Global Dominion Access, S.A. (DOM) Earnings Call Transcript & Summary

Welcome to the earnings report of Dominion. Ms. Patricia Berjon, Corporate Development Manager; Mr. Tobillas, General Director; and Mikel Barandiarán, CEO, will be attending and presenting this conference call. [Operator Instructions] I would like to hand over to the speakers. Thank you very much.

Good afternoon, everyone, and thank you very much for attending our end of year earnings report for 2019. 2019 has ended with results that, in our opinion, we consider excellent. These results with which we comply all the parameters of a strategic plan. You know that we have a very ambitious strategic plan 2019-2022 that we presented in May, and we're not only achieving it, but we are exceeding it. We will see this in further detail with numbers. But as headings, I would say that we have double-digit growth in all the items in the income statement that is rounded off by 20% growth in net profit, and we have very high conversion cash flows in -- very high levels of conversion cash flow amounting to EUR 113 million. And as -- this is important, but also we see the continuous evolution of a business model. This is how we go in to create added value. This growth is driven by 3 strategic projects. 360 Solutions are Tier 1 model in services B2B and the Smart House project in B2C. We're going to run through the numbers and some of the developments that we have had in the projects. But I would like to highlight that this year, we have made special efforts in providing very detailed information on the closing of the year, both in quantitative and KPIs. We've tried to collect within the legal and reasonable limits. The recommendations that you have conveyed in order to be as transparent as possible, and I hope that is useful. Before going through the main figures, I would like to talk about the effects of the new accounting rule IFRS 16 that we apply for the first time for this year 2019 -- in 2019, so that you can interpret and compare the results. At a balance sheet level, the impact of the IFRS 16 is about EUR 42 million. We started off the year with impact close to EUR 52 million, but we've adjusted this as we signed new contracts or others were canceled. This makes -- difficult to make estimations. And in income statement level, IFRS 16 adds EUR 20 million to the -- at contribution margin and EBITDA level and EUR 1.5 million at EBITA level and an impact of EUR 0.3 million in negative. And having said this, I'm going to talk a little bit about the year. We have -- our business figure has grown by 14% that amounts to EUR 947 million, which is approximately 1,150 accounting figure. This is a very high growth, but this is an organic growth of 8.5% and exceeds the growth commitments in the strategic plan, the expected growth of up to 5% and exceeding the average growth levels that we had along the year. With regards to the inorganic growth, it includes the pro forma invoicing of the acquired companies, Bygging and Alterna over 10 and 11 months, and the ForEx effects that in net has been new due to -- 0 due to diversification. Contribution margin and EBITDA are distorted due -- since we applied IFRS 16, that's why we look at the EBITA, EBIT prior to PPA's amortization, where we expect compound growth greater than 10% and where we have had an EBITDA of EUR 63 million. These growth levels show the difference in operating leverage levels with which we work. So the structure weighs for the first time less than 3% of sales. And the amortization are very well contained on 2.3% over sales, around EUR 22 million. With regard to the financial results, this is -- this year is higher than 2018. The increase is due to the negative impact of the equity swap negative assessment and the differences in negative -- in exchange rates that has a difference of EUR 5 million. This is offset by the income statement in a like-to-like basis, referring to BAS and the -- put the shareholding in the concessionaire in Antofagasta. With regards to the tax -- corporate taxes, the expenditure is around EUR 4.5 million due to the activation of negative tax basis that will be used very soon in United States. So the continuous operating net profit is about EUR 39 million, which is 20% greater than previous year and is full -- and is in line to complete -- to comply with our aim, which is to double the net profit of -- in 2022. In the accounts, you will see around EUR 33 million. This is due to the fact that the discontinued activities is including the differences in Brazil conversions to the results. This transfer amounts to EUR 6.2 million, and it's an accounting movement has no impact whatsoever on the cash flow or on equity. And most of it is performed over the last quarter of the year. If we accept this, we have a recurring earning income statement, and it collects both positive and negative signs, but those -- these are compensated and absorbed by the business. Now I would like to analyze where the growth come from. We see growth in Services and Solutions Services grew 13% and 16% Solutions. We also grow in all geographies and all activity -- fields of activity, some may grow more and gain weight over a total turnover like in the energy activity, which was already expected. Between the balanced Services and Solutions, we see greater weight of Solutions where they represent 38% of our activity. However, if we were to see this comparing on the contribution margin, the weight of both segments will be very balanced around 50% to 50%, if we correct -- we apply the effect of IFRS 16 that is affecting services. Services contribution margin grows on its business figure operating results considering that they're taking up margins that are more adjusted to the commercialization of energy. With regards to solutions, the contribution margin is around 15.9%, and therefore, above 15% target. The decrease that we saw vis-a-vis 2018 was due to the fact that the margins were very high since in this segment, we were having the first engineering phases in the Angola project, which had very high margins. The evolution of the segments and the geography distribution is very much linked to the different strategic projects that we have and that we would like to comment. I'm going to run through the 3 areas. Solutions 360. It's very clear that our