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

Hello. Connected remotely, I'm Miguel Coronel, Capital Markets Manager for FCC. First of all, I would like to wish you a very warm welcome to this earnings presentation. The documents were sent to the Spanish CNMV and I will be reviewing the financial statements of the company for the second quarter. I would like to direct your attention to the partial carve-out that we carried out in November last year of the activities of Cement and Real Estate because, as you know, the lower part of our income statement cannot really be used as a comparison. Of course, the top line is comparable. So the 2 periods are fully homogeneous. And I wanted to mention this because we're going to be looking at the specific effect of all of this in a quantitative way. I also wanted to mention that the guaranteed revenues, which basically revolving around some of our contracts. From the next quarter, we're going to be including also our concessions for infrastructure in this chapter, which -- because it's 100% project-based activities. So this is going to give you a better inkling into what we're doing. So at July, the portfolio was in excess of EUR 44 billion, a mild increase of 2.8%, but guaranteed revenues still provide a very solid visibility to our activities. So these are the 2 things I wanted to start off with. But if we now look at the main figures of our income statement, as I was saying, our turnover rose to EUR 4.5 billion -- I'm going to put on my glasses because I can't see very well. This was basically because of our increase in environment activities here, we took over -- well, halfway through last year, we carried out some takeovers in the U.K., in the U.S. and in France. Also in terms of Water, our integrated cycle and technology networks activity has also been very active with practically double-digit growth. But in terms of consolidated revenues, the activity that had a better performance was concessions, which increased by 45%. And here, this is because of a combination of different factors. First of all, inorganic activities, that is the beginning of new concessions and their contributions to our revenues, but this was also supported by a very solid performance of passengers and vehicles and different types of concessions. So the operational revenue -- the operational results rose to EUR 675 million. This was the EBITDA, an increase of 11.3%. And here, to explain the difference between revenues and EBITDA, I want to mention the recent contribution of our processing activities. In addition to inorganic growth, organic growth was also significant, and this is what lies behind that positive rise in EBITDA, which grew by 5 basis points. So at the level of the consolidated group, we practically reached 15%. And at the consolidated level, you can see that our operational activities are still having a very strong performance aligned with the good evolution of our company that we already mentioned in the first quarter. Now if we go to our net earnings, let me repeat to -- let me repeat what I was saying about the partial carve-out. Last year in discontinuous activities when we approved the carve-out, although it did not take place until November last year formally, but until June 2024, the contribution of these 2 activities, which have already abandoned us was EUR 93 million in 2024. As you know, these activities are not making any contribution anymore. This was the most significant impact in the bottom of our income statement. And then there's another thing I wanted to mention, which really didn't have any impact on our cash generation. First of all, the strength in the evolution of the euro currency rate, which has strengthened against most currencies. And this left a trace in this first half of some negative exchange rate figures. This is some impact on our cash flow. But in the first half, to give you an overview, first half of 2024, it had a slight contribution of EUR 1.5 million. So across periods, this is also a very significant element. And the third element I wanted to mention is a combination of value adjustments of different assets that we have, particularly in participation using the equity method and some other participations related to activities in the environmental field for an amount of EUR 89 million. And these adjustments, you can see them in the income statement. They have come in terms of other operational results and the results due to the application of the equity method. So all of these effects have resulted in a net figure that went down to EUR 80.7 million to (sic) [from] EUR 272.6 million because of the effects I mentioned. So there's a significant asymmetry between the operational evolution of our company and these effects that I have tried to outline. I hope I made it clear that they have affected us over this period. Now having said this, let me turn to the different business areas, the 4 business areas making up the group. In terms of Environment, here, the revenues went up by 14.7% to EUR 2.3 billion. As I mentioned before, waste collection and street cleaning is one of the most significant portions, and it rose organically. It grew organically in Spain, but also in France, where we bought a company called ESG, which doesn't -- which is a company devoted to street cleaning. And then there was also a growth in our operations in the U.K. and in the U.S. where we also had organic growth. In terms of processing or treatment, the growth has been higher, waste collection and street cleaning. And here, there was a significant effect from the acquisition of UK Urbaser together with the United States to a lower extent where there was integration of Gel Recycling in Florida. I also wanted to mention, and