HOCHTIEF Aktiengesellschaft (HOT) Earnings Call Transcript & Summary

Good day, and welcome to the HOCHTIEF Fiscal Year 2019 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Pinkney. Please go ahead, sir.

Thanks, operator. Good afternoon to everyone, and thank you for joining this HOCHTIEF 2019 results call. I'm Mike Pinkney, Head of Corporate Strategy, and I'm here with our Chief Executive, Marcelino Fernandez; our CFO, Peter Sassenfeld; and our Head of Capital Markets, Tobias Loskamp, along with several other colleagues from our senior management team. After we run through the presentation, we'll take any questions you may have, but let me start by handing over to our CEO who's going to run us through the key features of these results. Marcelino, all yours.

Thank you, Mike and the team, and good afternoon to everyone. I would like to start by addressing the announcement made last month regarding BICC, the Middle East based contractor, in which our subsidiary CIMIC has a 45% noncontrolling financial investment. In January, following the completion of an extensive study review, CIMIC announced its decision to exit the region. The decision was taken in the context of an accelerating deterioration of local market conditions. This will allow CIMIC, which appointed a new CEO in February, to focus its resources and capital allocation on the growth opportunities in its core markets. In this context, HOCHTIEF has recognized a one-off post-tax charge-off 8-23 (sic) [ 8-33 ] EUR 833 million after minorities in its 2019 financial statement. As a consequence, the group reported a nominal net loss of 2-0-6, EUR 206 million. We expect the total associated cash out late net of tax will be around EUR 400 million during 2020. This fully provisions all of CIMIC's exposure in relation to BICC. Following the announcement, the rating agency, Standard & Poor's, BBB investment-grade rating for HOCHTIEF is unchanged with a stable outlook. Now let's turn our attention to the core operational business, which continued to perform well during '19 with solid advances in profit, sales and order book, and significantly high underlying cash generation. Operational net profit, which skews one-off effect, rose by 1-4-6, EUR 146 million or 28% year-on-year to 6-6-9, EUR 669 million. All 3 divisions achieved an increase in the group's operational net profit, which also includes a first-time operational contribution from Abertis of 1-22, EUR 122 million. The group delivered net cash from operating activities of EUR 1.6 billion. This corresponds to a significant increase of EUR 1 billion year-on-year prefactoring. We have expanded our capital expenditure by EUR 174 million to EUR 518 million to take advantage of growth opportunities in mining and job-costed tunneling work. HOCHTIEF ended December '19 with a net cash position of EUR 1.53 billion after distributing EUR 450 million towards shareholders and posted a EUR 250 million cash out for BICC in '19. The group's order book reached a record high of over EUR 51 billion at the end of '19, an increase year-on-year of EUR 4 billion or 9%. The quality of our order book is enhanced by the high level of visibility, which are construction management, mining, alliance-style contracts and services activities, provide and which account for 2/3 of HOCHTIEF's order book. A strong level of new orders, EUR 30.4 billion was secured, up 9% year-on-year. Given the positive prospects for our operating divisions and Abertis and supported by a robust balance sheet, management intends to propose a dividend for '19 of EUR 5.80 per share, which represents a 16% increase compared with 218 (sic) [ 2018 ]. For 2020, we expect to achieve an operational net profit in the range of EUR 690 million to EUR 730 million compared with EUR 669 million we are reporting today for '19. Let's move to the cash flow analysis. If we focus on the underlying trend here, you can see that net cash from operating activities of EUR 1.56 billion was EUR 159 million higher year-on-year. This variation is prior to any factoring impact, which, as you can see, was negligible during 2019 as the factoring level was stable during the year. And we had a cash inflow from working capital despite the increasing use of alliance-style contracts and the strong mining growth at CIMIC, which have risen capital profile -- working capital profile. Looking specifically at the fourth quarter, we can see a cash inflow of close to EUR 1 billion, driven in particular by the seasonally strong swing in net working capital. Due to increased mining and job-costed tunneling work, net operating capital expenditure increased by EUR 174 million to EUR 518 million. Our CapEx has been expanded significantly in the last 2 years. This increased investment in growth is already yielding substantially higher returns. For example, you can see in the CIMIC results presentation that the mining business achieved a 40% increase in pretax profit in 219 (sic) [ 2019 ]. Let's move to Slide 6, net cash overview. The group continues to have robust financial position. HOCHTIEF ended the year with a net cash position of over EUR 1.5 billion. Adjusting for the EUR 250 million cash out for BICC in 2018, net cash would stand at around