HOCHTIEF Aktiengesellschaft (HOT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the HOCHTIEF Half Year 2023 Results Call. [Operator Instructions] And I would now like to turn the conference over to Mike Pinkney. Please go ahead.

Thanks, operator. Good afternoon to everyone, and thank you for joining us for the presentation of HOCHTIEF's first half 2023 results. I'm Mike Pinkney, Head of Corporate Strategy, and I'm here with our CEO, Juan Santamaria; our CFO, Peter Sassenfeld; as well as our Head of Capital Markets, Tobias Loskamp; and other colleagues from the senior management team of HOCHTIEF. We're looking forward to taking your questions, as always. But to start off with, our CEO is going to run us through the key aspects of our performance during the first 6 months of the year. Juan, all yours.

Thank you so much, Mike and the team. Good afternoon to everyone, and thanks for joining us. HOCHTIEF has achieved robust performance during the first half of 2023, with higher sales and profits, a strong growth in the orders and a solid net cash position at the end of June. This reflects our strategy to further strengthen HOCHTIEF's position in its core markets, whilst at the same time pursuing selective growth opportunities in the rapidly expanding areas of high-tech, energy transition and sustainable infrastructure market. Furthermore, we continue steadily improving the risk profile of our order book and executing our ESG priorities. Now let's look at some of the key numbers. Sales increased by 9% during the first 6 months of the year to EUR 13 billion, and HOCHTIEF's operational net profit for the period rose by 8%, EUR 270 million. Nominal net profit of EUR 262 million was 9% higher year-on-year. During the second quarter, cash flow from operating activities pre-factoring showed a strong performance, increasing by over EUR 100 million year-on-year to EUR 676 million. On a last 12-months basis, this cash flow metric stands at close EUR 1.2 billion, up over EUR 400 million compared with the previous period. HOCHTIEF ended the period with a solid balance sheet showing net cash of EUR 346 million, an increase year-on-year of EUR 381 million. New orders during the first half of 2023 rose strongly to over EUR 18 billion, up 26% and includes several important high-tech, infrastructure projects. At the end of June 2023, the Group's order book stands at EUR 53.6 billion, up by 8% year-on-year on an f/x-adjusted basis. On Slide 6, we can see the Group's outstanding cash flow performance in more detail. As I indicated, the group achieved a strong cash flow performance during the second quarter of the year. The cash flow figures for the first 6 months incorporate the characteristic seasonal movement seen during the early part of the year. Looking at the last 12 months, to adjust for the seasonality, underlying cash flow from operating activities stands at a high level of close to EUR 1.2 billion, highlighting company's strong and sustained cash conversion. On Slide 7, we can look at the positive net cash evolution. For the end of June, HOCHTIEF has reported a net cash position of EUR 346 million. This represents an increase year-on-year of EUR 381 million. Looking at the quarterly movement, the period end figure shows a EUR 736 million increase compared with March, driven by the firm second quarter cash flow performance. I would also like to note that in June, the credit rating agency S&P reaffirmed its investment grade credit rating of HOCHTIEF with a stable outlook. The next 2 slides show more detail on [ development ] of the group's orders. Our new orders rose substantially during the first half of the year to over EUR 18 billion, an increase of 26% year-on-year and equivalent to approximately 1.25x work done in the period. The EUR 9.5 billion [ of work done ] in the second quarter was 21% above Q2 2022. These significant increases are being driven by the strong growth we are achieving in the high-tech, energy transition and data, infrastructure sectors, a central pillar of our group strategy. Around 50% of our new orders in the first half of the year were secured in these structural growth markets we have identified. At the end of June, our order book stood at EUR 53.6 billion, which on an f/x-adjusted basis represents an 8% increase year-on-year. As a result of HOCHTIEF [ de-risking ] approach to order intake, the vast majority of the new work secured during the January-June period was lower-risk in nature. The consequence is a proportion of low-risk projects in our order book is now approaching 85%, up from around 80% at the end of last year. From a geographic perspective, over half of our backlog, 55%, is located in North America, with a further 35% in the Asia Pacific region and 10% in Europe. In the presentation, you can find more details on solid