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

Good morning, and thank you very much for attending this video conference for the earnings presentation for ACS 2021. I really hope that next year, we'll be able to hold this event with a live audience and that we will have a chance to meet up with so many of you who usually attend our presentations at our headquarters. I'm here with our Corporate General Manager, Mr. Ángel García Altozano. And as usual, at the end of the presentation, we'll open a Q&A in order to respond to any queries that you might send us through the system that we've established for that on our website. During my introduction, I will go into the 5 basic themes that have defined the group's performance in 2021, which will determine ACS' future in coming years. First of all, I'd like to underline the excellent performance of our businesses in an environment which is still hard hit by the COVID-19 pandemic, which we hope is, soon, is going to come to an end. In the first part of the presentation, I will analyze the main financial and operational metrics for the group, which, as you know, has obtained the biggest net profit ever with EUR 3.045 billion, net profit which includes capital gains obtained from the divestment of our industrial business to the French group, VINCI. I'd like to point out, however, that this transaction, which I will describe later, is part of a broader agreement with VINCI, which includes the establishment of a joint venture for the development of renewable energy assets all over the world, which we're particularly excited about. Finally, also, the revenue obtained through the sale of our Industrial Services business, the EUR 5 billion, we'll be allocating, as I've always said, essentially to investing in infrastructure concession projects. I'll talk in more detail about this later as well. I'd also like to spend a few minutes on our corporate simplification plans, which we're currently implementing, including the -- that we published yesterday for 21.4% of CIMIC shares. We know that a well-managed dynamic organization is essential for value creation. And that's why we have made these decisions and why we will be making changes in our corporate governance structure. Finally, I'll focus our boost towards sustainability where we want to become a global model in our sector. After this introduction, let me just sum up the most relevant aspects of 2021's earnings. As I've explained, both our Construction and our Concessions and Services businesses have had an excellent net performance with EUR 1.6 billion EBITDA, which 16% up on 2019 -- 2021. Net ordinary profit, including the contribution of Industrial Services in the year, was EUR 720 million. That's 33% higher in like-for-like terms. I'd also like to underscore the strong recovery of new contracts, up 41% after the very difficult 2020 due to the impact of the pandemic. As a result, our backlog is currently at a record high of over EUR 67 billion. Thirdly, I'd like to mention the group's excellent financial position, which enables us to undertake major investments for our group's strategic development. As you know, with the income generated through the sale of our industrial business, the group has a net cash position of EUR 2 billion. Our main operational metrics in 2021 were the following. Turnover was EUR 27.83 billion. That's a number that is similar to the previous years in like-for-like terms. That is without considering Industrial Services in either year and adjusting last year for the sale of 50% of Thiess and the impact of Gorgon Project in Australia. Total production increased by 2.5%, demonstrating the recovery that we had predicted a year ago. Production includes 50% of Thiess plus the joint ventures that we do not consolidate essentially in America. Our backlog is at EUR 67.262 billion. That's 11.3% higher than in 2020 in like-for-like terms and back to the activity levels before the pandemic. Our EBITDA is EUR 1.598 billion. That's up 16%. Also, our EBIT -- ordinary EBIT has reached EUR 1.084 billion. That's up 15%. And finally, net cash flow from operations before the capital -- the variations in working capital investments is at EUR 1.073 billion. That's up 75% in like-for-like terms. That is without contributing -- without the contributions of Industrial Services or Thiess in either year. On the other hand, the evolution of our main financial metrics in 2021 are as follows. Net attributable profit was EUR 3.045 billion. As I mentioned, 2021 included one-off positive impacts for a total of EUR 2.325 billion, mostly due to the net capital gains obtained through the divestment of Industrial Services. Without these impacts, net profit was EUR 720 million. That's 33% higher than the previous year, thanks to the recovery of Abertis. The group's financial position was at EUR 2 billion net cash. And our net equity is above EUR 7 billion with a substantial increase after the closing of the Industrial Services divestment. We've also reduced our factoring balance by EUR 426 million to EUR 1 billion, which is equivalent to 3.6% of the group's total turnover, which means that in the last 2 years, we've reduced our group's factoring balance by approximately EUR 1.2 billion. Turning to a bit more detail on our turnover. I'd like to point out that our revenue sources are highly diversified by businesses and countries with a strong presence in the most developed economies. Regions where the group is