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

Good morning, and thank you for joining this first half of 2022 results presentation. As always, we'll briefly analyze the key aspects of our results, which were released yesterday followed by a Q&A session. The main figures of this first semester, sales increased by 15.6% to EUR 15.4 billion, above the pre-pandemic levels. We see significant positive currency impact due to the strengthening of the U.S. dollar. FX adjusted -- sales grew by 7.9%, thanks to the positive evolution of activities and regions. Backlog raised EUR 69.2 billion, and with a positive evolution across region and activities, adjusted by FX backlog grew by 6.5%. Worth noting is the rebound of the U.S. backlog with 8.5% increase in local currency, thanks to the senior awards of a period in which first half of the year increased by 25%. EBITDA reached EUR 816 million and EBIT stood at EUR 547 million, increased by 10.7% and 13.7%, respectively. All activities had a positive operating performance, especially highlighting the recovery of traffic of the highways of Abertis above pre-pandemic levels. Its contribution to the group doubled to EUR 64 million compared to the first half of '21. Net operating margin remained actively stable, minor deviation in operating margin reflects business variation, operation in the U.S. has a lower margin than the rest of the countries and temporary changes in the cost structure, for instance, major civil works projects in Australia that finished the channeling portion of the year. Net profit for operating margin activity interest stood at EUR 265 million, growing by 24.5%, supported by the positive performance of the business together with the acquisition of minorities of CIMIC and the push from Abertis contribution. The group net profit reached EUR 330 million and includes capital gains from asset disposal. After June '22, the group held the net cash position of EUR 1.044 billion, improving by EUR 4 billion in the last 12 months after the sale of industrial services activity in December '21. And after the acquisition of CIMIC and by approximately EUR 1 billion. Year-to-date, net cash went down by roughly EUR 1 billion, which was allocated into buy out of CIMIC minorities. Geographical breakdown. After the disposal of Industrial Services in 2021, the group sales and backlog rebalanced towards its core strategic regions. Sales from America increased up to 62%, of which 55% comes from the U.S. market, 6% from Canada and the remaining 1% from Latin America. Australia represents 19% of total sales, and Europe represents 16%, still being explained the core market of the region, representing 10% of overall sales of the group, followed by Germany and United Kingdom. The backlog shows a similar distribution with 55 allocated in New York America -- in North America, the U.S. and Canada growing by 21%. Asia Pacific is mainly represented by Australian market, whose backlog rose by 1%. Similarly, 70% of the backlog is located in Europe. Net profit by activity. Constructions net profit amounted to EUR 170 million, up by 11.7%, driven by the positive performance of operating companies together with buyout of CIMIC minorities. Concessions net profit raised to EUR 79 million, driven by a EUR 52 million contribution from Abertis in the period, while last year was less than half of it. As we said, standing general increase in traffic rates explain this growth. Service net profit reached EUR 16 million, recovering pre-pandemic level. This positive performance of the business raised net profit from operating activities to EUR 265 million, which is almost 25% year-on-year. Finally, ACS headquarter account of EUR 65 million, which includes some capital gains from the [ NI ] asset disposal as the 25% stake in the Spanish [ photovoltaic ] plant sold to Galp. Overall, the group's net profit reached EUR 330 million. Let's give some update to our operating activities. In Construction, Sales went up by 16.1%, consolidating growth trends across regions and supported by the U.S. strength. FX-adjusted construction sales grew by 7.9%. Europe and Australia experienced double digit sales growth, while more important, it is the U.S. market rebound recovering pre-pandemic hit. Our decentralized structure and low operating leverage activity support margin stability, also helped by the implementation of operating measures to mitigate the inflationary pressures and supply chain disruption. As we said before, minor deviations in operating margins reflect business mix variations, as we said, higher growth in America where margins are temporary -- lower and temporary changes in the cost structure. Construction backlog remains solid growing by 6.6% FX adjusted. Worth noting is the rebound in the U.S. backlog with 8.5% local currency growth, thanks to the significant awards in the period. We increased 25% from the first half of 2021. Getting into Concessions, EBITDA raised EUR 85 million, thanks to the outperformance of Abertis, which contributed EUR 64 million. Abertis average daily traffic in the first half rose by 17.5%, traffic level recovery demonstrates the ongoing improvement that began in the last half of 2021, showing positive traffic trends above pre-pandemic levels in more geographies. EMEA Countries performance follows France, plus 25%; Spain plus 31%; Italy plus 24%; Brazil plus 7%; Chile plus 35%; Mexico plus 11%; and U.S.A. by 3%. This positive operating performance driven principally by traffic recovery, offset the expiry of some Concessions such as [indiscernible], enabling Abertis net profit PPA to reach EUR 285 million and 8.5% increase year-on-year. Net contribution to ACS profit accounted for EUR 62 million, doubling