performance in H1 2023 of our divisions, but let me just highlight, first, the positive margin development and order book momentum in [ Americas ]; second, the strong revenue growth at CIMIC; third, a sharp increase in the orders in Europe; and fourth, solid traffic and tariff growth in Abertis. I wanted to take some time now to give you an update on our new strategy which we presented at the full year 2022 results presentation back in February. Our pursuit of opportunities in the rapidly expanding high-tech, energy transition and digital infrastructure markets is [ accompanied ] -- as I just underline, our continued focus on further de-risking of the order book. In parallel, we continue enhancing our engineering systems and logistics know-how and remain focused on delivering on our ESG commitments. Furthermore, our capital allocation decisions support the Group's diversification and simplification goals as well as our high-tech infra expertise. We are now entering a new phase of our strategy where we can begin to harness our investment expertise in these strategic sectors. Let me give you some examples of areas [ of priority ] that we're working on. A reliable energy supply system that helps to manage renewable energy distribution is essential if net 0 aspirations are to be realized. Battery energy storage systems, or BESS as they are known, will play an increasingly important role in this. In June, CIMIC subsidiary UGL announced it had been contracted to build a 219-megawatt BESS and associated energy infrastructure in Western Australia for Neoen, a leading independent producer of renewable energy. This is the third project of this type we have been awarded so far this year. At the beginning of 2023, the Group was contracted to install a Tesla-supplied BESS and the associated high-voltage grid connection 250 kilometers west of Brisbane. And during the second quarter, we are also selected to install a 35-megawatt 1-hour facility in Port Hedland, Western Australia. As a leading designer and constructor of sustainable electricity generation and storage assets, UGL has already delivered 17 major Neoen energy generation and storage projects. I wanted to briefly touch upon the topic of hydrogen, which has the potential to be another important contributor to the global transition to net 0. In Australia, for example, the government has stated ambition to become the world leader in hydrogen by 2030 with potential related investments of up to AUD 300 billion. CIMIC has been involved in 4 major front-end engineering design studies based on its engineering expertise and we are currently constructing a hydrogen-ready power generation plant in New South Wales. This leaves the HOCHTIEF Group in a strong position as hydrogen related investments ramp up. [ As where ] -- HOCHTIEF continues to rapidly expand its presence in electric vehicle batteries manufacturing, a strategic market for the Group. In the U.S., Turner's most recent major award was a project for Panasonic Energy’s USD 4 billion EV battery production facility in Kansas. The plant is expected to begin production by the end of March 2025 and will eventually reach approximately 30 gigawatts of annual production capacity. A Turner joint venture is also building a multi-billion electric vehicle battery plant for Honda and LG Energy in Ohio. Annual production capacity will be some 40 gigawatt-hours by the end of 2025. Another area where HOCHTIEF is well placed is the digital infrastructure sector, where the roll-out of high-tech infrastructure including 5G and its applicability in state-of-the-art facilities is rapidly expanding. So far in 2023, Turner has been awarded projects to build 4 large-scale data centers worth in total over EUR 500 million. And following several awards and completions of data center projects in the Asia-Pacific market, CIMIC recently secured another data center contract in Hong Kong for a major international developer. Overall, at the end of June, the Group had over EUR 4 billion in digital infrastructure projects in the order book. As we become a leader in these high-growth markets, capital allocation will play an increasingly important role in the strategic development of our company. We are now beginning to invest equity in these high-tech growth sectors where we can apply the financing, project management and O&M capabilities we have built up over many years in our PPP business. In Germany, for example, HOCHTIEF and an infrastructure partner will invest in decentralized and sustainable EDGE data centers. The demand for these sustainably built and operated data centers is very high, especially in Europe. And construction is carried out to the highest energy efficiency standard. They are the basic infrastructure for many new technologies and particularly suitable for regionally