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

Hello. Good morning. I'm Miguel Coronel, Market Manager of FCC. I would like to wish you a very warm welcome to the presentation of the results of the first half, which we already submitted to the Spanish CNMV. As you may have seen, the first half, we experienced a visible recovery across all our areas. There has been a lower impact of the restrictions. But yes, so the impact has been less than in the first half of 2020. If you look at some key indicators, I would just like to mention the EBITDA, which increased by 22%, went up to EUR 529 million. And this can be explained about from the increase in revenues. There was an improvement in the operational margins across all the different areas in the group, which made it possible for us to reach 16.7% EBITDA, especially in activities related with infrastructure, construction and cement. The attributable net profit increased twofold over the period apart from the operational figures that I mentioned, which was due to a positive performance also of exchange rates. We had EUR 11.3 million positive as compared with EUR 7.3 million negative in the previous period. Also, there's the impact of the selling of some infrastructure concessions where the agreement was concluded over this period. Now regarding the evolution of revenues to give you a little more details. The turnover in the group reached EUR 3.1 billion, 12.3% higher. The growth occurred across all our activities. We will look at this in greater detail, and it was more visible in Construction and Cement. If you look at the different jurisdictions in the Spanish market, revenues increased similarly to the consolidated figure by 11.2% until EUR 2.8 billion across different areas of activity. The environmental platform, for example, had an increase because it was more activity to do with the waste management. Also street cleaning increased significantly, which had already occurred in the first quarter because of different measures that we took. In terms of Water, we also had some recovery in terms of the cubic meters, Water and also some actions related to technology and networks. These are activities related with the infrastructures that we operate related with integrated concessions that we operate in Spain. Also in Construction, there was an increase. We had a good pace in terms of the execution of our projects without any disruption, and we had quite significant growth in this area for both large and small projects. As regards to Cement, there was also a speeding up of the recovery. The growth in volumes stayed very stable. It was -- the growth was a 2-digit growth. And I also want to mention that the area of concessions only made a contribution until the 30th of March last year, but we did have some increases because of the house development activity. Now the geographies, I would like to mention the case of the U.K. Here, revenues rose considerably. We had 2 main areas of growth. One of them was construction where implemented 2 contracts that we have underway in England and Wales, and we had recovery in waste treatment plants in that country. In other EU countries, we also had higher activity levels in Central Europe. Water treatment in these countries also had a very stable performance. Whereas other activities in the same geographies, such as construction, also showed a higher level of activity, especially in terms of the higher number of contracts awarded in countries like Norway. In the Czech Republic, which has a relatively significant weight in water in the environment, also played a very important role and had a very good performance. In other geographies outside Europe, especially in the Middle East and Africa, well, those countries had been performing not so well, but now the situation has been slightly redressed. We have, for example, a construction contract in Riyadh, which is going very well. And also for Water, we have some projects to develop water infrastructures, which are in a similar situation, one of them in Saudi Arabia and the other one in Egypt. Now in the Americas, there was a greater contribution in some construction contracts, particularly in Mexico and Chile. And in Colombia, to a lesser extent, but in this case, field of water. There was a higher contribution because of some acquisitions and some assets and some contracts in the north of Colombia. In the United States of America, there was also good performance in the environment area because of the incorporation of certain contracts. With all of this, the EBITDA, thanks to our cost control policy, reached 16.7%. Now if we go into greater detail and if we look at the evolution of the different areas of our business and if we start by the environment here, the revenues increased by 12.6%. It reached EUR 1.5 billion. As I said before, the good performance we've seen across all 10 countries where we operate, and we especially so an increase in the activity of street cleaning and especially in waste treatment and waste recycling plants. As I said before, in Spain, the performance was also positive 8.9% more to EUR 895 million. Here, we -- there was a greater contribution of a packaging processing plant in Alicante and some other contracts, which are low unit values, but which, together, account for quite a lot. Also, urban cleaning was an important chapter here. In the United Kingdom, as I said before, here, there was a specific increase of 11.7%. It reached EUR 333.1 million, especially centered on the recovery of volumes treated at different -- or processed at different plants. And some new contracts, we have concluded to do with recycling and recovery. In Central Europe, there was an even higher rise with up to EUR 267 million in revenues. All the countries performed well. I just want to mention