from previous year. Also in April, Abertis distributed EUR 302 million of dividends, of which EUR 297 million to the ACS. Service activities, both sales and operating margins, evolve positively bringing back profitability to pre-pandemic levels. Retail sales reached EUR 905 million, growing by 10.7% coming from both domestic and international markets. Margins recovered to pre-pandemic levels raising EBIT with EUR 27 million. Positive evolution of the backlog to at EUR 2.7 billion, and June came both from domestic and U.K. market. ACS acquired subsidies in the U.K. contributed to the market outperformance. Year-to-date cash flow. The group generated cash flow from operations before CapEx and working capital of EUR 895 million, which is 19% better than last year's in the same period. Working capital outflow, which amounted to EUR 340 million year-on-year, is always affected by the seasonal effect. Offsetting the last 12-month, variation remains practically neutral. CapEx and operating lease payments in the first half of the year, EUR 491 million, while asset rotation amounted to EUR 77 million. After EUR 408 million cash outflow related to the ACS shareholder remuneration, during the first quarter and some minor adjustments, net cash position remains virtually stable since the beginning of the year. After the acquisition of CIMIC's minorities, which amounted to EUR 985 million, the group net cash balance at the end of June was EUR 1.04 billion. Last 12 months -- debt evolution, in the last 12 months, we see the following the funds generated from operations activities, which include asset rotation from transport and energy infrastructure drove down debt in EUR 1.1 billion. The sale of Industrial Services division in 2021, year-end implied a cash inflow of EUR 4.9 million, placing the group net cash in a net cash position. Shareholder remuneration amounted to EUR 1.1 billion. And in the first half of '22, the full cash impact of CIMIC's takeover bid implies a cash outflow of almost EUR 1 billion. Overall, we came from EUR 3 billion net debt, as of June '21, to EUR 1 billion net cash as of June '22. Recent awards. Some of our recent awards during the first half of '22, just to give you some color in Australia, alignment works for the Sydney Metro, Western Sydney Airport Rail Link with EUR 295 million development of tunneling works for the Western Harbour Tunnel in Sydney, EUR 150 million. In North America, construction of 16.2 mile light rail transited from Bethesda to New Carrollton, in Maryland, EUR 1.3 million. The construction of the Health Education Building of Lexington campus of the University of Kentucky EUR 225 billion. In Europe, the contract for widening of the riverbed of the Svrakta Rive preventing from flooding n Czech Republic, EUR 378 million, and the expansion of line 11 Metro de Madrid by adding 5 stations along 7 km for EUR 213 million, just to name a few in geography. In the last 12 months, the new awards amounted to over EUR 36 million growing by 20%. This out performance in order intake were significantly after the slowdown in 2020 due to a pandemic has driven the group's backlog to historical record highs across activities and core regions, especially in the U.S., that represents half of our backlog in Australia, where we have been able to offset the diminishing of activity in neighboring countries. This solid trend provides thne visibility confirming the positive group for the coming years. Before concluding this presentation, I'd like to give you a brief color of the current sector outlook, where we see favorable perspective for the coming years. The strong demand for infrastructure globally. This demand comes from mainly from population growth in urban areas. There are also other powerful drivers such as any transition backed by important global initiatives and commitments from countries institutions and organizations. In addition, the G20 governments have announced a USD 3.2 trillion, which is approximately 4.6% of the total GDP of these countries of infrastructure investments as a stimulus being the U.S. repurchase alone one of the most relevant with approved USD 1.2 trillion investments over the next 10 years. This is about EUR 500 billion on top of the baseline of regular investments. This plant is the largest federal investment in infrastructure ever. And the key point is that it's a full-blown need to revamp the infrastructure network in the country. Also in Australia, where the infrastructure investment budget of the federal and state governments are AUD 250 billion for the next year and in Europe with the next generation of funds. We believe we are prepared for this opportunities and also for challenges in the sector is facing, which you all know, inflation, supply chain disruptions and resource scarcity. Despite the recent event, we have been able to manage them throughout our local business and operations, focusing on client needs and efficient use of capital. And let me just to conclude, highlight the key takeaways of this first half '22. One, a strong operating performance with solid cash flow generation; two, a robust financial position even after completing CIMIC takeover with the EUR 1 billion net cash position; third, an attractive shareholder remuneration with AGM approving a stable dividend policy of EUR 2 per share. For order intake, pushing backlog to record his which provides good near-term visibility. As you see in this transition year, we continue moving forward in the simplification of our corporate structure. Our reinvestment proceeds in Concessions, I'm sure we'll have more input very soon. Thank you very much for attending this conference. And now we are ready to answer any questions that you might have.