oriented companies that prefer computing power and data storage close to their headquarters and customers. Furthermore, as the importance of cloud computing continues to grow and artificial intelligence applications evolve, more and more companies want to convert their IT systems to this model to process and store data. Another example of how we are expanding our presence in the value-chain of these high-growth industries is the Australian Glenrowan solar farm project. During the first half of 2023, CIMIC commenced construction of this solar farm in northern Victoria, the development rights of which were acquired in 2022. The company will develop, invest in, and manage the solar farm, with our services subsidiary UGL to undertake construction, operations and maintenance. The 245-hectare solar farm will have an installed capacity of up to 130 megawatts and generate enough electricity to power approximately 45,000 Australian homes. This renewable energy project development is part of our strategy to establish a diversified portfolio of energy and utility assets within the Australian National Electricity Market. Let me move on to another strategic area, natural resources, which is playing a key role in driving energy transition globally and producing a significant increase in demand for lithium, nickel, copper, amongst others as well as metals. Last year, we acquired [ Onyx ], a company with strong project management and enduring expertise in this area. But to further develop our know-how, in July this year, CIMIC purchased a Canadian engineering and metallurgy company, NovoPro. With its strong know-how in lithium processing technology, HOCHTIEF gains additional access to opportunities in this expanding sector, as demand for batteries and electric vehicles increases, while enhancing the Group’s North American presence and offering to clients. This bolt-on acquisition is consistent with the Group's strategy of expanding our presence in the value chain of high-tech infra as well as with [indiscernible] strategy targeting a growing pipeline, metals and minerals opportunities. We also continue to be very active in PPPs, a long-standing core area of expertise for the Group. In June HOCHTIEF won a major PPP building contract in Berlin. The Group will refurbish and build new offices for the Institute for Federal Real Estate and subsequently operate and maintain them over a total 30-year period. Our objective is to help the client make the buildings more sustainable. As the retrofitting contracts covers the refurbishment and operation of the properties, we can optimize these buildings over their entire life cycle. As a result, we can reduce the carbon footprint as well as the operating costs of tenants and in the process help create around 2,400 jobs. HOCHTIEF has also been awarded a PPP contract in Germany to build a new central location for the University of Applied Sciences for Police and Public Administration in the state of North Rhine-Westphalia. HOCHTIEF will rent the university campus and deliver operational services for an initial 20 years after the construction work of around EUR 200 million is completed. Environmental, social and governance, ESG, is a strategic priority for management. In 2021, HOCHTIEF made the commitment to be climate-neutral by 2045. Our sustainability performance already puts us amongst the leading companies in our industry. HOCHTIEF subsidiary Turner has been recognized for several years as the largest green builder in the United States. In Australia, we are one of the leading providers of sustainable infrastructure projects. CIMIC, for example, is [indiscernible]mine rehabilitation [ skilled ] in some environmental and operational [ specialists ]. Thiess have delivered award-winning rehabilitation programs globally for more than 30 years and is a trusted partner in sustainable mining operations with over 10,000 [ hectares ] rehabilitation work executed since 2007. Meanwhile, back here in Germany, environmentally-friendly projects in building and infrastructure account for the majority of our new projects. Our strategy and the high-tech markets we are focused on are helping our clients achieve their ESG goals. So to wrap up, HOCHTIEF has delivered solid figures for the first half of the year, a strong Q2 cash flow performance, positive operating margin momentum, further substantial progress in de-risking our order backlog and a significant increase in new orders, particularly in the high-tech sectors we're focused on [ orders ], starting to selectively invest equity. Furthermore, we continue to advance with our ESG commitments. Finally, we can confirm our guidance for 2023 for operational net profit in the range of EUR 510 million to EUR 550 million. Now thank you very much, everyone, for listening, and I welcome your questions.