the positive effect of the recovery activity and the activity of selling byproducts. As I said before, the United States and the mining market, here, the base effect is very significant of over 50% and the figures of almost EUR 69 million. And we're still incorporating new contracts through our approach based on organic growth. I just want to mention the contract in the capital of Nebraska and Omaha. I also want to mention that the Iberian Peninsula, which we include here, there was also a very homogeneous performance. With all of this, the EBITDA of this area recovered significantly to 15.6%. It reached EUR 248.1 million. And this has been the result of a combination of higher volumes of activity and a certain improvement in the prices of certain products. Sorry, I did -- I do not -- perhaps I made a mistake in the margin. The EBITDA grew by 15.6% and the margin increased by 15.9%. In terms of Water, revenues stayed stable. Well, there were 0.4% higher with EUR 564 million. The main activity here is integrated concessions and water infrastructures had a higher level of activity. And this 0.4%, this was quite homogeneous across the board in Spain and in other geographies. And this made it possible to compensate for lower activity in technology and networks. As you know, these are the developments we carry out, the improvements that are carried out across the network that we operate in the integrated cycle business. And specifically, in Spain, revenues reached EUR 388 million. They rose by 6.2%. Here, there was an increase in cubic meters invoiced, and it happened both for domestic and nondomestic or residential and nonresidential customers. And in Spain, there was a higher activity in technology and networks, especially because of the activities that we carry out related to the integrated concessions to keep our network in good state of repair. Now in the Middle East and Africa, there was a fall in the revenues of the area. And so that's why the combined growth was only 0.4%. Now in the Middle East and Africa, revenues decreased significantly, but this is due to the fact that there were -- there was lower progression in some of the water treatment plants and some wastewater plants. And also, there were some contracts in the capital of Saudi Arabia, which expired. In other areas, Central Europe, for example, revenues increased by 3.7% to EUR 53.3 million. I just want to mention the integrated cycle activities in the Czech Republic where we had a more positive evolution in terms of prices than in terms of cubic meters in demand. In other European countries, Italy, Portugal, France, where we are expanding our activity, revenues increased more than they did in Spain. They increased by 9.9%. This is practically an integrated cycle activity. Fully, we reached a very significant amount of sales. And I want to mention the concession we have in Southern Italy in Caltanissetta, where there was a greater contribution. According to a review that we carried it out, this was because of the tariffs applied. Now in terms of the Latin American area, revenues increased by 28.2% to EUR 30 million because of a high level of activity because of things that we have been doing in Colombia and Mexico, integrated cycle and water infrastructure domains. So the EBITDA grew more than revenues. It grew by 6.8%. It reached EUR 134 million. And this is just explained by the fact that there was a better performance on the integrated cycle activity than in the technology and networks activity. And this explains that in addition -- this explains that the operational margin increased quite significantly by 28% as compared with 23% of the previous period. If we talk about construction here, revenues grew by 13.8%. They recorded over EUR 700 million. As I said before, there was a good performance in the pace of execution across all the different platforms in Spain and in the rest of Europe, Latin America. Specifically in Spain, the turnover increased by 12.1% to EUR 414.8 million. There were very important contracts such as the works in the Santiago Bernabeu football pitch, football grounds. We are really doing very well even ahead of schedule. And then there's other European markets such as the Netherlands, Norway, Belgium, even the U.K., the turnover increased by 18.4%. There were EUR 169.5 million in revenues, and the performance for planning was as expected. In Latin America, the turnover also grew. We almost reached EUR 100 million. And as I said before, this was thanks to the progress in the Maya Train in Mexico and the project in the center of Chile, Concepción. In the Middle East and Africa, this is where the lowest contribution occurred. And this was because of the progression and very important works such as the Riyadh underground system, which is about to be completed. And so the work is about to be completed. So the EBITDA reached EUR 42.6 million last year. We could only record EUR 17.4 million. So this is due to the evolution in the revenues, the growth which is a 2-digit growth, then the reduction of our -- some of our overheads and the disappearance of some of the disruptions that we suffered last year because of the COVID restrictions. And so the operational margin increased to 6% over the 6-month period. As I said before, the activity in this segment was -- we had a greater recovery. Of course, there was some cyclic effect. The revenues in this area reached over EUR 200 million. They grew by 27.9%, similar to the same period last year. This was basically thanks to the growth in demand, and this happened in quite a balanced way, both in domestic markets in Spain and local Tunisia market. And we also made a significant effort to export, especially from Spain and from Tunisia. The Spanish market, local market in Spain, the turnover increased by 21% to