you can see this in greater detail when you analyze Environment, there's the activity that we call others. And here, there's been a significant growth. The most important growth in the 6-month period related to greater sales of what we call secondary raw materials, including the sale of electrical energy. So this is what we recover and things we give a second life. In terms of geographies, there's 4 main platforms here. We already talked about the Atlantic concepts, but I'm going to be breaking it down here, but it comprises Spain, Portugal and France. And then we have the U.K., Central Europe and the United States. Now within the Atlantic platform in Spain, revenues growth -- revenues grew by 6.7% (sic) [7.6%] to EUR 1.1 billion. And as I was saying, the most important thing is that the advancement has been quite homogeneous across our different activities, waste collection, street cleaning, treatment and of course, others. And others refers basically to the maintenance of gardens and green areas. The second platform is the U.K., a significant growth, 26.4%, EUR 498.6 million. Here, you can feel the effects of U.K. Urbaser. There was also a significant increase in treatment activities and some by-products. Central Europe where we operate in 6 or 7 countries where we are headquartered in Austria, a growth of 5.3%. Here, you know that the main core, relatively speaking, is Austria, the Czech Republic and Slovakia. And I want to mention what we did in the Czech Republic with higher prices and in line with what happened in the U.K. We also did quite well in terms of secondary raw material. And the last platform, last but not least, is Portugal and France and the United States, EUR 215 million in revenues. And here, there's a combination, which is still very successful of organic contribution with the growth that we have achieved in terms of oil stains growing in areas where we are already present, piggybacking on the economies we already possess and also the participation of Gel recycling holding. And I also want to mention that we carried out the acquisition of the first energy recovery plant in the United States in the area of Florida, in the southern area of the peninsula of Florida. And this is going to start contributing to our results from the second half. And competitively speaking, this is going to also bolster our American platform. Now in Atlantic, although it still has limits that we have Atlantic with significant growth, Portugal and France with significant growth, particularly because of the incorporation of ESG in France. Now all in all, the EBITDA grew by 18.8%, so above the revenues, EUR 355.8 million. There's, of course, an effect related to the acquisitions and the operational margin grew very significantly, the most significant figure for the whole group, 15.4% as compared with 14.9% last year. Now in terms of operation, the operational evolution of Water activities, these are basically integrated cycle activities. Revenues here grew by 9.2%, EUR 965 million (sic) [EUR 865 million] more. Here, as compared with previous quarters, performance of the main activity, partial or integrated cycles versus the projects that we are working on in the networks that we exploit. Well, this difference really was not that big in this period. So in terms of geographies, Spain, which is still making a significant contribution, although its relative weight lower and lower, but it still contributes over 50% of the revenues of the group. Revenues increased by 11.2% (sic) [11.9%] reaching EUR 500 million. Here, we had an improvement in the cubic meters consumed as well as in tariffs. The experts in this area were telling us that we had -- that the consumption previous to the pandemic -- Well, we have gone back to the consumption levels previous to COVID. So the performance has been very salutary both in terms of price and volume. And Technology and Network, this is the concessions that we explored also grew significantly in Spain. Now in terms of the Central and Eastern Europe, particularly our platforms in the Czech Republic and Georgia, these are assets that we own, not just exploit, the revenues grew by 4.4%. Here, we had an increase in tariffs. You know that these are businesses that are regulated. But in addition, we are bound by some regulatory plans and those tariff increases related to the targets that we have in terms of operations and service levels have been quite considerable, so much so that they allowed us to compensate for certain reduction in consumption that we experienced in the Czech Republic. But in Georgia, what we had problems with was with the currency rate given the strength of the euro. So we had a depreciation of minus 3.8% of the local currency. In the rest of Europe, revenues increased by 3.7%, EUR 55.7 million. Here, I want to mention that we had an improvement in prices, both in Italy and in Portugal in spite of the fact that the effect of a more responsible consumption, the result of the drought is still there, which is something that was not really the case in Spain. Now in the case of the Americas, with the transaction that we carried out in Texas, our turnover increased by 12.7%. And similarly, we had a good performance in both Colombia and Mexico in our BOT activity and network technology. Lastly, in the platform that we have in what we call MENA, Middle East and Northern Africa, our performance was similar to 2024, only 0.5% growth. And perhaps this is the only region where there was a combination because there was a greater activity in Saudi Arabia and less activity in Algeria because of a readjustment of tariffs related to BOT projects and to the models we have for pricing. So the EBITDA in this area grew by 6.2%, EUR 196.3 million. As