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

Everybody, as you know, we have FCC present this morning the earnings of the group. My name is Miguel Coronel, as you already know, Director for Markets in the group. And as you know, this morning, we presented the earnings of the group for 2020. I want to repeat, as a preliminary comment, that this has been very tough year. But in spite of that, all across -- the different quarters have had a very stable performance across all of our activities. We have had a high degree of activity in terms of our services across all our main business areas, and this has shown our public service company nature because we deal with the basic services. We offer basic services to public and private customers. Our operational -- our EBITDA was quite significant. It was an increase of 2.1% with respect to the previous financial year. And as I said before, in terms of essential services, I would like to specifically refer to the greater contribution of cement and transport concessions. The net attributable earnings was also a significant figure. It was slightly lower than the previous year by 1.7%. And taking into account that the net earnings of the year, apart from different nonrecurrent elements, well, it shows negative currency differences of about EUR 51 million whereas, in 2019, the figure was EUR 14 million (sic) [ EUR 15 million ]. But this negative impact doesn't have any consequence on our treasury position or on our cash flow. If we go into detail into the different headings, if we look at the turnover, well, it was over EUR 6 billion. And across all our activities, of course, the measures taken because of COVID had their effect. Water and Environment, the most significant in the group, they had the ended the year in a very stable way. Specifically, if we look at the different geographies in the Spanish market, revenues by 6% to EUR 3.6 billion. If you look at Environment, Spain urban waste collection, which, of course, has been considered essential, behaved very stably and compensated for the reductions in certain service, which were considered not essential, especially during the strict lockdown. In terms of water cycle, there was a slight reduction in volumes and volumes build, especially for some types of nonresidential customers and in some tourist areas, and there was a lower contribution of technologies and networks. But on the whole, the evolution was quite stable. As regards Construction, well, there was a significant increase in revenues because last year, in spite of all the difficulties we experienced, we had a significant volume of projects that were assigned to us. So we managed to keep a positive execution pace, and we also compensated for the impact of lower activities because of the restrictions between March to May. In terms of Cement, there was a reduction volumes in the domestic market, which was influenced by the different measures but, which later on, were compensated for by a series of measures which were also taken by the business unit. Another important market for us, which is the U.K., the revenues generated focused basically in the environment area, well, there was a reduction of 9%. And here, we were affected by waste treatment because the volume was lower because of the lockdown measures, and it was combined with a lower contribution because of the -- because of some problems in our Edinburgh treatment plant. Another important market for us in Europe is the Czech Republic, but there was a slight reduction of 0.6%. Here, fundamentally, this is a currency effect because of the fall in the Czech krona. But in local currency, there was a slight growth in different areas in this market, such as Environment and others. In other countries within the European Union, we also -- we did have a growth of over 9%, EUR 803 million, especially in the area of Construction because we signed a new contract in the Netherlands for the construction of a highway and also in Water because of the greater contribution of the integral water cycle in the north of Paris with acquisitions that we conducted in 2009. In the Central European markets, Austria and others, in Central Europe, from Poland to Romania, we had very stable activity also because of the nature of our environmental services, very well sustained across the whole year. Now if we leave Europe and we look at Middle East and Africa, we had a reduction of 19% in our revenues. In Construction, we had a series of delays and stoppages. You may have heard that the lockdown measures in some countries were extremely strict, in Saudi Arabia, for example. But in other activities which were less linked to project development, such as Water, we managed to sustain our activity. The last geography, which is important for the group, is the Americas, both Latin America and the United States. We also had a reduction because the execution of our projects, well, was quite slow in the same way as in EMEA; also, the development of projects in the Water sector; and there were some specific countries where the lockdown measures were extremely strict, especially in countries in Latin America. However, in the United States, we did have a greater contribution, especially because, in the United States, we are basically concerned with environmental activities, basically waste collection