EUR 133 million, and this was more than the whole sector. And this was because of the growth in volumes. And this happened against the background of price stability, continued price stability across the period. In the local market of Tunisia, the turnover increased by 34%. The contribution was EUR 31.5 million. And apart from a growth in volumes, which was quite salutary, there was also an increase in prices considering that in Tunisia. The FX of dinar against the euro, well, it was not good because it depreciated by 4%. So exports increased by 41.7%. It contributed EUR 57.1 million. And they became stronger, especially exports from Spain, where we have different platforms like U.K., France or even from Tunisia. There were some exports to some nearby markets. So the EBITDA increased significantly. It recorded EUR 48.4 million and the effect of -- because of the effect of the volumes I mentioned. And we need to admit, of course, that in the second quarter, there was an increase in the prices of energy and fuel. We also need to mention that with sold some CO2 rights in the first half of 2021 for EUR 7.8 million vis-à-vis no contribution of that chapter last year. So even if we make this adjustment, the growth was very robust. For that reason, the operational margin reached 21.8%. Last year, we -- it was 15%. And if we excluded the CO2 contract, the margin would still be 18%. So if we look at this in terms of the cash flow evolution and the impact on our borrowing levels, the operational flow rose to EUR 163.3 million. It was almost 80% higher than the first half of last year. Here, application of current capital was lower than that of last year, around EUR 300 million. And I would like to mention that in both periods, both in the first half of 2020 and the first half of 2022, well, we decided to eliminate the balance to do with factoring transactions, which this year for Water and last year for Environment allowed us to -- both our financial cost of the group reducing the payment of financial rates corresponding to phasing out. Now taxes over profits. We had an outlay of EUR 40 million this year, higher than what we had last year. These were interim payments, which we hope we can recover in future periods. And to do with other operational sales, there was an outlay because of the application of certain expenses and provisions that are similar to what we had last year. Nothing very, very significant. In the second section to do with the cash generation, the investment flows need to be mentioned. And here, the Environment and Water areas played a very important role. In Environment, we applied investments for EUR 116 million. We are still growing, especially in our activity, but not just treatment or processing. Also, I mentioned the plant of Campello in Alicante in Spain. The plant in Loeches is about to be finished, this is very close to Madrid, and the progressive advancement in plant in the Northeast of England. In terms of Water, there were payments for EUR 58 million. There was something very significant. This highly recommended payments depending on different financing plans, which absorbed EUR 11.5 million. There were advances in the contracts we have under development or under expansion in Mexico, in Colombia, one of them in Spain, but nothing to note where the -- in absolute terms. Everything according to plan. Now in terms of divestitures, I want to mention that in the first half, in terms of cash, there was an inflow of over EUR 300 million because of the sale for over EUR 400 million of the concessions that I mentioned before. But if we take into account the operational evolution, the investment and the financial expenses, we will see that the financial debt was -- went down, and our position has strengthened the results. So the consolidated net debt went down from December by 7.5% to EUR 2.5 billion. This is the result of the operations conducted by the group. And this also absorbs the effect of the disappearance of the credit sessions, factoring transactions, which went down by over 110 million. As you can see, the information we have distributed to the -- we have submitted to the CNMV, the total net debt we have in the group is all distributed across the subsidiaries, specifically Water and Environment, most of it is investment-grade debt. So the head company closed June with a net cash position of EUR 234.8 million. Please remember, and I want to remind you, that information we submitted to the CNMV, we included -- and this is not in this cash position, but we included the sale of some energy assets, which was concluded recently. And this will make a certain contribution to our results, but we will see this effect in the second half. But this amount will have a positive impact on that net cash position of EUR 234.8 million for FCC, S.A. The report also contains a breakdown of our financial debt and the different activities involved. They don't want to run on. I just want to wrap up by saying that this first half has shown yet again that we have been able to weather the storm. There's still many uncertainties around us, but our revenues and our profitability stay very strong. The main indicators that we have in the first half allow us to compare very favorably with not just 2020, but with a pre-COVID year like 2019. And this is the result of a very high quality of our position, our competitive position and, of course, the performance of the different teams. So we are cautious but, obviously, our results are much better and our financial position is also much better. Thank you all very much for your kind attention, and that's all I wanted to share with you. So we are now going to open the floor for questions. So we can start by the questions from the floor here in the room. Okay. So the Q&A session will begin now.