I was saying, I would like to mention and underscore that there's a reasonable combination of volume and price that explains this. And our margin remained at 22.7%. Such slight fall with respect to last year is due to the fact that last year, we reached 23.3% because Technology and Networks had a greater contribution. And as you know, the margin in Technology and Networks is lower. This year, in the first half, the figure was 10% contribution. And in the same period of last year, the figure was 7%. All the figures are included in the document. Now in terms of Construction, the Construction activity, well, there's nothing really new under the sun, but I will break it down for you. Here, revenues had a slight reduction to EUR 1.3 billion. There was a lower contribution of industrial projects. As you know, here, there's a significant weight of industrial projects of all kinds, but particularly those linked to renewable energy plants. We're still securing new contracts, but this is the element that really explains the reduction in sales that we experienced. In Spain, specifically, the turnover went down by 5%, EUR 566 million. And here, this is because 2 projects were completed. One was in the south of the -- well, both were in the south of the country. In other geographies in Europe, the growth was positive. The evolution was positive, 11.7%. And here, we have completed a significant motorway, which is very important for Concession, a motorway in Wales and also motorway A9 in the Netherlands progressed very, very satisfactorily. And then there was another project in Romania. In the United -- in the Americas in general, we grew by 5.1%. And in the next few quarters, we will see more about this because our railway projects have really started off, particularly in Canada and Pennsylvania in the United States. Here, well, I want to mention the beginning of Phase 1 of a large contract in the United States, the Scarborough contract, which represents -- well represented at the start more than EUR 1.8 billion. And this contract will be developed in collaboration with the customer, but I just wanted to specify it. Another important area that we have -- well, is MENA. There was a significant reduction of 55%, EUR 68.4 million because this was due to the fact that the project -- well, we already completed the Riyadh Metro lines. And so this didn't make any contribution this year. And we also had an early cancellation because of the customer decided it of the Neom project. This was project that the customer decided to put on hold. The evolution was positive, and we are going to be stand by to see what the customer finally decides. But that doesn't -- that hasn't really created any problems for us. So the contribution is just small, but the beginning of the new contract in last year, the new contracts last year, particularly those in Australia, particularly the social housing project in Queensland, give us reason for hope. So all in all, in construction, our operational margin went down to 5.6%. So it was a slight reduction in EBITDA reached EUR 75.8 million, 7.6%, although within the evolution, the normal evolution of the division, both revenues and EBITDA progressed in a very predictable way. Now let me turn to Concessions. The Concessions area grew by 45.1%, reaching EUR 50.5 million. Here, I would like to mention apart from the underlying evolution of traffic, I want to mention the road project in Aragon, which contributed EUR 12.5 million in revenues out of a total of over EUR 50 million. And to a lesser extent, there's the revenues from the Parla Tramway. We acquired 100% of this concession in April last year. This is a very positive thing, although the contribution is lower than that itinerary 8 in Aragon. You know that most concessions that we have are concentrated in Spain, and we invoiced about EUR 48 million. I just want to say that we had a full the contribution from other markets, basically Mexico and other areas because in 2024, there was the exit of a small concession also that we had in Portugal. And so it's now contribution. If you look at the revenues in Concessions, well, you will see that this is full, which is explained by this because in Mexico, we had a significant increase last year or last -- yes, we had an increase of 30%. The EBITDA in this Concessions area rose to EUR 29 million. It's 26.8% more. The operating margin went down to 58% this year because itinerary 8 of the Aragon concession, while it is being developed, well, the revenues are accounted for in the top line and the margin is lower. And so the mean concessions margin has gone down in the period, but this is an effect that you know very well, and it's only got a temporary effect. Before I conclude, I just want to mention something about the evolution of our operational performance in terms of cash flow and the balance of our cash position. So the different blocks of the cash flow starting with operations was EUR 329.5 million. It went down by EUR 61 million with respect to the previous year. But this was due, and we will see this in a minute, to the partial carve-out in the bottom part of the income statement. So if we look at the most recurrent part, which is the working capital, the outlay was less than EUR 300 million. Most of this money was concentrated in Construction and to a lesser extent, in Environmental activities in line with our goals. In terms of sales and taxes -- payments and taxes, we had an outflow of EUR 26 million, slightly lower than what we had last year because there was a regularization in the first quarter of this year of the company tax, which was paid in 2023. And as I was saying in terms of our cash flow, I want to point your attention to the fact that this year, we had an outlay of less than EUR 20 million linked to the variations of provisions. But last year, we had EUR 144.9 million more, which included the activities that were going to be carved out, Cement and Real Estate. For that reason, we were obliged to reflect a different differential evolution. And I would like to mention this to you so that you can analyze this properly. Now in terms of the investment cash flow, we had an application of EUR 319 million lower than the EUR 750 million last year. Of course, last year, we had a delta because we made -- because this year, we made fewer acquisitions than last year. This last year, we acquired Gel Recycling, ESG, U.K. Urbaser in the environmental area. But the investment effort is still going strong. 