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

Good afternoon, and welcome to the presentation results of Dominion. Before we start, we'd like to remind you that after the presentation, as usual, there will be a Q&A. [Operator Instructions]. We'll start the presentation with Mikel Barandiaran, CEO of Dominion; Roberto Tobillas, Managing Director; and Patricia Berjon, Director for Corporate Development.

Hello, everyone. Good afternoon, and thank you very much for attending this conference call on the first half of 2024. We barely published the information an hour ago, and the first thing I'd like to highlight on these results is that we find ourselves in the first half of the year where the business is moving forward positively from the point of view of the business portfolio and contract performance and from the point of view of strategic advances, some of which have already been included in the figures and others are to come in the coming months. Although it's true that we've been through a more challenging [ market ] in the development and invoicing and investment intensity margins, the positive dynamics and the medium and long-term objectives are still in force and will continue to materialize during the rest of the year and the rest of the year's strategic plan. There are 2 very clear subjects that should be mentioned in this first half. On the one hand, there's the inorganic aspects linked to the mobile devices which has an impact on sales negatively and in working capital dynamics. And also during this half year, we've had less activity in renewable projects. And regarding the capital allocation investment and debt criteria, we are according to plan and in conformance with the payment commitments you all know about and the strategic transformation in our plan. During these first 6 months, a large amount of these investments have been concentrated while there have been no operations in the opposite sense with a temporary decoupling that will be offset in the coming quarters. I would point out the good operating margin dynamics and the recurrence of the business represented by the high growth in turnover and margins in the service segment without forgetting that in the last line, we continue to have a very high financial cost. We're going to see all these dynamics reflected in figures. And I'll start with the income statement that shows a practically 5% organic increase, although the global growth is practically flat. There are almost [ 20 million ] turnover eliminated inorganically after the restructuring of the businesses carried out in second half 2023. That is the inorganic part subtracts 3.3% in the half year while the exchange rate effect subtracts 1.2%. Regarding margins, we highlighted the business operating profitability continues at very high levels, 14.9% sales over sales for contribution margin and 12.5% of EBITDA, which remains over the 12% for the third quarter running and consolidates the dynamics we've been seeing since the beginning of the year 2023. I'd like to remind you that the strategy is to focus the company on the more profitable activities and businesses and reduced activities with lower margin profiles. There are no significant variations on the amortization side. And regarding financial expenses, we have a somewhat positive net effect because of the positive contribution of the exchange rate differences in the comparisons in the half years. But there's a significant increase in financial expenses, somewhat more than EUR 6.5 million as a result of the interest rates and increase in debt related to the payment commitments that have been taken on during the first quarter of this year. We have an attributed net profit of EUR 16.3 million, which was [ 30% ] compared to the first quarter of 2023 and is completely connected to these higher financial expenses I've just mentioned. Let's see what is the performance of the activities of the implied business segments. We start with sustainable services, which has slightly increased its weight in invoicing and in margins over the total company and represents 71% in turnover and 62% in contribution margin and provides high recurrence to the company's income statements. Services reaches a turnover of EUR 401 which means growing 2% compared to the same half last year. But since in this segment, concentrates the entire half year inorganic effect, the organic growth is much higher and is at a very healthy 7.9%, much higher than the target established in the strategic plan and showing the strength of the areas that we have strategically put our stakes on. Regarding the contribution margins, once again, we see the results of our positioning, mainly because of the environmental services with a 12.4% margin in the 6 months and 12.7% for the isolated quarter, which is the highest figure in the historical series for this segment. There are no main headlines in the activities for this segment beyond the good performance and the positive prospects for the coming quarters. The 360 project segment has had a more moderate activity than in previous quarters and compared to the first quarter in 2023. The reason is due to the execution pace for renewal projects as a result of various factors present during this first half of the year. During the first quarter, we said that we were at the time, in transition since we were completing the Dominican Republic farms and taking the activity to the European environment. In parallel during the second quarter, elections were held in 2 of the geographies we operated in, Dominican Republic and Mexico. This always slows down some of the percentages but these elections have had positive results for our interest in these regions. This is the case of the Dominican Republic, where in June, we opened 1 of the 5 farms we have coming to operation. And the rest will be connected in the coming months. And finally, we haven't performed at the same rate that we have been doing in the Dominican Republic since we are trying to pace the investments and the new projects with the existence of agreements in this investment. For the rest of the projects, industrial perspective, the pace is still strong, and progress has been made in projects that are closer to generating a direct turnover or being included in our portfolio figures. For example, a project in the LatAm hydroelectric power station, our distribution networks or an anti-tsunami alarm in Chile. The closing of the portfolio for [indiscernible] has been [ EUR 601 million ] with no major variations compared to previous quarters. The commencement of these projects and the recovery of the execution phase in renewables should take us to the second half of the year where the projects will come back to their previous levels. And regarding the 360 project, the levels are still above the goal, 18.8% in this first half of 2024. And finally, the segment participation in infrastructures, the business is pretty similar to the same half in 2023 since we have the same plans in operation that we had at that time. And along the way, we have disinvested in all the current [indiscernible]. And now the Cerritos wind farm is available for sale. The infrastructures under construction carried out in 2023 in Dominican Republic are about to be connected, as I said, and about to join the COD. And [ 80 ] megawatts are close to be executed in Italy. And regarding the Cerritos wind farm, very specific progress has been in action that could take place during the third quarter of this year and for which we have several purchase options on the table. Regarding the balance sheet movements, both movements were already carried out, and were discussed during the presentation of the results for the first quarter of this year. On the one hand, we had to make payments related to corporate operations in previous years, the most important of which refers to recovering the total control of the renewable business with the purchasing of the stake in Incus for EUR 67 million. And the other EUR 9 million are earn-outs in operations, such as Bygging India tank and other environmental service buildings. Another EUR 60 million have been invested in the transformation in various business areas. Specifically, EUR 20 million of expansion CapEx assigned to the renewable project pipeline and the device renting business. And the rest is working capital as a consequence of the reduction in retail business. In other words, there is a net working capital nature in the sale of devices since they deferred payment to the manufacturers. And reducing the volume of this business reduces the net associated operating working capital. And in March, we acquired treasury shares around EUR 12 million, the objective of which was to complete the participation plan as part of the management team and the share capital of the company, which was finally carried out in June and through which almost 50 managers became Dominion shareholders. On the other hand, the activity has generated free operating cash flow of EUR 25 million, including the payment of taxes and financial expenses. These increases [ in debt ] should be circumstantial since in this first half of the year, there are many payment commitments and investment decisions with the goal of materializing the benefits during the strategic plan. While during the second part of the year, we will not have this investment pressure with the payout of the dividend as the only significant payout. There are no other significant movements. We have shared our EUR 15 million last 9th of July. And we also have the already mentioned earn-outs. And finally, it's important to mention that continuous growth and organic growth with a clear operating profitability which means that we can expect a second half of the year that will be stronger and with fewer investment needs. And we foresee a year 2024 in line with the general guidelines of the strategic plan. Thank you very much. And we now move on to the Q&A.