business model is not a typical EPC model. Otherwise, it would be very difficult to understand the margins that we have. We work to offer an integrated solution to the customer with a comprehensive vision of the chain value, both in digital transformation in big renewable projects, hospital projects and more and more in industrial solutions. In solutions, we are more and more diversified in type of activities as well geographically, the weight in energy has doubled in the last 2 years. And geographically, Asia is gaining weight. After buying Bygging, allow us to develop our activity in the potential market of India, but it will allow us to be a launching pad for the projects that we have in the Asia, Oceania area. Over 2019, we have checked the high-level of portfolio allocation that we've had in this area. Future visibility for Solutions segment is provided by the portfolio, which at the end of the year amounts to EUR 609 million. It's important that apart from having this fixed portfolio, we have a high visibility on a pipeline that includes hospital tenders in Chile, where we are already participating. In the services B2B, we're actually managing to position ourselves as Tier 1 as global managers of our services required by customers to operate managed services, allow us to grow operating margins and increase our difference with regards to other competitors. We have different types of clients like Dow Chemical, [ Berger ], [ CSP ], [ Cores ], Peugeot, Michelin, among others. It's also important in B2B, the greater activity that we conduct in operation and maintenance of electrical grid has a lot of potential compared to the telco sector, which is more mature and has become a commodity in markets like the Spanish market. So in this regard, we have said over the year, the importance of contracts with ENEL in Peru and Chile that represent EUR 20 million with regards to the turnover. And with regards to services B2C, that represent 10% of our contribution margin, it's worth to explain our business model. Again, the business model for Smart House is based on the ownership of client and the existence of recurring income based on services provision. This is contrast radically with a retailer, which is more linked to the consumption dynamic. Therefore, we're not a retailer. But we integrate services that have our own -- we have our own distribution channels. And from here, we get our income and the profitability. Our efforts are focused on increasing the lost time value of clients, i.e., lifetime value of the clients. So that's why we leverage synergies from having our client to have more services from the same provider. We'll have more incentives to stay with them. And this is what we use and the advantage of having this own distribution channel. So this project, the Smart House project has been running for 2 years, through which we have been building different services verticals that we want to offer. As we stand, we have 400,000 service contracts. that are distributed in 260,000 insurance of electronic devices, 145,000 energy supply points, gas and electricity. This means that in 2019, we have captured 75,000 new supply points, doubling more than what we had in previous year. And we have 26,000 telco lines that has been captured over the past 2 months of the year. We launched this at the end of October. And now I'm going to talk about the balance sheet where I see a very clear message. I think that the end of year number clears out any doubt that we could have generated over the semester. We generate EUR 47 million in cash flow without any variations in the working capital, leaving a net cash flow of EUR 130 million. So we have generated EUR 47 million cash flow from an EBITA of EUR 63 million. So we have a conversion rate of 75%. As we said in our strategic plan, you know that this, as calculation, which is detailed in the web page presentation includes all the effects on the activity cash flow, except the inorganic except -- includes CapEx, financials, taxes and working capital variations, which has been 0 over 2019. The variation of EUR 9 million is inorganic. With regards to CapEx, our objective is that the investment level is ideally under the amortization level. This year, the CapEx has been higher linked to the initial investment for the greenfields in Peru and Chile. And we're talking about EUR 6 million that amortized in sped-up manner in 3 years. So if we renew these contracts, the EBIT will grow exponentially. This EUR 47 million that we've generated has made our cash flow grow by EUR 7 million out of EUR 106 million in 2018 to EUR 113 million at the 2019 closure. And we've used this to pay the earnouts and M&As and investments that has amounted to EUR 29 million, paying dividends to minor shareholders and positive working capital of approximately EUR 10 million in the MA operations. We also achieved -- we have achieved the return on net assets levels. The strategic plan sets out 20%. And in 2019, we've reached 25%. Therefore, way above the target. These cash flow generation levels, together with the low commitments in the earnouts, I still remember that at 2019, the commitments for an earnouts was around EUR 30 million, out of which EUR 7 million will be paid in 2020. This, together with the cash flow that we have allow us to pay out to the shareholder for the first time in 2020, we will pay out dividends, and we just launched our first buyback program for shares. The Board has agreed distribution of 1/3 of the profit -- of the net profit that will amount to EUR 100 million -- sorry, EUR 11 million. The way of the distribution will be communicated after the General Shareholders Meeting in May. We also -- the Board also approved the program of buyback for shareholders. The program will go for 1 year, can be renewed and it sets to buy as a maximum 8.5 million shares that are equivalent to 5% of the company, and we will dedicate maximum EUR 35 million. So we have concluded this year with excellent results, and we already look into 2020, where our -- all our targets in our plan are still effective and where we commit ourselves to be above 5% in turnover in spite of the very high growth that we've had this year. Thank you very much for your attention, and then we can move on to the questions -- to any questions that you may have. Thank you very much.