activities, especially from households. So as a public service, we didn't face too many variations, and the incorporation of new contracts led to a very positive increase. Now I will refer more specifically to the different business areas now. I will start by the Environment and urban waste management. There was a contribution of -- well, it contributed almost 50% of our revenues. The turnover in the environment area was very similar to that of 2019. It reached EUR 2.88 billion. In terms of activities within the urban waste management, waste collection and associated activities such as street cleaning, well, remained stable. There were new contracts, especially in the southern states of the United States. Specifically, in terms of waste treatment in the United Kingdom, we had -- we were a little bit affected cause of private customers or households, together with public customers, and also because the Edinburgh plant had a lower contribution. It took away about EUR 15 million from the revenues. In Spain, as I said before, activity, well, evolved very positively. Taking into account the situation, it increased by 0.8%. Revenues were EUR 1.7 billion, very stable across all the different phases of the business even -- it needs to be remembered that last year, in the treatment activity, we also had a positive performance because we were developing different plants, amongst them, the one in Loeches in the Madrid region. Now in the U.K., the turnover for the Environment was 11% lower. It went down to EUR 600 million. In this sector, we had a reduction in the activity, especially for tertiary customers. This is a one-off effect that could not be avoided and a lower contribution, as I said, because of the Edinburgh plant in Europe, and the activity will be very stable, EUR 464 million. And if I mentioned some countries, I would say that we had a recovery in our activities in Poland whereas, in the rest of the countries, business stayed very stable. As I said, in the United States, there was a significant contribution of contracts in Florida and Palm Beach, and growth in Environment was significant in this jurisdiction, over 58%. The EBITDA in the Environment reached EUR 450.9 million as a result of the revenues and particularly because of the activities that we had in different treatment plants, especially in the U.K. Well, we should mention that we had some outages -- or we had to stop operating some of the plants temporarily. Now the second area would be that of the water cycles with Aqualia. Revenues have also remained very stable, EUR 1.1 billion. We had a higher contribution from the integral water cycle business. As I said before, there was a higher contribution, especially from contracts in France, Colombia and Saudi Arabia, in fact -- in spite of the fact that there was a slight reduction in activities in some areas because of the lower volumes, because of the pandemic in some market. The technology and network activity, which is really a support activity to operations and integral cycle, also had lower rhythm in terms of the execution of some projects as a result of the temporary disruptions we had to face, especially in the development of some international projects. Now if we go into greater detail of the different markets. In Spain, revenues in Water were over EUR 700 million. There was a reduction of 2.5% because of the fall in volume, especially in some tourist areas, in some tertiary customers, nondomestic customers, but it was compensated for by the commissioning of some new maintenance contracts, for example, maintenance -- network maintenance operations in areas like Madrid. I also wanted to mention that ordinary maintenance in technology and network linked to our concessions were also attenuated because of the lockdown measures, so they were just limited to what was strictly necessary, and that also contributed to the slight fall of 2.5%. Now internationally, EMEA revenues did grow by 44%, EUR 163 million we recorded. Here, we had a good progression in the development of some contracts, which are also extremely important in markets like Egypt as well as the contribution of a set of companies that were acquired. These are water cycle companies in Saudi Arabia, which had a positive performance. As far as Central Europe is concerned, led by the Czech Republic, revenues grew by 6%, reaching EUR 105 million. It is true that we had lower activities in some countries because of -- in the network and technology area, but the most significant market, which is the Czech market where we own a network, in spite of the fact that there was a slight drop in consumption, the increase in tariffs compensated for that. And in smaller markets like France, we had -- we managed to grow. But -- and the revenues increased by 10.3% in that jurisdiction. In Latin America, revenues went down to EUR 57.4 million because of the lower pace in network and technology and also because of the end of the works in some plants that had been under development. So with all of this, the EBITDA for the water cycle reached a significant -- well, a slight increase and reached EUR 288 million. And concessions are now a dominant activity. They account for 90% of the EBITDA, and this allowed us to maintain our margins at levels close to 24%. Now having looked at utilities and taking into account the solid