We're ready for questions, operator. Thank you.

[Operator Instructions] And we have the first question from Luis Prieto from Kepler Cheuvreux.

I just have one actually. And it is -- it's basically -- now that almost 3 year have passed of Elliott's entry into Thiess, how should we think about their [ production ] on the stake going forward into next year and the following?

So it's -- I mean just to give everyone the framework, although I think everyone understands the framework, pretty much Elliott had the right to execute that put starting in year 3 to year 6, which means that pretty much it start in 2024. Which are the chances that Elliott execute that put, we don't know. And we were in conversations with them right now to see if they want -- if they're open for discussions, because certainly, we would be open to discussions. We always thought very highly of this business, and we believe that it's a very good business in performance. And as we diversify and transition this into more green mining, certainly, we emphasize even more [ acquisition ]. From our rating agency perspective, we consider in our group the liquidity and our position as if Elliott was going to exercise the put in [ 1 ]. So that's what we are looking in our accounts. Difficult to say at this stage, but we can -- we might have more information at the end of this dialogue that we're having right now with Elliott, and probably that will happen in second half of 2023. So by the end of the year, we'll know exactly Elliott's position.

The next question is from the line of Graham Hunt from Jefferies.

2 from me. First, I'm just wondering if you can share a little bit on, I guess, some of your risk management processes as you're seeing so much order intake in order backlog at kind of record levels across the business? How are you managing such strong growth in terms of the risk profile of the order book and bringing that down? Any specifics on that would be helpful. And then just on the U.S. market, I wondered if you could give us any latest trends? You talked about, obviously, the strength in the high-tech infrastructure end markets, but maybe some of the other markets, some on commercial and then resi, hotels, et cetera? What is the latest that you're seeing there, would be very helpful.

Well, first of all, starting with the risk management. We're being very strong and I thing that I make emphasis in that into our presentation on the level of risk that we're willing to take, which is very low. Very low not only in sectors where traditionally have low risk, such as Turner or UGL or Thiess, et cetera, but throughout the entire group, right? That would include civil works and building as well. So basically, our new policy in general only allows different companies to get into collaborative contracts, to get into projects orders, progressive design together with the client alliances, pluses. And if there was a design build component only for work that we've done in the past and in regions where we are very consolidated and traditionally, it's the same projects, [ same ] region, and we had consistent profits. Basically, if you follow -- [ is ] an approach when you go through the -- I mean, our general backlog, we are about to achieve, as I said in the presentation, 85% of our portfolio characterized as low-risk projects. But when you look at our new index, we get above the 95%, because basically, most of our working are on these bases. We're not doing EPCs, right, basically, or we're not doing design [ deals ]. We have a few exceptions that we are willing to consider. And basically, this [ acceptance ] are what we drive or we build for ourselves. It is our own developments. Glenrowan, for example, it's our solar farm we built for ourselves. We're happy to take the risk. This is for us. We're not subsidizing anyone else, if things were in the wrong direction, which, by the way, are not, okay? We're quite comfortable with the way we are pricing these days. In order to do that, we appointed a new Chief Risk Officer at HOCHTIEF level. We're putting our 3 management committees with focus pretty much in strategy and risk, one for North America, and one for Europe and one for Asia, all of them in place, and they are working [ with ] everyone. In terms of the U.S. market, you were asking for pretty much the way we are distributing our work in hand or how things are going in the commercial offices, building space, traditional sectors. Let me start giving a review of the order backlog in the first half of 2023 for North America, for example. So 12% of our backlog is in vacation when it comes to hotels, residential and commercial. We will be talking about commercial 16% and hotel residential 85%. and that's more in the traditional side. What are we seeing in that sector? If you ask my opinion, 6 months ago, 1 year ago, 1.5 years ago, I was always a little bit skeptical about the evolution. I was very optimistic in general in Turner because of batteries, because of biopharma, data centers, 5G, general. There's opportunities for Turner to get into semiconductors space, and we're pushing them. And I was very, very excited about those. And I was seeing those opportunities -- not only opportunities for the company, but also to replace potential, more traditional backlog, and that's the way that we were planning our spot in North America. It was a possibility to grow, but I mean, what are we seeing right now, that everyone is retrofitting their current commercial office space. Everyone is turning their buildings into more sustainable. So a sector that I thought was going to see a decrease, it's actually increasing, which comes to a surprise to me. And that not only in the U.S., that's happening across Europe and across Australia. Everyone wants a more modern office, more connected, more sustainable with more modern spaces, et cetera, et cetera. So there's a lot to do with that. In healthcare, there's a huge expansion in healthcare, not only biopharma, I mean traditional hospitals across North America. And in the case of the stadiums, that's more stable. I mean there's always -- I mean that continues in a stable path. We're not seeing growth. We're not seeing decline at this stage. A lot of retrofitting as well about all stadiums, and that's happening because technology is evolving too fast. And most of what we're doing, yes, there's from time to time a new stadium that requires demolishing, but there's a lot of retrofitting of -- pretty much to change IT, to change the structure, et cetera. So in general we are seeing positive performance for areas with huge growth in the high-tech space.