[Operator Instructions] The first question will be asked by Carlos Treviño from Santander.

I have several questions. First and foremost, Patricia, you just said that you were above 5% in sales. And talking about EBITA, the target will be to grow in line with the target of the plan 2022 by 3%. So specifically, what are the margins in Q4. In the fourth quarter, the EBITDA has been under the income, the profit, if we take out the IFRS 16. I understand that it was very difficult to do this comparison because we had very high margins. But I would like to ask you whether there's being any specific restructuring costs that could have impacted profitability? And another question on B2C. You talked about less than 10% of the contribution margin. In our presentation, you said -- in the previous presentation, this was 10% of the revenues. This means that the contribution margin is under the average in -- for the company, and this is reasonable because it comes from services. But within services, the question -- the contribution margins on B2C, would it be above the average of the business? Or would they be greater or lower? And coming back to the trends that we are seeing with the coronavirus crisis. And I would like to ask you for any internal study that you have conducted? And whether you think that what's happening, it could affect your business, many for a number of projects that you have in the affected areas? Or maybe you can have some sort of supply issue, although you're not a producing company or any sort of issue that you can have analyzed about coronavirus?

Carlos, thank you very much for your questions. I'll go one by one. Talking about the 2020 targets, what we said that in spite of the growth that we've seen in 2019, We have visibility to commit ourselves to grow in turnover of 5% and the EBITDA growth levels will be around 10%. These are commitments. With regards to the comparison 4Q isolated, that's what you said 2018. And the fourth quarter of 2018 had extraordinarily high margins because we had a lot of weight from solutions and the first phase of the Angola project, where we saw the -- where we had the engineering phases, which has higher margins. And that's one of the reasons in the comparison, these are more limited in the isolated stage. But you also mentioned that this year, we saw very good results, and we've taken advantage of this to make some sort of additional restructuring that we could have done in 2020 but we've done in 2019. This is, in a way, captured in the fourth quarter. And if you look at the global numbers, it's completely absorbed by the positive news on the business. You've asked about B2C about the contribution margins. It's true that in this part of the business, the contribution margin is a bit lower compared to other services. But I would like to remark that the services contribution margin despite of having the business is still growing over sales percentage. And coronavirus, that was the last question. Exposure, in our case, is limited. Well, we will see where it gets to, how far it gets? Maybe we say something different in a month but our exposure is limited in our businesses, and we haven't conducted any special analysis, internal analysis in the company on this because we reckon that there's no impact right now.

Could you quantify the restructuring extraordinary costs for Q4?

I don't have the figures right now, but we will be somewhere in the region of EUR 2 million or EUR 3 million for additional restructuring.

[Operator Instructions] Next question is asked by Ivón Leal from BBVA.

I have a couple of questions. The total amount for earnouts, maybe I had it mistaken or it's been reduced because it was 36 and now it's 30. That's the first question. And then the second question, the working capital is true that it's very good this year. And If we can review this based on businesses, I thought that in 2019, we saw some sort of negative impact on the working capital due to the sales drop in phone house. Is this true or that wasn't this real story? And eventually, what do you hope for in working -- in terms of working capital for 2020. I think that the Solutions business depends on the payments performance, but we're talking a working capital -- balanced working capital that in 3 years, we shouldn't see any investments nor the investments?