generating earnings are the U.S. and Canada with turnover representing 53% and 6%, respectively, of total production; Australia with 19%; Spain with 11%; and the Rest of Europe with 7%; and the remaining 4% includes Asia with 3%; and Latin America with 1%. On the chart, you can see the evolution of each market in like-for-like terms that is adjusting for the impact of the exchange rate, which overall has had an impact of 0.5% on our turnover. Our backlog at the end of 2021 was EUR 67.262 billion with a breakdown which is similar to that of our sales. I think it's important to point out that approximately 97% of our backlog comes from developed economies, particularly the U.S. with 45% of our backlog, up 4% in local currency; Canada with 4%; Australia with 29% of the total and up 12% in like-for-like terms, considering the adjustments with the divestment of 50% of Thiess and the exchange impact. And our backlog in Europe is 18% of the total and up 11%. Of this European backlog, 8% Spain, up 12%; and the remaining 10% is in Germany, the U.K. and Poland mostly. This excellent evolution of our backlog in 2021 confirms the growth trends we have seen in the last few years, which were interrupted by the global COVID-19 pandemic in 2020, where contracts or contract flows slowed down. In 2021, new contract levels have come back to normal, and we expect strong growth in 2022, 2023 in the group's strategic markets, mostly North America and Australia. Main new awards for the group were: in Australia, construction and operation of 2 tunnels in Melbourne for EUR 2.465 billion; development of the first Section of the M6 Sydney Highway in New South Wales for EUR 1.234 billion; and the CopperString 2.0 project for the construction of a high-voltage transmission line in Queensland for EUR 1.092 billion; operation and maintenance of the regional railway line of the country for 10 years in New South Wales for EUR 958 million; design and construction of 9.8 kilometers of tunnels -- tunneling for stations of the Sydney Metro and the West Sydney Airport station for EUR 957 million (sic) [ EUR 857 million ]. In North America, consultancy services prior to the construction of the physics and engineering building at Yale University, New Haven, for EUR 306 million; extension and refurbishment of the I-95 in North Carolina for EUR 243 million. And in Europe, I'd point out the design and construction of the high-speed railway station in Birmingham, U.K., for EUR 313 million; and here in Spain, the building of an Amazon logistics warehouse in Asturias for EUR 161 million; as well as, of course, various service contracts for Clece in Spain for EUR 702 million. Moving to construction. Our turnover was EUR 25.879 billion. In Australia, CIMIC's contribution has recovered strongly after the delays caused by the pandemic and is up 36%. U.S. and Canada represent together about 64% of this business area's turnover and have shown a solid recovery in the second semester of the year, up 8.6% versus Q1. Sales in Spain, which are 6% of our Construction business, are up 2.8%; whilst in Germany, with 4% of our turnover, they are up 8%. EBITDA from Construction was up 1%, up to EUR 1.275 billion. And net ordinary profit, excluding the one-off impacts in HOCHTIEF through the arbitrage of the Alto Maipo contract in Chile, was EUR 273 million. That's 3.8% more than the previous year. The positive outlook we have for our main markets and the large backlog of awarded projects in the last quarters, ACS is being very optimistic on the evolution of our Construction business in 2022, we expect growth to exceed 5%. Abertis is also showing a solid recovery with average traffic growth of 21%, with positive traffic volume trends at levels equal or higher than those of 2019. As a result, the contribution in 2021 to ACS' net profit was EUR 117 million, and it was minus EUR 35 million the previous year. Also, this recovery in mean daily traffic, together with the incorporation of our new toll highways in the U.S. Elizabeth River Crossing and Mexico RCO, whereof its traffic is higher than before the pandemic, have allowed Abertis to achieve revenues of EUR 4.8 billion, up 20% and an EBITDA of EUR 3.351 billion, up 28%. Now 2021, Abertis signed contract with the Chilean government to build a tunnel to improve mobility in one of the most congested areas of Santiago. The total investment in the project will be over EUR 300 million in exchange for an extension on the Autopista Central concession for an additional 20 months. We've also reached an agreement to take over Alienor's stake of 35% and Sanef Aquitaine, which is 100% to Eiffage for a total amount of EUR 222 million. These 2 transactions are part of Abertis' strategy of divesting of minority stakes in order to use the revenues to invest in new projects in order to continue replacing the group's cash flows. Iridium has brought in EUR 50 million in net profit, boosted by greater contribution of new concessions and the divestment of various assets such as the Toledo Hospital or the Baixo Alentejo highway. Moving on now to social services turnover in 2021 were EUR 1.643 billion, up 1.5% with respect to the previous year and back to normal levels after the impact of COVID on its business during the previous year. Contribution of national market is 92% of turnover. That's up 18%. Whilst the European market, mainly the U.K., 8% and grew 4.6% in the year. We're very proud to have Clece within our group because of