EUR 1.8 billion. This is after a total of around EUR 450 million were returned to external shareholders, of which approximately EUR 350 million was for HOCHTIEF shareholders. Post the BICC announcement, HOCHTIEF's investment-grade BBB rating remains unchanged with a stable outlook, and this is also true for CIMIC's credit rating. So our balance sheet remains solid, and we continue to be well positioned to actively consider all our capital allocation options. On Slide 8, we can say -- see some of our major recent credit wins. For instance, in Europe, a HOCHTIEF-led joint venture has been awarded a GBP 400 million contract to deliver the second phase of the London Power Tunnels project. We were awarded a PPP for the modernizations of Hessian Police facilities here in Germany last month. Last month, we announced that HOCHTIEF is part of a joint venture to build and maintain extensions to the A12 and A15 highways in the Netherlands worth in total EUR 1.2 billion. CIMIC has secured a number of important trade wins. In Q4, a CPB joint venture was awarded an alliance-style contract for the rail extension worth over AUD 400 million as part of the Perth Metronet project. The previous quarter showed a AUD 1.3 billion contract extension of the Curragh Mine in Queensland announced where Thiess will provide services for a future -- for further 6 years. And as a part of a joint venture, UGL and Pacific Partnerships reached contractual close on the extension of an existing PPP contract for the Sydney Metro worth over AUD 350 million. Americas. Turner recently became recognized as a #1 green building contractor in the U.S., has been awarded several notable projects in recent months, including a health center in Oregon, an airport expansion in Florida and the development of 42-story mixed-use tower in Washington. Flatiron, meanwhile, is to widen a large section of the Interstate 405 highway in the State of Washington for almost USD 100 million. Let's move to Slide 9, order book. The group's order book reached a record high of over EUR 51 billion at the end of '19, an increase year-on-year of EUR 4 billion or 9%. All divisions expanded their order books over the 12 months. The quality of our order book is enhanced by the high level of visibility, which are construction management, mining, alliance-style contracts and services activities provided. Together, they account for 2/3 of HOCHTIEF's order book. This means that our order book risk profile continues to develop in a very positive manner as our activities have greater earnings and cash flow visibility. A strong level of new orders, EUR 30.4 billion were secured during the year, a 9% increase compared with '18. And we continue with a disciplined bidding approach, and this remains a priority across our group. Looking forward, the pipeline, which are based in the U.S., Canada, Australia, and Europe have identified, stands at about EUR 600 billion. Divisions. On Slide 10, we have the Asia Pacific division and the result published last week by CIMIC. Post the one-off BICC impact, statutory impact was minus AUD 1 billion. And as a consequence, no final dividend has been declared for '19. CIMIC is looking forward to return to its standard dividend policies subsequently. Net profit after-tax impact ex BICC was up 3% year-on-year to AUD 800 million with stable revenues and margins. Operating cash flow of AUD 1.7 billion was up substantially by more than AUD 1 billion year-on-year refractory. CIMIC's financial position remains robust with a net cash position of over AUD 800 million and AUD 3 billion of undrawn facilities. Looking at the order book, the operating companies' work in hand grew by 4% year-on-year to AUD 35.3 billion, with total work in hand of AUD 37.5 billion and AUD 13.1 billion of new work was secured. I will highlight that alliance-style contracts account for 25% approximately of the CIMIC construction order book. Now for 2020, CIMIC announced its NPAT guidance of AUD 810 million to AUD 850 million, which represents further growth on the underlying 2019 results. Americas. Sales increased significantly by 17% to EUR 15.3 billion or 11% in local currency terms. Operational PBT rose by 6% to EUR 321 million at the top end of the '19 guidance range, and operational net profit was 14% higher. Americas achieved an outstanding performance in cash generation. Net cash from operating activities more than doubled to over EUR 700 million with factoring stable. This increase was driven partly by sales growth and a strong focus on cash generation, particularly in terms of working capital. In addition, the high cash-in level was boosted by timing effects. The Americas net cash position at the end of December stood at EUR 1.5 billion, up by EUR 325 million year-on-year. And the order backlog rose through a year-end record high of EUR 23.6 billion. This is up by EUR 2.5 billion year-over-year or 12% with almost EUR 17 billion of new orders secured during '19, a rise of around 10%. For 2020, our guidance for Americas is for operational PBT rise to between EUR 330 million to EUR 350 million compared to EUR 321 million reported today. And on Slide 12, we can look at Europe. Europe, which has continued to increase its profitability