The next question is from the line of Marcin Wojtal from Bank of America.

The first one is just a follow-up on your contract mining business, Thiess. Can you confirm whether you received any dividends from Thiess in the second quarter? And if so, what was the amount received? And question number 2, if I may. Can you talk a little bit more broadly about the outlook for Asia Pacific? In what segments of the market are you seeing encouraging order intake? What is the competitive environment, and how should we think about your profitability? You're mentioning in your statement that there is some dilution from the Westgate tunnel, but is your underlying profitability in Asia Pacific improving or a little bit deteriorating?

So let me start with the mining business in general and the dividend. So including MACA, the profit contribution from Thiess in the H1 was EUR 57.3 million. That was versus EUR 62 million in the same half 2022. And the dividend from Thiess was AUD 54 million, and that's pretty much versus [ AUD 89.5 million ] in 2022. Now where are we seeing the growth in Asia Pacific and margins, et cetera. So let me talk about the forecast and let me talk about the margin. Margins in general right now are a little bit low for 2 reasons. The first one is, I mean, Westgate is in its peak. Westgate project, in the past, as I mentioned, as part of our agreement on the job, we were not taking any profit on the project. So it means that all the revenues that come are nonprofit. And also interest rates have increased significantly across the board, but that affected more the CIMIC -- I mean, the CIMIC part, basically because of the debt structure and also in particular with Thiess as well because of the agreement we have with Elliott. Because at the end of the day, they have $180 million guaranteed and as the interest rate increases and affect this, we only get the difference versus the $180 million. So that's affecting. I believe that, that's only throughout Westgate. That's only seasonal. We're expecting to see back margins as in the past with no doubt. Where do we see the growth? Well, we see growth, first of all, in Australia, transmission lines, renewable projects, a lot of work in both areas in renewables, in batteries, solar farms. We see a lot of work in data centers across Asia. So that's -- we are seeing that increasing significantly. If you look at some of the -- I mean, just examples of the pipeline we are building just in Asia. We're looking in Australia for CopperString. That's around $5 billion to $8 billion. We only -- we announced that this year, but we only announced engineering part because we do have -- it's a negotiated deal that we have won. We won the first part, which is engineering. It's around [ $15 million ], but we are negotiating an entire [ $8 billion ] for us on a 100% basis, right? So it -- that's not in our work in hand, but that will come at some point once we negotiate with them. We're seeing a lot of data centers across Malaysia, Singapore, Indonesia, Philippines, Hong Kong, everywhere. We see -- as we have transitioned -- and I'm going to get back to one of my points in the presentation. I'm going to open our entities. We have one firm called Sedgman that traditionally was doing only processing plants associated to coal. And as you can imagine, for a number of years, there's no new processing plants associated to coal mines. But also, we made the commitment not to get into coal, greenfield projects in mining. So for the last few years, we've been -- as I was talking in the presentation, diversifying that through our methods. The amount of new work coming from nickel, molybdenum, copper, lithium, et cetera, et cetera -- I mean, of course, coal, of course, [ other ] effective and valuable. So there's a lot of growth in that stage. And because we have expand our engineering capabilities, not just mining operations but engineering, there's a lot of work, potential industrial side of lithium, nickel, magnetite, molybdenum in various -- in the industrial side. I mentioned before, solar farms, and Glenrowan. We're looking at 5 new opportunities to develop the right over land that we do have an option potentially to generate and to develop, and those will be renewables. I mentioned in my presentation the 3 to 4 storage facilities, the batteries that we are building for Neoen and Tesla. We are going to apply those for some of our clients with different technology. But also we see opportunities to implement those in some of our solar farms and other for our solar farms that we built in the past up to '17, where there's a potential to install some of these batteries. And I focus obviously a lot of this in Asia Pacific, but this could apply globally, but specifically in Asia Pacific because of your question. We're also seeing a lot of alliances around dams and pump hydro projects. We're seeing a lot of work in hospitals around Australia. We're seeing work in infrastructure associated to natural resources, potentially to hydrogen. There's a huge pipeline that right now on hold. So that's go slowly, but whenever ramp up, it's going to grow significantly. And not to give you a few examples, but we believe it's going to grow. Now the big question we always have is Hong Kong. That was one of our biggest markets in the old days and right now has been reduced almost to zero, except for our presence in data centers, private clients. I believe that, that eventually has to come back, and we are having good conversations with clients. And if you look at our cash flow, the [ light ] in Asia, and because specifically Hong Kong is the only region of all our regions globally that hasn't achieved 100% conversion operating cash flows, speaking, right? So -- and we believe that 2024 has to be the breaking point, right. In 2024, that has to change, and we recover normality in contracting and in cash flows. What other examples can I give you. From a civil perspective, Philippines, Indonesia, Hong Kong, a huge pipeline. Probably Australia is going to slow down. The peak will be 2024, and there will be really a slowdown probably for 2, 3 years, and then plants will come later. I'm not concerned too much about that because I think that we will stay in a well position at least for the pipeline, even it will be more reduced. I don't see so much work in building in Australia, but we're not in residential any way. That has never been part of our pipeline. It's part of our pipeline in hospitals where as I mentioned before, it's growing significantly. And I hope this gives you an overview of that market.