the social services it provides regardless of different circumstances right now with the pandemic and also because of its contribution to a fairer society in those markets where it operates. In 2021, the ACS Group's activities generated, this is before working capital variations and operating investments, a total of EUR 1.073 billion in gross operating cash flow. The split was approximately 70% for Construction services activities and 30% came from the Concessions business. Operating cash flows after the deduction for operating investments and the working capital variation amounted to EUR 558 million. This figure is 50% higher than the figure recorded in 2020 despite the fact that Abertis' dividend fell by 32%. And that confirms the trend in recovery for the construction activities, especially in Australia, where the impact has been greater. As you already know, the group's net profit in 2021 amounted to EUR 3.045 billion. Out of that figure, EUR 2.325 billion correspond to extraordinary impact, mainly the net capital gain for the sale of our Industrial Services business. That means that the ordinary net profit totaled EUR 720 million, 33% up on the ordinary net profit figure recorded in the previous year as you can see in this chart. Now this increase is largely due to Abertis' recovery. Abertis' contribution increased by EUR 152 million. The contribution of each activity to the ordinary net profit is as follows. Construction made an ordinary net profit of EUR 273 million, 3.8% up on the previous year. Concessions generated EUR 167 million in net profit. EUR 117 million out of that figure correspond to Abertis, which, in 2020, made a negative contribution to profit of EUR 35 million. Industrial Services obtained an ordinary net profit figure of EUR 328 million. That's up 5.1%. Lastly, Services made a net profit of EUR 29 million. That's 64.5% higher than the previous year, following the impact of pandemic in 2020. Let me, if I could, give you some details of the impacts from the sale of Industrial Services on our 2021 financial results as well as other nonrecurring results booked during the year. The net capital gain for the sale of Industrial Services amounted to EUR 2.909 billion after the accounting elimination of tax credits that we had registered on our balance sheet without any cash-out impact. Now after the sale of Industrial Services now no longer in accounting scope, we have felt it was appropriate to cancel in accounting terms those credits that are still valid and will be valid from a tax point of view as we move forward. Other nonrecurring results include the provisions that were booked for the reassessment of operating risk amounting to EUR 479 million and the losses incurred by HOCHTIEF for the unfavorable arbitration claim in Chile that was for a value of EUR 102 million. The ACS Group at the close of 2021 had a net cash position of EUR 2.009 billion. This major improvement in the group's financial position is essentially due to the closure of the Industrial Services business, which had a net impact of more than EUR 4.1 billion. Specifically, we -- after the proceeds of the transaction was EUR 4.98 billion. And at the start of the year, we deconsolidated the activity, which had a cash figure of EUR 859 million. The ACS Group has earmarked EUR 879 million to remuneration for shareholders and minorities. And out of that figure, EUR 488 million have been reserved to pay out dividends for ACS, EUR 204 million to the buyback of treasury stock of and EUR 187 million for minorities. You may already be familiar with the details of the agreement reached with VINCI. But let me, if I could, remind you of some of the key elements of that agreement, which entail a major transformation in our strategy in the group. First of all, the sale of our industrial activity for a total figure of EUR 5.58 billion can be broken down as following. EUR 4.902 billion, cash payment received on the 30th December on the signing of the transaction; EUR 78 million that were collected during the year in dividends; and EUR 600 million as an earn-out linked to the renewable energies portfolio that Cobra has identified all over the world. We're talking about EUR 40 million per gigawatt. This agreement also includes the creation of a joint venture to develop the renewables portfolio that ACS and VINCI are going to develop over the next few years. That means a major investment opportunity with a 49% stake in a company. That will be developing, as I said, the renewable energy assets in the portfolio of at least 15 gigawatts during this decade. We will be reserving for this project some of the funds that were earned through the divestment. I also want to point out the value of the assets that we are retaining. Over EUR 1 billion is the value, and they correspond to several wind farms in Latin America with an install capacity of more than 300 megawattss, 3 CSP plants with an install capacity of 260 megawatts, that's in Spain, United States of America and South Africa. And there's also the Kincardine offshore wind project in Scotland, 50 megawatts, and a number of desalination plants, water treatment plants and gas storage facilities. All in all then, this transaction has allowed us to unlock the value of the Industrial Services business, EUR 6.6 billion in total and to address with a robust financial position, the challenges of investment and growth in the infrastructure sector moving forward. The first strategic goal is the