during 2019. Operational activity increased by EUR 4 million year-on-year to EUR 66 million, in line with EUR 65 million to EUR 70 million guidance. The increase was driven by high construction profits and a solid operational activity margin. Nominal net profit was 15% higher at EUR 45 million. And the sales performance reflects the disciplined bidding approach, which the business continues to apply in its construction activities. Europe reported EUR 42 million of net cash from operating activities in line with the division's nominal net profit and driven by the construction and PPP businesses. The figure for '18 was partly driven by the real estate divestments. At the end of '19, HOCHTIEF Europe's balance sheet showed a stronger cash position of over EUR 510 million, up EUR 36 million year-on-year. New orders was a highlight with EUR 2.2 billion of work secured, up 15% year-on-year and which represents 1.5x the level of work done during 2019. The divisional order backlog at the end of the period stood at EUR 4.3 billion and has increased by over EUR 730 million compared with December '18. The 2020 guidance for Europe is for operational PBT to continue to develop in a positive manner and reach a level of around EUR 70 million. Then we move to the next slide, summary of the Abertis performance in 2019. Revenues rose 4% on a comparable basis with a solid traffic growth of 1.9%. Traffic was over 4% higher year-on-year in Spain, with a 1% rise in France. On a like-for-like basis, EBITDA was 8% higher at EUR 3.7 billion whilst comparable net profit increased by 9% to EUR 1.1 billion. HOCHTIEF's 20% share of profits after holding costs and PPA was EUR 122 million compared with EUR 84 million for the 7 months we consolidated Abertis during 2018. Red Eléctrica in '19 is a key strategic achievement. New bond issuances and bank facilities were secured on a very attractive terms to refinance existing debt. And EUR 875 million dividend was distributed in May 2019, and EUR 150 million per annum efficiency plan has started to be implemented. Furthermore, in October '19, Abertis and the sovereign wealth fund, GIC, announced that they have reached an agreement to acquire a 70% stake in brownfield toll road company, RCO, Red de Carreteras de Occidente, one of the largest transport operators in Mexico, which manages 876 kilometers of toll roads. Abertis will fully consolidate RCO and will invest EUR 1.5 billion for a 50.1% stake. RCO is a high-quality asset with a good strategic fit and a source of long-term cash flow generation, which extends Abertis' portfolio duration and further diversifies the company geographically. Overall, our investment in Abertis is going as planned, and it significantly increased our level of profit and cash generation, and at the same time, enhancing our earnings visibility. For 2019, the Abertis contribution represents 18% of our operational net profit and the dividend received accounted for 15% of free cash flow from operations. Let's move to Slide 14, and then to conclude. Aside from the BICC impact, HOCHTIEF's geographically diversified cooperational business has delivered a solid performance in '19 with its focus on developed markets. Shareholder remuneration continues to be a key element of the group's capital allocation strategy along with focusing on attractive organic and strategic growth opportunities. And given the positive profits for our operating divisions in Abertis and supported by robust group balance sheet, management intends to propose a dividend for 2019 of EUR 5.80 per share, which represents an increase of 16% compared with '18. Again, our guidance for 2020 of operational net profit of between EUR 690 million to EUR 730 million implies an increase of between 3% and 9%, means that the positive underlying momentum in the business continues. As I said, about 2/3 of our EUR 51 billion backlog comes from construction management, mining, alliance-style contracts and services. And this means that the majority of the business is in activities which provide growth with an attractive risk profile and long-term visibility, thus enhancing the quality and sustainability of our profits and cash flows. And this is complemented by the contribution from our 20% stake in Abertis. Looking further forward, a EUR 600 billion project pipeline provides a positive long-term context for the group further supported by the EUR 230 billion PPP pipeline. Our strategy continues to be focused on further strengthening HOCHTIEF's position in its core markets, derisking the business, taking advantage of growth opportunities and sustaining cash back profitability accompanied by a rigorous risk management approach. And a substantial geographical diversification is the key advantage in delivering this strategy. In addition and fundamental to our work transformation, CIMIC is making significant progress in digitalization and innovation. And we're at the forefront of this technological development in our industry. And we will continue to pursue steady growth on capital allocation as they arise as part of our commitment to deliver attractive and sustainable shareholder remuneration. Thank you very much, everyone, for listening, and now we welcome your questions.