[Operator Instructions] The first question comes from Beltran Palazuelo from DLTV.

I would like to ask a question regarding I think you just mentioned earlier, investment in Concessions directly through Abertis. Could you give a little bit more detail how you're seeing the landscape globally, let's say, with the slowdown and with more uncertainty, I see more opportunities to to reinvest your strong balance sheet in Concessions, it would be very helpful to see what you're analyzing currently.

Well, as you can imagine, we are looking at different markets and different assets. Obviously, in our core market, basically U.S. and Europe and Australia. I think we really soon will be able to provide you with the specific information once the Concessions have been obtained. But obviously, it wouldn't be wise to disclose why the negotiations are ongoing. But we have a hope that in not too long a period, we'll be able to make some announcement. My apologies for being not being more transparent, but obviously, that would handicap the negotiations.

The next question comes from Bosco Ojeda from UBS.

A couple of questions from me. The first, if I could follow up on the previous question, what do you think is your firepower for those sort of Concession investment, is it EUR 1 billion, EUR 2 billion, EUR 3 billion, EUR 5 billion? Or what sort of size do you think you could access with your current balance sheet? And second question on the Construction area, given the complexities around there on cost and number of things if you -- and what do you think is the outlook for the end of the year for margins? Are you identifying any particular works where you might have some travel or clients or any debasing payment there? Is everything under control? Or should we be a bit fearful about potential delays?

I guess as far as firepower, we don't have to show up the muscle, but you know that we are now EUR 1 billion in cash before the transaction with Industrial Services, we have close to EUR 3.5 billion net debt. So it's close to EUR 5 billion firepower. If you combine that as an equity component with addition, which you can also lever depending what type of asset, the amount is meaningful. It depends very much the type of projects and the currency that really have to take and the IR in which you're investing, but basically, we think we have a significant firepower. Also, if there were to be through Abertis, our partners, Atlantia, have manifested their willingness to contribute and so forth for the growth on a 50-50 basis. So in terms of firepower Concessions it's really more far power than attractive Concessions in the market. Obviously, there is a lot of money and investors searching the same assets. So I don't think we'll have a problem with that. In terms of construction, well, you've been in the business for quite some time. Obviously, the pressure -- inflationary pressure is real. I think we've got fairly well under control of the situation. About 40% of our backlog comes from Turner, which is a cost plus business. We've got about 35% -- 30%, 35% of our backlog, which is services, UGL and [indiscernible]. Basically, they do not have the cost of materials as a significant portion. And then the remainder, which is building, more often than not, these have escalation clauses now. In the large civil works, the ones which you have in Australia, they are mostly of them are alliance where you have cut the risk and the new projects have this escalation. So I have to give you a figure, we might have 5%, 10% of jobs, which are without inflation protection, but this is basically all we have and is being managed prudently. The purchasing in the building project, which are much order in time, you can advance from the beginning. So you have the acquisition of the raw materials close to the beginning of the jobs, so the inflation that you are going to face is pretty much the one you have considering in the bidding. So we're not very concerned with that. You have to manage it carefully, but we do not see any major problem being created by that.

[Operator Instructions] The next question comes from Fernando Lafuente from Alantra Equities

I just want to follow up on -- and I guess, the question is a little bit tricky. Just follow-up on the -- on your focus on growing in Concessions and one sentence that you said at the end of your presentation that we will hear something soon. I was wondering, obviously, I don't want you to tell me that what are you thinking of, but what should we expect going forward in this strategy to grow in Concessions? It's a strategy focused on transportation assets or could be any other Concession and not necessarily through your Abertis -- or through Abertis?