investment in the development and operation of infrastructure concession assets, which will allow us to increase the weight of our assets with more recurring cash flow and strike a balance between different sources of generation of funds between Construction/Concessions without giving up either of them. We believe both in Construction and in our Concessions business, and this will give us greater visibility on future results and dividends in the group. And to do that, we're going to use the 2 drivers for growth and investment that we have. We have Abertis for the mid-tier projects or brownfield projects, and Iridium for new or greenfield projects, focusing on strategic markets in the group. And I mentioned that before, didn't I, North America, Australia, Europe, including Spain and Germany, where we are a leading reference player in the sector. Turning now to the simplification of the group's corporate structure, and we have taken already the first step. But towards that simplification with the recent tender offer on the remaining 21.4% of CIMIC with an investment of close to AUD 1.5 billion, EUR 950 million, approximately in equivalent terms, we are planning to totally integrate CIMIC in the organization, promote its growth in a very attractive future with a great upside. The conditions of the offer were detailed last Wednesday by the CEO of HOCHTIEF in their annual results presentation. But I'd like to remind you of some key points in that. The final price of AUD 22 per share with no possibility to modify that, the tender offer is on 21.4% of the capital. This is not controlled by HOCHTIEF at the moment. That's equivalent to 66.6 million shares, and it's unconditional. Another way, there's no limit with regard to acceptance of the offer. And the period we're talking about is 6 weeks. That is up until the deadline of 9th of April. We believe that these conditions are highly attractive for CIMIC's minority shareholders. Likewise, in this corporate simplification or streamlining process, we are going to bring our corporate governance into line with the new stage of the group and also make sure we're fully aligned with international best practices with regard to governance sustainability. That is why the next Annual General Shareholders Meeting to be held in May, we will be proposing to increase the independence and diversity of the Board of Directors, the appointment of a new CEO for the group and to reinforce our Audit Committee with regard to sustainability. It will actually be -- the name will be changed to Audit and Sustainability Committee. This determined commitment to sustainability has always been part and parcel of the history of our group. Environmental aspects, health and safety at work, social integration, corporate ethics have always all played a key role in ACS' culture. And we're very much aware of the responsibilities that we have vis-a-vis difference stakeholders that form part of our community. That is why we have launched our new 2025 Master Plan with 3 fundamental themes and a clear goal to drive global sustainability of the infrastructures as a leading company in the sector. In fact, the ACS Group is the leading construction company in the U.S., Australia, Germany and Spain. It's also a benchmark company in the Concessions business through Abertis and Iridium. These 3 themes are: promoting the global transition to sustainable infrastructures; to be a key partner in economic development and then to integrate into the company specialized and diverse talent; and to also be a key player in business practices, good business practices with committed governance and commitment to sustainability. That is why we want to give importance because it serves the sustainable development in the group. We continue to align our interest with society's interest and to drive forward with the measures that will make us more efficient and more environmentally friendly and reinforce our social factor and with regards to security, diversity, better human resources to make sure that we can continue to promote an ethically responsible business culture. The detailed aims of the sustainability plan that we have in the group, you can read those on our website that I've already posted. But let me just summarize the 17 priority goals for you here. The reduction of greenhouse gas effect emissions, our aim is to reach a climate-neutral position in our operations by 2045. And we've committed to reduce in 2025 -- by 2025 15% of our scope 1 emissions, 30% of our scope 2 emissions, and this is compared to 2019. We're also committed to increasing diversity in our workforce, especially in personal responsibility. Specifically, we are expecting to increase by 25% the number of women in our senior management post in the whole group. And we also have a commitment to training with regard to governance, sustainability and compliance so that we can reinforce our corporate culture and the corporate culture of our suppliers in such key areas. All in all, essentially, we are a global leader in the infrastructure sector with a large backlog of products in strategic markets, combining our proven operational efficiency and strong financial position that responds to the global challenges of the sector with a dynamic, competitive and sustainable model, led by 120,000 people in more than 35 countries, and they will allow us to continue to grow profitably in the future. Thank you very much. And it's now time for our Q&A session.