The next question is from the line of Victor Acitores from Societe Generale.

I have 2 questions. The first one is on the Slide #6, when you disclose the cash flows. It's on the factoring. On the second quarter, we have seen the factoring is slightly higher of EUR 200 million. In order to understand first, what level of factoring we could see [ and ] it could be at the end the year? And then the ratio -- the [ factoring ] industrial sales is growing, and let's say, on sales growth because there are different periods of collecting. This is the first question. The second question is regarding the slide on CIMIC, that is Slide #11. You see in order to understand where we can see that the cash conversion of the EBITDA could go at the end of the year -- the first half is close to 50%. What could be the level at the [ end of the ] year?

So starting with the factoring. I mean, I think we're in very reasonable levels of factoring, right? It's a little bit of a, call it, seasonal. It's pretty much similar, I believe -- I think that it's very similar to the same level 1 year ago. We feel comfortable in these levels. Probably it will reduce by the end of the year. That's what we saw last year. And probably, it will reduce as we come to the second part as we go. I'm not -- I mean we're not willing to increase that amount or decrease. We were comfortable at the current levels. Regarding the cash conversion at CIMIC, we are at 50%. That's correct. It's true that it's -- it would be -- without light in Asia, it would grow to 75%. And I think that the reason for it is just -- I mean, it's just seasonality. I mean, we are not seeing any [ problem ]. I mean I believe when I'm talking about the conversion before, I was thinking on forecast for 2024 -- sorry, 2023. We are not seeing any major issue right now that we're not concerned. And in fact, the only area where most of the [indiscernible] conversion is [ coming from ], which is Hong Kong. We have been waiting for 3 years right now on a resolution of a lot of [ mediations ], arbitrations, et cetera, et cetera. And, well -- sorry, more than arbitrations, mediations or reconciliations, which means that we will get paid. I mean it's not that we depend on a judge. Typically those processes are very normal in Hong Kong. So that should be around at some stage in our favor. But yes, I mean, nothing -- I don't think that there is a major issue in the region.