evolution we've had, I will now turn to the activities that are closer to Construction and the development of all sorts of constructions here. Revenues dropped by 6% to EUR 1.6 billion. I already mentioned that we were basically affected by the restrictions imposed in Latin America and in the Middle East which were, to a certain extent, compensated for by the greater pace of activity that we had in Europe, particularly in Spain. I already mentioned that specifically in Spain, in the construction sector, there was a growth of 27.6% to EUR 848 million. And there were many very -- very many important projects that were conducted, including the Santiago Bernabeu football grounds and the implementation of other contracts that made it possible for us to reach that 2-digit increase in our revenues. In other European markets, our turnover grew also significantly by 24% and with revenues of EUR 390 million. And here, we implemented contracts for highways, such as in the Netherlands, in Norway. And also, we worked in the Romanian airport of Bacau. Then in other areas, the situation was different. In transport, for example, in the Riyadh metro, we're about to finish that construction in Saudi Arabia. Well, that project was affected by the strong restriction measures taken by the Saudi government, which persisted for most of 2020, and which would only progressively recover, but this had an impact. As regards to the Americas, the turnover went down by 62.9%. We had a lower contribution from some projects which had come to an end, for example, Line 2 of the Panama Metro or the conclusion of the Gerald Desmond Bridge in the Los Angeles Harbor. And also we had a slowing down in other markets. But EBITDA was EUR 53.6 million in construction, which is not bad, compared with the EUR 100 million that we reached in 2019. So this is because a combination of the lower activity and the slower execution in some areas, together with our prudent approach to endow provisions. Now the second activity related to the construction cycle is Cement. And here, revenues down to EUR 382 million. Here, we already had a reduction in volumes in our local markets because we -- in the markets where we produce and we sell. This is Spain and Tunisia. Also, our export activities from Spain and Tunisia were also heavily impacted. In the case of the Spanish market, more specifically, the turnover went down. But it went down less than in other areas, EUR 237 million. We had a fall in demand of almost 2 digits in volumes, especially in the first half of the year. But there was a very stable evolution in prices. So prices more or less stayed at the same level but -- and in the second half of the year, there was a progressive recovery of demand and a progressive recovery of activity. This was a trend towards normalization. In Tunisia, although Tunisia is not that significant, but in euros, revenues stayed stable, EUR 57.8 million. And here, a drop in volumes and a positive evolution of prices led to the strengthening of the local currency. And so in euros, the contribution stayed quite similar. And there was a slight improvement throughout the volume in terms of demand. As I said before, export activities did experience a contraction by 17.9% to EUR 87 million. But the EBITDA in this area performed significantly because it went up by 61%, EUR 139.9 million. And this is due to 2 factors. The most significant one is that we sold some excess rights of CO2 in the area, which was EUR 58.9 million whereas in 2019, as you will remember, we only sold rights for EUR 5.8 million. On the other hand, if you think about the evolution in prices that I mentioned, well, it was compensated for by lower energy prices. So even if we excluded the impact of the sale of CO2, the EBITDA of this area would have performed in a very stable way. It would even have improved by 0.4%. Finally, given its contribution, I would like to refer to our transport concession activities. As you know, we already reported at the 30th of September 2020, as a result of the agreement we reached with a financial investor, well, we decided to change the criterion used to consolidate assets and liabilities for different concessions, especially of the Cedinsa Group. So they are classified as held to be sold, whereas the consolidation method based on IFRS 5 is still kept in the P&L. So taking into account this accounting consideration, our income for this area was EUR 123.5 million. So they rose with respect to the previous year because there was a change across the year, a change between 2019 and 2020, because of what happened with Cedinsa. Cedinsa, of course, is predominant. It accounts for most of the activity in Spain, EUR 121 million. And transport concessions, as with other activities, also experienced a fall -- a 2-digit fall in volumes and traffic, especially for light vehicles as a result of the lockdown measures. But given the greater contribution of concessions in 2020, the EBITDA in 2020 was EUR 94.6 million. Right, having reviewed the operational evolution of the business areas, I would like to turn to the reflection of all this in the evolution of the cash flow of the group. The cash flow in terms of operations, our current capital, well, was EUR 302 million. And the figure in 2019 was lower, EUR 183 million. But here, that is a differential factor