We have several questions essentially on 2 topics, one on the strategy. And the first question is from Luis Prieto from Kepler, who's asking, what other simplification measures might you consider as well as that bid on CIMIC's minority stakes?

Well, as I said before, the divestment of our industrial activity will definitely enable us to simplify the group's structure, which, as we all know, we have a listed company, which owns another listed company, which in turn owns another listed company. And they all have construction and some concession businesses. And so this first step, for simplification, will mean we'll no longer have 3 different listed companies, but just 2. And also, we're working, as I said many times, to see what we might do with these billions in revenue that we've obtained from the divestment of our Industrial business. As I've said, of course, we strongly believe in Construction, but we also want to focus on Concessions. And we're working to see which infrastructure projects, particularly concession projects we should invest in. All I can say is that we're working on it. We've identified some opportunities already. And well, I think towards the end of this month, when I think we will be publishing the call for the general shareholders meeting, we'll have more information on these decisions and we'll be able to share them, but basically staying along the same lines. And of course, we're always working to see how we might be able to merge or concentrate on Construction businesses or Concession businesses. On the other hand, very soon, you may hear of some moves in that direction.

Well, I think that's also answered the next question from Bosco Ojeda from UBS, who's saying that over the last few years, you've sold a lot of businesses, services, Thiess, concessions. You're selling Zero-E. You sold Urbaser. Aren't you divesting too much too quickly? Can you make a guarantee that you will be able to continue growing your business by making new investments in the last 2 or 3 years? Well, he's asking about new investments. He's saying that we have been divesting a lot.

Well, as I said, this transaction will help us to simplify. We've already started to simplify our structure, and we'll continue to do so. And of course, what we will do is to invest in opportunities between EUR 4 billion and EUR 5 billion in infrastructures and if possible in concessions.

Okay. And I think all these questions about strategy are essentially the same question. So all the 10 questions that have come in about the strategy are basically the same. But about the earnings, there's several questions. One, which is asking for more detail on the provisions for operating risks of EUR 479 million this year. Ángel, do you want to answer that?

Okay. I'm sorry, I think you couldn't hear that. My microphone was off. I'll repeat. Basically, of the EUR 480 million, well, there's 2 groups: there's one EUR 300 million provision -- portfolio provision for working capital and litigation risks, different projects and contracts and litigation has pending; and then one for EUR 165 million provisioning the Tonopah asset in Nevada, which will have a capacity lower than the design capacity. And so we've provisioned that because we will not be reaching the design capacity. So that's the 2 main items we have for risk provisions.

There's another question that's come in. It's come in by -- from Fernando Lafuente from Alantra. He's asking what are we trying to achieve with CIMIC? Are we going to restructure it? Are we going to sell it here? And he's also asking how we're going to finance or how HOCHTIEF will actually be financing the purchase of CIMIC?

CIMIC has activities, and it will continue to develop those business activities as before. But it will be integrated in the future in HOCHTIEF. At the moment, we have not done anything more than that. And that in itself is a major simplification with regard to overheads, et cetera, because it will be part of HOCHTIEF's activity. How will it be funded? The HOCHTIEF's CEO said himself in different ways, it could be financed. For instance, with the hybrid bond, with credit, putting -- selling off an asset, for instance. That might be a good option for that. That 20% of Abertis in HOCHTIEF might actually come over to ACS. In other words, we could bring all the concession activities under the umbrella of ACS. We're working on that option, too. So as I said, it's going to allow us to reorganize the group in between Concessions and Construction. That's what the money will be used for. And of course, there will be these infrastructure projects that we will have a EUR 4 billion there.