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

Miguel, first of all, congratulations on these results. They have been really very good. I have a couple of questions. One of them has to do with the buyback of shares. You have a program of 0.4% of the capital, 1.7 million shares. I understand that this -- you're going to be buying these shares in the market because you have some treasury stock. So the question is whether you will buy back as many shares that you have in the treasury stock. And then what is the rationale behind this buyback program? That would be my first question. And the second question is, looking at the first half of the year in terms of EBITDA and profit and cash position, I just wanted to know your thoughts about where the consensus is with EUR 1 billion in EBITDA this year. What can you tell us about the consensus in terms of where you stand, where the company stands?

Thank you, Alejandro. Well, with respect to the buyback program, it is true what you say. For those of you who have not seen it, we have also submitted buyback program, which will last 2 months until the 30th of September. It may last until then, or if any of the targets was reached, which is to -- which acquiring around 0.4% of capital, or if we exhausted the amount -- the assigned amount, it would finish sooner. Our treasury stock now is very, very small. It's 0.4%. The purpose is that if we reach that 0.4% over this period until the 30th of September, that amount would reduce our share capital. And the main goal is to improve the remuneration to the shareholder. The EPS would go up immediately. Now what we're going to do with the existing treasury stock? We don't really know we will play it by ear because the follow-up of the plan will be dynamic, and we'll have to see how things evolve and what the effect is. With respect to the rationale behind it, the purpose we are seeking is to add a thin layer to what the most important thing is, which is our results, which is what I mentioned during my presentation. It is just one more formula. It's a flexible dividend we have just paid out to try and get the market to have a favorable take on the way in which we remunerate our shareholders. Right. With respect to what you were saying about the consensus, well, yes, we are aware that the consensus is around EUR 1 billion. It's lower than what we reached last year. As you know, we don't provide a quantitative estimations, but it is true that the first half speaks for itself. We said last year that the group is extraordinarily resilient. 80% of the group is just a utility, and this is not something we say. It is just evidence. It is a public service. And this is something that the company shows day in, day out, and they've shown it for over 100 years. So all that I can say is that I'm convinced that the market will have to review and revise its forecast because with a figure of EUR 330 million in the first half, obviously, that forecast of EUR 1 billion will be lower than the actual figure. And you have to consider that we have not yet gone fully back to normal because there's still some restrictions to do with the COVID-19 pandemic. But well, the market will have to make its calculations in the light of these results.

Next question will be asked by Victor Acitores from Societe Generale.

Miguel, I have 2 questions, if may. The first one has to do whether we had -- well, looked at what Ferrovial and Urbaser movements in the market. So I would like to know whether in the environment, you can give us a percentage of the part of EBITDA that you generate that might be equivalent to the businesses that were sold by those 2 companies I mentioned. I know that contracts are a little different from each other, but it's just to understand the multiples that may exist in that part of the EBITDA. And the second part of the question, well, you mentioned the amounts to do with Environment factoring for last year and this year. You provided a figure for Water. I think you had -- you said over EUR 100 million. And here, I have 2 questions. First of all, could you give us any -- an accurate underlying for working capital? And then number two, what was the environment factor included last year?

Well, I will start with the easy question, which is the last one. The factoring for last year to do with the Environment, and if -- I guess, there was a reduction of EUR 222 million in the first half of last year. This year, the figure until all the factoring transactions were phased out in Water was EUR 112 million. And the evolution is not just factoring, I think you also want to take into account other one-offs such as the evolution of some advanced payments. So the total figure in consumption would be about EUR 150 million in terms of consumption of working capital in this first half of the financial year-end. This figure was better than we had expected. So we are reasonably happy. You know that the first half is always characterized with higher consumption levels than the second half. Now with respect to the first question, well, as you know, when I mentioned that we are a very old company, 120 years old, well, it's basically to do with the environment. I'm not going to talk about other companies because I don't really know what other people do. But we, approximately, in our case, you can see the figures we provide. For example, in this first half, the waste selection and street cleaning activity, which is an activity that we render city councils, the waste treatment activity, which includes the whole chain, which is the second phase of urban waste management, it's basically -- all of it is processing. There is some industrial component, but it's basically recycling, recovering, including valorization of waste. And in others, we basically include activities that we call ancillary activities, but they're very closely related with the services we render to the councils. So it's sewage, maintenance of green areas, beaches, fountains. So it's miscellaneous of activities connected with our public customers, some cross-selling. You could call it cross-selling. So it's all a question of margin really because our margin is of 16% -- it was 16% at the end of the first half. And I would say that the businesses that were sold are quite similar to our activities. I'm not going to say whether they are better or worse, but they are very similar. There was another transaction like Covanta in the United States and some others. I think that the multiples, I'm sure that you know them better than us, but I think that they're quite similar.

Yes. Can I ask you one additional question?

Yes, go ahead. I don't know whether I'll be able to answer it, but just go ahead and test me.