2/3 are recurrent investments and 1/3 is still linked to the different activities related to development, which are still not contributing to our EBITDA, but they will do -- they will do. They will do in due course. So our investment efforts are still going very strong. Now financing cash flow. Well, we had an outlay of EUR 31 million (sic) [EUR 30.1 million], but there was EUR 50.6 million contribution. And I just want to mention that there was a refinancing that we closed in June last year for Water for half of the financial debt. We captured hybrid debt because we resorted to the banking market to maximally optimize the financing cost, and we refinanced a total of EUR 1.1 billion, which were to mature in July 2026, and we captured some money, not just to refinance early, but to increase our average cost, also increasing our cash position in that business area. So all in all, our cash flow had a slight variation. And if we look at if we look at -- if we take into account what we did in terms of financing, we had a slight increase in our financial debt in the gross financial debt of the group, EUR 5.2 billion after the deal with Aqualia, 2/3 of capital markets, 1/3 is banking debt. Most of the debt is long term. So as you can imagine, this is something -- this was all very solid. The net financial debt, so after the adjustments was below EUR 3.2 billion. Essentially, I would like to mention, and we've said it -- I would like to mention the operational flows and the effect of the temporary evolution of the expansion of current capital. And the financial debt, as you may have seen in the breakdown, it's 100% concentrated in our 2 activities, Water and Environment and the headquarters with its perimeter activities and the net cash flow closed at EUR 915 million. That's about all I wanted to share with you. As you can see, the results still show a very strong evolution of the company. We grew double digits in terms of revenues and EBITDA and the operational profitability still performed strongly. This second quarter was a little bit slacker in terms of that inorganic -- the first quarter was a little bit slacker in terms of inorganic activities, but things have picked up in the second quarter, but the group has really progressed in a very healthy manner. That's all I wanted to share with you. Thank you very much for your attention. And now we can turn to the questions and answers.

Total investments of the group were EUR 364 million in the first half of 2025. Can we expect a similar level in the second half?

Thank you, Filipe, for the question. Well, at the level of maintenance investments and growth investments with basically current assets, especially environment, I would say, yes. What you need to consider is the investments that we have already disbursed in July of our energy recovery plant in the south of Florida. So what I would say is that you should estimate that the -- all of those investments, well, should be of a similar amount of last year's investments, close to EUR 900 million for the whole financial year.

Next question. The operational margin of Water grew by 0.5% in the first quarter and 0.8% in the second quarter. Should we anticipate a continuity of this trend with lower margins also in the second half of 2025?

Well, not necessarily. Just remember that here in terms of Water, as you can see in the first half, 10% was contributed by Technology and Networks, which is basically projects that we carry out that are hired by our customer, a public company to do improvements or repairs or emergency work because you should remember that we need to manage network diligently. But unless we are the owners, as we are in the Czech Republic, we're not really responsible of the final condition of the network. Having said this, we have a forecast for the whole of the year, but it is true that Technology and Network, for example, we are required to carry out certain projects, and we have to carry them out instantly. Things are difficult to foresee. What I would say is that if we look at things -- if you look at the breakdown, I would answer that in the integrated water cycle, there could be a slight increase, while in Technology and Networks, things will remain stable. If we combine the 2, I would say that perhaps we should expect a similar margin in the second half of the year although it is true and now I'm getting back in time that things will improve as compared with the first quarter because in the second quarter, we have higher consumption volumes because of the summer. Our business is in the Northern Hemisphere, so there's a greater water consumption. So if you compare it with the second quarter, and let me rectify what I said, margins will go up. But if we compare things with the same period of last year, they will stay very similar.

Next question. Could you clarify why you made provisions for possible legal obligations in the U.K. related to the Environment? What kind of legal obligations are you referring to here?