Fernando is also asking about whether there will any impact on our Construction business because of increases in construction materials or wages? And if there are additional costs there, are you managing to pass them on to our clients, your customers? Can you give us an overall picture?

Well, there is, yes, a general trend in the sector to identify concrete project risks and to share them with clients. This is done differently in different parts of the world. You can have alliance or contracts, progressive guarantee price. Essentially, what all of these are trying to do is to identify the risk, put them together and share them with the clients so that the contractor doesn't have to totally take on those risks. It has 2 effects though: one, advances are reduced; and two, that the gross margin might be slightly lower, although you would expect perhaps the net margin would be the same or better because risk would be reduced quite significantly. We don't see that there will be a major downturn there for us because there was always a few risks in the projects that we're taking on.

Another question actually has come in several times on dividend policy, on the payout policy. Some are asking specifically about the dividend for this year. But many others are asking whether we will be changing our payout policy thereafter if we have a long-term strategy? And could you give more color on that?

Well, with this divestment and with our current ability to invest, we are working on a payout policy we want to be as stable as possible, and so I'm speaking to the directors. And we had a Board of Directors meeting yesterday, by the way. And our aim is to propose to the general shareholders meeting a dividend of about EUR 2 per share, and we maintain that level for the following years.

There's other questions, more technical questions. For example, Filipe Leite from CaixaBank, is asking whether we could give some additional explanation on the compensations for the AP-7 that Abertis is currently negotiating with the government.

Well, the AP-7, as you know, there were 2 types -- in the agreement, there were 2 types of remuneration, one for the capital invested in the extension. It was just over EUR 1 billion. And that's been recognized by the government. And we expect to be paid that this next month. And then there was another compensation for the fall in traffic volume as a result of the works and because of BICC, and so we're waiting to see their response to our claim. It hasn't been resolved yet. It was net EUR 3 billion approximately after taxes. And we -- first court ruled in our favor, then there was an appeal. So it's going to take a few months. But we hope to be able to receive a significant part of that.

Nicolas Mora from Morgan Stanley is asking us about Dragados. The question is whether there's any intention to integrate Dragados in HOCHTIEF or whether there is any possibility of combining it or coordinating with us? And there's also a question about possible investment and concessions and what are our strategic markets that we are looking towards.

Let me answer that second part of the question. The strategic markets that we are identifying are markets where there are highways, toll road concessions such as the U.S. there are lots of different highways and we're competing there against investment funds or pension funds. But anyway, there are lots of different to toll roads, highways there that we are examining. And we will, of course, go for those projects where there is certainty that we have the best guarantees. You know that in Abertis, we have invested in 2 toll roads, one is in Mexico, one is in the U.S. We're still looking around. We're still seeking others. And some will be for Abertis and some for us. And that first question. What was the first question?

Yes. The first question was about Dragados, it was a suggestion.

Yes, you're right. It's -- for concessions, we have 30% Abertis and 20% is with HOCHTIEF. Yes, we're starting to work -- to look at whether we can actually bring these parts together. And we have our Construction company in the States as well and Dragados is there too. So yes, we're also working on that element of simplification activities to see what we can do together in a unified fashion.

Before I move on to the next questions, there are some investors and analysts who are asking about the EUR 479 million in provisions. We have already explained that EUR 300 million for operating businesses, essentially Construction. Whether we expect that to be released or whether it's going to be an outlay eventually. Well, there's a bit of everything. Most of it are costs that have already been incurred. And so perhaps in some litigation, we might receive some compensation. But most of that amount, we don't expect for it to becoming cash outlay. Okay. Another question that we've been asked for the suggestion that you might, for instance, acquire 20% of HOCHTIEF. There's a very specific question from CaixaBank about whether you need authorization from Atlantia for that transaction.

Well, Whatever we do in HOCHTIEF, of course, we will do together with our partner, Atlantia and an agreement with them.

In general, there's also a few technical questions that we will answer directly by e-mail from Investor Relations, but there's really nothing else to answer now.

Well, in that case, if there's nothing else. Thank you very much for your questions and for attending this earnings presentation. And I hope that all of these goals that we have defined for this year, which are very ambitious, will be achieved as a result of this major divestment that we've made and that they will enable us to continue with our current payout policy and to keep growing and to simplify the group structure and to have a governance policy as I've just described. Thank you very much, everyone. Thank you.