Well, as you know, Fernando, we've got here two shooting guns. The traditional brownfield normally they come through the Abertis investment portfolio. The company which scans the market, the one who knows what is going on, one. They look around, if it is a brownfield, obviously, they present it to Abertis, which normally starts in detail with the involvement of all the shareholders. If it is a greenfield, normally, the process is similar, but easy to identify, look at the construction cost with Dragados normally. After realizing the pricing, analyst makes attractive investments. Then we talk about it with Atlantia. In the past, they didn't want to get into greenfield. I think that might change. But if they say they don't like it, then we go ahead in our own route with other partners. This will probably change, I think Abertis is also continuing to participate in greenfield, but the process is the same. I think we are processing both green and brown, but we'll see how successful we are. Just to add on that probably one of the thing which has changed is that the attitude of Atlantia, which is now much more focused in the investment they've incorporated through this public offer in the shareholding. They are very united with a clear idea to grow so basically both shareholders have the same objective very much aligned, and we talk with them openly and share views and objectives. So I think this will give Abertis more time. And in the case of a renew is very easy because we are ourselves alone, and there is tremendous amount of money willing to join up with us. The experience that [indiscernible] has is very, very, very valued in the market, and we have a list of investors, which are always willing to be coming with us in the project.

Maybe -- sorry, I have a follow-up on this -- on other kind of Concessions, not transport, I mean, not the pure toll roads, are you considering looking at it?

We are looking at most everything that moves in terms of Concession. Obviously, in Europe, we do not do any investments in the renewable business outside of our agreement with Abertis. A different story is in Australia with [indiscernible] is investing and still investing in road. That is something that will continue. And there's quite a lot of opportunities in that market. We are seeing other Concessions. I must say that obviously, they don't have also in tons. We've got a few, and we look at them all, but the focus is the transportation Concession.

And the last one, sorry, are you seeing, I guess, the same levels of competition from these financial investors for Concession assets even after the increase in freights? Or has it diminished somehow?

No. The table of investors are pension companies, insurance companies and pure financial investors. And the problem they have, we have with them is that they are very aggressive in proofing returns. They were able to leave with a very low yield. That, I think, is going to change. So it's going to be a bit easier the competition we're finding people investing at 4% IRR, which obviously didn't make sense for industrial investor, but that is going to probably to be renewed.

The next question comes from Joao Safara from Banco Santander.

Just -- I mean most of my questions have been answered. Just a very quick one. I mean we've seen this quarter that you've accelerated the divestments in terms of your non-core assets. Is there -- is this something that we'll continue to see in the near future? How much there are still -- there are to sell roughly EUR 600 million, if I recall correctly, but if you could update us on that, it would be helpful.

Well, basically, as you know, we had a year of a transition. We come from a model where we have construction, industrial services and services and with a very small lag in Concession. Now we're moving to a new business model, which is construction, concession and services. So we are changing from one model to the other, which, obviously, implies deploying the capital we obtained into Concessions and also simplification of the group. Having that in mind, we have some assets which come from our old industrial services activity, which we have for sale. It is not burning in our pocket, so we can keep them for a while. But as long as we see a price which really recognizes when we perceive this value, we'll sell them. So we keep on seeing this rotation of assets, but without tremendous urgency, you will see we think that the market is going to improve a few months later, we'll wait. We think it's basically there, we'll sell them. And there is appetite for these type of assets. So we'll sell them, but without huge capital gains because those assets were putting in market value when the transaction took place. So it's more generating liquidity, maybe give or take a few millions in capital gain, but nothing outstanding.

Just a follow-up question on -- regarding the capital gain. The EUR 65 million you booked as discontinued operations, is this all the capital gain? And is this all related with solar PV or it also includes the wind power assets in LatAm?

A portion of that, I think EUR 30-some million is incorporated there.

How much, sorry?

EUR 30 million -- EUR 35 million, EUR 36 million is the wind asset.

[Operator Instructions] Ladies and gentlemen, there are no further questions. Dear speakers, back to you.

Okay. Then there are no further questions, thank you very much for attending. I guess we're always available if you have any consideration on the numbers after looking at them thoroughly. You can call us and we are at your disposal. And again, [indiscernible] is very hot in those which are in this neighborhood, welcome to new holidays. Have a happy summer. Thank you very much.