[Operator Instructions] Starting with the people that raised their hand. Enrique Parrondo, JB Capital.

And I had 2 questions. First of all, regarding this growth in the second half of the year, where you expect things to reactivate and mainly through the project side. What class -- what kind of growth do you expect here? It seems complicated to reach that 5% sales for the complete year since the figure in the second half would have to be very significant. So I'd appreciate a little bit of color on this. And related to this, but more long term, bearing in mind the guidelines given EBITDA margins '24, '26, we're already seeing the improvements. But considering the year 2024 which perhaps would be more modest from the point of view of gross in the top line, what kind of growth can be considered for the next few years? And do you still feel uncomfortable with those sales growth guidelines in particular?

Thank you, Enrique. Let's see. I'll start with the second part of the question. We're seeing that the second half of the year could have a very interesting increase in portfolio. So in the project side, we're very optimistic of a significant portfolio in projects, both the renewables that are already underway as well as projects that are funded by agencies and one-off projects. So we feel very comfortable about that. As Patricia said, on the project side, it is what it is. We've had some temporary differences, let's say, in the closing at the end of June. But as usual, we're going to see what the operations are in December. Again, we see a temporary issue, but there's nothing that has dropped off. So we could have volume in Italy. We could go back to having more in Dominican Republic, significant projects under execution. And I think that we have to wait until the last quarter to see the whole picture, because it could be actually [ better ] then. But in any case, Enrique, in this first half of the year, we've grown organically at a rate of 5%. In other words, although we've seen a slowdown in projects perhaps, the global figure for the company is 5%. I think it's important for us to consider that in that simplification process that we established in the strategic plan, we are going to carry out divestments. And when we talk about increases of 5% in sales, as Patricia said, we're talking about organic growth that will be affected by those divestments.