Right. As a group from the -- the businesses are doing well and things are quite rosy. But one of the group's strategies is quite fruitful. It's the expansion in the United States with certain contracts. It is true that things are fragmented, but what type of strategy might you develop in the U.S., especially in some regions? I'm not talking about bottom acquisitions, but any opportunities that you may detect in the American market that can give your environmental unit the possibility to grow in a profitable way?

Well, the U.S. is a continent by itself. It's 50 states. Now we are present in 3, in Texas and Florida. Now we've just entered Nebraska. Now our attitude is selective and cautious. We don't want to sacrifice our profitability and our return on capital. So far, the experience has been organic. We know that we are facing up to huge groups, Waste Connection, Waste Management, Republic Services. We are a centenary group. We are very humble. We are very prudent. And I think that our strategy is an open strategy, but governed by profitability. It is a market where we will only act if we can be profitable. Omaha, in Nebraska, it's the capital of Nebraska. We were invited when they saw credentials from Florida. Florida is a very dynamic part of the United States. That's where Orlando is, together with Southern Miami. So they spoke well about us. We, for example, introduced compact natural gas vehicles in Florida. And in Spain, we also have very revolutionary vehicles, which do not just use for collection. They are just platforms by themselves. So as you say, the United States is a market that is an evolution. And each state is very autonomous as far as the environment is concerned. So they have -- they may have different approaches. But we're very cautious. We like the American market, but we will keep growing depending on what opportunities arise. So far, the experience has been positive, and we believe that we might keep growing. But the idea is to follow the same pattern we have followed in the places we are already present in.

[Operator Instructions] We have a question from Alejandro Vigil.

Well, I will ask a further question about the levels of CapEx and some medium-term reflections from you. The CapEx is rather flat year-on-year. Do you expect an acceleration of CapEx later this year and then the medium term? Also these plans to do with the circular economy, what is your take on that investment opportunity in the medium term for the company?

Well, Thank you, Alejandro. Just consider that last year, we're still in a difficult situation with COVID-19 where transactions and the availability of -- but it's a difficult year. It's a difficult year. It's not an ordinary year. So in that respect, we have executed, we have managed to identify opportunities and we have been able to implement many of them. This is a year where we have -- I would say that, not just this first half, but also the second half, we should expect a normalized CapEx of around 8% of our revenues. So more or less repeating the figures, the payments for investments of the period. Now for the future, well, of course, we have great expectations about the circular economy. We are at the center of the circle because we are involved with the water state, the water cycle, the waste management and other activities like the development of sustainable and efficient infrastructure to do with materials, energy consumption, efficiencies, energy activities. So -- but of course, we will have to wait and see. We are, of course, on our toes. We're on top of it, on top of things. In terms of future investments, we are convinced that there will be future investments, but they will have to be -- it will have to be done in a profitable way, so that we can keep up the high quality of returns that they grew 6. As they materialize, we will start executing them.

The next question will be asked by Filipe Leite from CaixaBank.

Miguel, I have a question to do with the increase in the prices of raw materials and how they can impact on the different activities of the group in terms of your operations and in terms of your margins.

Filipe, thank you. I mentioned it before. From the second quarter, we witnessed an increase, but it's very uncertain to know what will happen with the prices of raw materials in the future and what the impact will be on the production chain. It is true that in Cement, we have felt a certain increase in cost -- in the cost of the megawatt and coke or other materials. Generally speaking, this is where we might see a little bit of a higher impact. But the rise in volumes in the second half stand-alone, in June stand-alone, in Cement, the net effect has been neutral. So it hasn't had a negative effect on the operational results of the area itself. And I'm mentioning Cement considering what the weight it has in the group because it is the one that is most heavily affected. But then in the rest of the divisions, like Water and Environment, we performed periodic revisions of prices, so we can link the price to the evolution of costs involved in rendering services both to do with Water and the Environment. I can't really -- I don't have a crystal ball. I don't know what is going to happen with the prices of raw materials. But if they did rise, we have mechanisms that allow us to increase our prices. So we are covered in that respect. Now as far as Construction is concerned, contracts also include clauses that protect us from these rises because these are long-term contracts and these things are included in the clauses of the contract. So as regards to first half, the effect has been neutral. Especially for Cement, there hasn't been a negative effect. So the future, we are reasonably prudent, but we believe that given the nature of our activities and given the way in which we fix our prices, well, the impact is going to be really negligible. Thank you, Filipe.

There's no further questions from the floor.

Okay. Thank you all very much. Again, you know that we are available on the usual channels. And those of you who have not yet gone on holiday, we wish you a very happy holiday. Goodbye.

Thank you, everybody, for connecting. The meeting is adjourned. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]