Yes, operator, we're ready to take questions. Thank you.

[Operator Instructions] The first question comes from Guillermo Fernández at Kepler.

The first one would be, if you could give us some color on the positive working capital inflow? You have reported EUR 100 million ex CIMIC. I think these represent around an inflow of over EUR 300 million, and the income is mostly coming from the U.S. The question would be to understand whether this is mainly driven by a particularly material advance payment in a single contract or is it a more spread result of different projects? And also, if you allow me a second question on the pipeline and the different opportunities you envisaged. If you would consider doing construction works for the -- for RCO, the Mexican subsidiary of Abertis, in particular, I think, I have read that the subsidiary has to invest around EUR 300 million, well, in exchange of some construction maturity expansion. And also, if you consider investing in managed lines, in particular, operating in Maryland, in the U.S.?

Guillermo, thanks for your questions. Let me take the first one. As you've highlighted, the working capital performance and the cash flow overall in the group has been very strong. As we've highlighted there, we've got a very significant increase in the underlying cash flow pre-factoring of almost EUR 1 billion year-on-year. And as you've seen in our divisional split, Americas was a particular highlight in that sense. So the cash flow there from operating activities was over EUR 700 million, so it's more than double the 2018 level. And that's -- if you take the 2 years together, that's EUR 1 billion of cash flow that they've generated. So obviously, there's several factors here. The first is that, as you can see, there was strong sales growth. So in euro terms, that was 17%, that's about 11% FX adjusted. And there was a little bit of acceleration during the year as well. Secondly, the teams are very focused on efficient cash flow collections. Obviously, you know that the majority, 90% or so of our sales there come from Turner and the business is performing extremely well. I think the third thing to say that, as Marcelino was flagging, there were some timing effects related to some new contracts and also some cash recovery from previous years. But it's not sort of driven as you were asking by 1 big contractor or anything like that. So look, overall, we think it's really an extraordinary performance of the Americas business. But that's notwithstanding, we expect a very solid performance in 2020 as well.

Guillermo, RCO -- you know that we don't have any subsidiary -- any construction subsidiary in Mexico. And then, obviously, we are not planning, in fact, to go there. Is -- I think it is more advisable for RCO, in fact, to get local construction companies because they can also provide better services and we're not going to say to go to this kind of investment that they are planning to do. Because of that, clearly, that -- this is not driving us to Mexico. To continue in regard of Maryland now is in a predevelopment agreement. And this is the fact in this process. And it's a project that will come, but it will take years -- but it will take too long. Obviously, we, together with Abertis, we have studied the possibility of being from the very beginning in this kind of predevelopment agreement, but there is nothing that is going to be really factual in a short period of time. And then the only thing is like being involved in the predeveloping agreement is a good thing for continuing further or looking at it is interesting for us to be involved in the subsequent project that will come after this predevelopment agreement and -- but currently, we don't know how long we will take Maryland, let's say, the State of Maryland, say, to go further.

The next question comes from Norbert Kretlow at Commerzbank.

I had a question on the earnings contribution from Abertis. When I make the math comparing H2 '19 versus '18, I note that it's -- that the earnings contribution is slightly down. Can you maybe elaborate on the drivers? And what to expect going forward? And the second question would be on the equity ratio. With the BICC impact, it has dropped to below 9%, how happy are you with that figure?

Well, maybe just to start with your second point. I mean, the equity ratio per se is not something that we follow particularly closely. Obviously, as we said, post the announcement regarding BICC, S&P -- our BBB rating with S&P is unchanged and with a stable outlook. And in terms of dividend payment abilities, et cetera, that's a function of the parent company, HGB account. So we're not -- no issue there as far as we're aware. And secondly, on Abertis, I mean, obviously, there's a function of timing there in terms of seasonality. There's also, obviously, the PPA that is applied to the contribution, obviously, our contribution is net of that PPA. And there's also the case that one of the Spanish concessions dilemma finished in 2019. So I think the underlying trend is positive. You saw the traffic growth because -- that Marcelino was flagging there, particularly strong in Spain and France, was very solid as well. And we think that the net contribution in 2020 will continue to be solid.

But maybe coming back to the equity and CIMIC, obviously, we are not worried, that's about the amount, but obviously, we want to rebuild equity as much as possible.

Maybe 1 follow-up on the...

And this is a -- it's a good thing for...

Sorry, the line is pretty bad. I can't hear anything by now.