We continue with Juan Peña.

I had a few questions. First of all, the infrastructure you mentioned, Patricia, in Dominican Republic that were going to come in the following months, you mentioned divestments. Are these divestments for the second half of '24? Or would that be in '25? And linked to this, I don't know whether you can give us any visibility on the net debt regarding the '24. Because the increase in this H1 is quite significant and it surprises at least me. And if we have visibility of the thing you talked about, Cerritos, for example, we expect it to close -- finally close during this half of the year. And other divestments, do you have any figures in mind that could serve as a guide regarding net debt at the end of the year? That would be very useful. And secondly, regarding CapEx, you said that there's an extraordinary CapEx, let's say, or a growth CapEx of EUR 20 million. But in the annual accounts, I can't see the recurrent figure because it's a very high figure in the investment line, and I'm not sure if that's it or whether it's included in something I don't know about. So I would like to have some visibility as to whether this CapEx growth is going to be repeated. In other words, will it be EUR 4 million? How much is recovered technically [indiscernible] which will give us a total of EUR 80 million in CapEx? Or if the other figures that have a bit of visibility. And finally, going a step further, my colleague, Enrique has just said, last year, with the presentation of the strategic plan, you estimated an EBITDA of EUR 150 million for the year which wasn't reached in the end because of the announced -- theoretically, it was reached. And although it's difficult, obviously, to make estimates, do you currently think that those EUR 150 million can be reached on an EBITDA level for this year bearing in mind that we have just over EUR 70 million in H1? And we mentioned they did speed up in this second half. And finally, can you give us a bit more color on the famous subject of the agreement with the industrial partner in Europe. That would be more than welcome to shed a little bit more light, because in the end, we've been talking about this for almost a year. And logically, the sooner we know something, the better for the company and for everyone.

I'll answer the question. I'm sure I'll be held by Patricia, I'm not sure I wrote it all down. You talk about Dominican Republic and the infrastructures. Yes, in August and September, we'll be connecting Washington Capital 2, 3, at [indiscernible] and an additional project that will start to build, [indiscernible] in the month of September. And you know that we are a facilitator. We're not playing at being an IPP. And that's in the process. It's in the process in a very attractive way. I think the Dominican Republic, being a partner of ours with the majority stakeholder, we could consider of up to 100% to acquire the PB portfolio that would return the buyer into the leader in Dominican Republic and would also be very well positioned for everything that's coming next year, and there are going to be more tenders or PPAs. So we're not going to give concrete figures on net debt, obviously. But we do see a second half with a significant contribution in the generation of operating cash flow, and we feel that these operations can give us a different picture to what we have now in June, which, as Patricia said, we have all the inorganic investments carried out and paid for. And basically, we have equal effect acquiring a control of 100% of the area in the renewable area. And what we did want to show is that you'll see that, that 25% that we purchased is going to significantly cover the payments. So both current and future payments. So I think that that's approach. Regarding EBITDA, there's nothing that makes us think Dominion in relation to these operations, we see a positive second half to tackle that figure of EUR 150 million we gave. Let's see. And certainly, the day we don't see it, we'll say it. But if we don't say it, it's because we're optimistic, and we do see it. You were talking about the growth CapEx. You will have seen some investment in working capital. And in Italy, we have what we paid for, developments and so forth. And then we have IFRS 16 in the half, that means a net increase of EUR 6 million. And what I would say is that our CapEx, let's say, we've closed the replacement CapEx with around 8%. So we have stronger financial discipline that we've taken in the last 2 or 3 years, and we will be looking on the CapEx. And then some color on the agreement with Europe, as far as I can say, again, we are focused on finding a partner for the Italian portfolio. You know that the Italian portfolio this year is to build 4 projects, 2 in Sicily, 2 in Basilicata. That construction doesn't -- isn't included in the country margins because they will be eliminated. So we feel that during the second half, we have to find a solution between 3 closable options we have on the table. And we are assessing all 3 and perhaps making more progress with one of them. And that's as much as I can say. You'll see it. And I think it will also be seen in the second half of the year. But like everything else, the operations are on the table. There are names to them. And what we have to do is materialize them. I don't know if I forgot something out of the 3 or 4 questions.