, obviously, it is not being even consider yet at this time. We have quite a long time to go, and the Board has not addressed the issue. So I cannot give you any more information. But I mean we have a 65% payout in the last year, but we have not addressed the issue for this coming year.

[Operator Instructions] There are no further questions. Dear speakers, back to you for the conclusion.

Okay. Thank you very much. And then I'm sorry for the period of the year, the 14th of August. I know that it is not the best date to do that. But thank you for attending today's conference call, and then we will keep you informed. And enjoy your vacation rest, and we will be back shortly. Thank you.

And of course, any questions -- any additional questions you have, you can e-mail or call us directly.

Yes. And wish you -- stay safe, you and your families, because this period is very challenging on that. And I wish you all the best of that and to stay safe. Thank you. Bye.