because we ceased to use recourse to the selling of credit rights. And this entailed a reduction of over EUR 200 million from 2020 -- from 2019 to 2020. So this is a very significant effect that needs to take into account. Also, in the case of tax payment, we had to pay EUR 96 million. Last year, we also had an exceptional payment because of our regularization of fiscal incentives. Combining all of these effects, especially those of EBITDA and tax payments, we had a cash flow generation of EUR 605 million. With respect to the investment cash flow, we had an application of EUR 401 million, which grew slightly with respect to the previous year. By area, with respect to CapEx, in Spain, I already mentioned the progress made in the Loeches treatment plant, which entailed an investment of EUR 120 million last year. We had paid EUR 55 million. Internationally, there's an integral treatment plant in the northeast of the U.K., which also entailed an outplay of a similar nature. And also the urban waste collection investments, basically, machinery and materials that we need, for example, last year, in Omaha, Nebraska, we invested over EUR 34 million on a contract for waste collection in the city. That begun in December last year. In terms of Water, in terms of investment, apart from our logical maintenance investments, I already mentioned, in the beginning of 2020, we acquired different companies, an integral cycle in different areas, which is Colombia. And in Spain, we also made an investment of EUR 23 million to acquire a desalination plant that serves the irrigation area in the country. So the total amount of investments here was EUR 60 million. So those investments, well, accounted for EUR 200 million growth, concentrated in Water and Environment. I also want to say that in 2020, we conducted a sale of a minority stake of a subunit of our Environment business in the U.K. to a private investor. This is an incineration plant for GBP 198 million. So this was a financial investor it was sold to. So as a result of the cash flow and investments, and with the very stable evolution of dividend payments and the debt servicing, our treasury stayed very stable. We had a balance of over EUR 1.2 billion in cash and cash equivalents. So if we compare it with the consolidated net, well, there was no impediment for us to have a net debt that was much lower than that of the previous year. So the financial consolidated net closed at EUR 2.7 billion. So there was a reduction of EUR 781 million in our debt. And this is because of different elements, amongst them, the agreement to sell the Cedinsa Group that I mentioned before. So this entails the deconsolidation of its debt. With respect to our structure, it stayed very stable. As you know, our activities and utilities concentrate practically all of our debt, amongst them, the Water area. The net financial debt that I mentioned incorporated over EUR 1 billion. This is a loan that is structured in the long term, basically, in capital markets environment. That's an addition of another EUR 1.3 billion. Most of it are also long-term issuances, and the rest are investments -- or, well, funding that corresponds to the financing of projects, which are also very stable in the long term. As far as Cement is concerned, this is an area which concentrates a small part of our net -- of our total debt of EUR 2.7 billion. We should mention that it closed its net financial debt at EUR 173 million, which entails a very significant reduction with respect to 2019 because of the high free cash flow generated, which was used to significantly reduce the debt. With all of that, as I said before, the corporate financial debt with recourse closed at EUR 101.6 million. And I want to mention that this net does not include the impact of the divestiture of over EUR 400 million from some concessions that I mentioned before. So this is a long and the short of what I was going to say about our earnings of 2020. As I said, they show the resiliency and the stability and the nature of -- the stable nature of our activities. We are in a very complex complication. And also for 2021, we will keep being prudent. But we need to underscore the robustness of our business and the intrinsic quality of the activities and the services we render. I also mentioned that, for us, apart from the investments that we are making, we have been able to keep up our investment pace for over EUR 200 million. So we never stopped adding value to the group. And this, for us, is essential, both -- well, because it's very important to keep up your investments. Well, you have all the data on our website and on the website of the CNMV. So thank you very much, and we can now turn to the questions. So we could start with the questions from the floor in Spanish.

[Operator Instructions] The first question will be asked by Alejandro Vigil from Bestinver Securities.

Miguel, congratulations on your results for 2020. I have a couple of questions for you. The first one is if you could give us -- at a qualitative or quantitative level, what's your vision of 2021? What's your outlook in terms of operational revenues and cash flow? And number two, well, your exposure to the circular economy and all the opportunities in terms of recovery plans, how does your company see the opportunity of finding new growth opportunities?

Thank you, Alejandro. Thank you very much for your questions. As regards 2021, you have seen -- I always say that the best way to show what you're doing is with your own facts. Rating agencies are always concerned with the resilience of your business in the face of extraordinary circumstances. And 2020 has been extraordinary, and you have seen how the group has evolved in terms of its revenues and its EBITDA in a very stable perimeter. There hasn't been many changes in the perimeter. This is what we know. It's -- like-for-like, it's all very homogeneous, especially in terms of the different sections of activity. So this could be used as a basis of the worst-case scenario. 2021 -- we don't expect 2021 to be as bad as 2020. Across the different activities, we do expect a certain level of recovery. I have mentioned markets that have been more affected in the U.K. In those markets, we do expect a projective recovery in 2021 in our tertiary activity, in our commercial activity in order to compensate for the drop we had in 2020. Now in other markets, Central Europe, Iberia, the United States, we should keep our momentum. And we are adding new assets, such as the Loeches plant. So we expect the activity will be better in the environment sector. In Water, I also mentioned the resilience and the growth we've had in revenues and EBITDA. We expect that markets like the Spanish market that had lower activities in the tourists areas, we believe that 2021 will not be as hard as 2020. We still have to see how things go. But in the worst-case scenario, we don't believe that we can be more affected than in 2020. So we are prudently optimistic for 2021. And so from June and July, there will be areas where we'll start consuming a lot more water. And then in 2020, we were also forced to stop some of our activities in countries like Peru or Saudi Arabia, and we expect that those excess costs that we had to face will disappear. So this should allow us to go back to more stable levels of activity and also acquire new contracts. And in the Cement activity, CO2, we expect that -- of course, this is an activity that contributes less than 10% to our revenues, but we believe that things are going to be evolving more positively. So on the whole, I would say that this year, we -- it's going to be -- so we are starting off from a minimum position. So we have a comfortable and an optimistic view, especially by looking at how the group did in 2020. So our experience, all that we did in 2020, makes us positive and makes us confident that 2021 will be better for us. In terms of the circular economy, well, paraphrasing a little, well, we are a circular economy, we can't really invent anything more. Today, well, was the last day for the submission of different memoranda of interest. And lots of initiatives have been submitted with the Ministry of Industry and Transport. As a group, we have submitted proposals for over EUR 3 billion, apart from the ones that we have promoted through different employer associations because, for us, the circular economy, recycling, preservation, sustainable water management, sustainable mobility, the urban agenda, efficiency, all of that is second nature to us. Just to mention plastics, plastics in Europe, there's going to be a requirement that from 2022, no less than 30% of plastic packaging should come from renewable sources. So there's a lot to do on that front. The Barcelona Council yesterday confirmed they will reassign the most important part of the city to us. And this was possible because of a bid that was based on our strength in terms of sustainable vehicles, introduction of the smart city concept and containers, introducing smart technologies in waste management and waste collection. So in the Environment, as far as energy efficiency, we have submitted tons and tons of proposals. I think that there's a lot of money involved. This is -- the amount to be invested is huge, over EUR 75 billion. So we have a very positive view on our capacity to be able to capture a significant part of these initiatives. But we'll see what happens. We need to wait until the 30th of April, which is when the first plan will be submitted to the European Union.

[Operator Instructions] The next question comes from [ Kirby Saez ] from CaixaBank.

I come from CaixaBank. I have 3 questions. The first one is related with working capital because the variation was close to 0 but, normally, there's a strong recovery in the last quarter. Could you explain why this evolution was 0 and how is working capital going to evolve next year? The second one has to do with the Construction division and the news in the newspaper that you will be working to launch an IPO for this unit. Is it a real possibility? And what's the rationale for selling a stake in this unit? And lastly, in terms of Construction margins, what levels do you expect for margins in this unit in 2021?

Thank you for your questions. With respect to working capital, well, I mentioned that throughout the year, there was an expansion of EUR 300 million in the second half. You're right, we didn't observe the recovery that should have happened. Of course, this is a very atypical year because, in the last part of the year, what you get is the consumption of the annuities of some customers, especially in project development, for example, in markets like Spain. And this has been an atypical year in the behavior of customers. But the main reason is the one I mentioned before because if you adjust the effect of reducing factoring without recourse, which was EUR 209 million lower in 2020 with respect to 2019, we would have had an evolution of working capital. And that effect of structural reduction in the second part of the year, we would have had a much better evolution in 2020 than in 2019 of working capital. We have -- we would have had a consumption of nonadjusted capital of EUR 109 million. So -- and as you said, this is because, in the second part of the year, we kept applying this -- we kept removing this factorization. And that's the exceptional effect. I also mentioned previously that the evolution of the conversion of revenues has been very positive throughout the financial year. And the mean collection periods also stayed at very satisfactory level. We even had improvement in 2020 in that respect. So at an operational level, we are very highly satisfied. In terms of the second thing you were mentioning, all those news in the media about an IPO of the Construction activity, no, we have no -- we have never suggested that we would do something of that sort. And in terms of margins of the Construction company, in 2019, with a similar level of activity, well, a little bit -- EUR 100 million higher. And in 2020, we had margin between EBITDA and sales of 5%. So when the situation normalizes and with the level of activity for 2021 in terms of revenue, we should be similar to that of 2019. Given the degree of progression that projects have in each of the contracts that we contemplate, we should be able to recover margin and profitability levels similar to those of 2019.