Mota-Engil, SGPS, S.A. (EGL) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Mota-Engil's First Half 2022 Results Presentation. I will now pass the floor to Mr. Pedro Arrais, Head of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon to all, and thank you for attending this call where we will present the first half '22 results. With me, I have here Mr. Goncalo Moura Martins, the CEO of the company; and Mr. Xiao Di, Board member and responsible for Planning and Control. As usual, I will start the presentation with some key highlights. After that, we will present the results overview. And at the end, I will share with you the highlights about the detailed presentation with the concessions portfolio that we shared today and finally, the usual Q&A session. So I ask you to move to Slide 4. And as a snapshot, I would like to highlight the strong performance achieved by the company and the higher perspectives that opened for the upcoming years with the results achieved in this first half of '22. Beginning to look to the backlog, Mota-Engil achieved in June, a new record level of EUR 9.2 billion, an impressive growth of 22% in just 6 months and a turnover of EUR 1.35 billion, that represents a growth of 19% year-on-year. Our profitability reached 15% margin and our net profit was EUR 12 million, an increase of 37% year-on-year. In line with the guidance, the company made a CapEx of EUR 108 million, while our net debt slightly decreased to EUR 1.1 billion with our gearing improving to 2.6%. Moving to Slide 6. We can see here the breakdown of the P&L and it's important to mention that the EUR 1.35 billion of turnover and EUR 207 million of EBITDA represents the best-ever performance in the first half. Net financial results roughly stable and the minorities were mainly related, as usual with Angola, Mexico and environment. All in all, the net profit reached EUR 12 million, the best net profit in the last 6 years. Moving to Slide 7. Here, you can see the contribution of which business unit to turnover and EBITDA. And starting by the engineering construction business, the European division showed a stable activity with a small decrease, reflecting the sale in January of the companies in U.K. and Ireland. In Africa, it's important to highlight the strong growth of 54% in turnover. And 14% in EBITDA in the first half of '22, reflecting the starting stage of new projects that will contribute to a solid growth in the upcoming years. In Latin America, the company reached an impressive growth in turnover of 36% year-on-year to EUR 430 million and a growth of 33% in EBITDA, a strong performance driven mainly by the operations in Mexico and Peru. For lasting environment, most achieved a 9% growth in turnover and 19% increase in EBITDA, showing a stable activity and margins above 30%, with international front growing already in the first half of '22, in line with the goals established in the strategic plan. At last, and considering Mota-Engil capital as the business unit with assets outside of engineering, construction and Environment, the turnover achieved was EUR 48 million. Moving to Slide 8. Here you can see the strong evolution of the backlog that will increase the company to higher levels in the full year of '22, considering also the EUR 2.2 billion contract signed recently and, of course, not included in the EUR 9.2 billion reported at June. Important to highlight that the recent contracts awarded are in core markets such as Angola, Mexico and Brazil, where the company has a long presence and the contracts with the execution period from 18 to 36 months, that will put the company in the upcoming years in a higher standard of activity. Very important to mention, the growth of backlog in regions such as Africa and LatAm with -- in average, with higher margins comparing to euro and with larger average contract size, which is positive for the outlook of the profitability and the stability of the cash flow generation. In Slide 9, as usual, we will not elaborate on that, but you can see that the average size of the contracts are increasing in the recent years, and 75% of these listed contracts are located in what we consider our core markets, accomplishing what we announced last November with the presentation of the new strategic plan when the company assumes that it will be the focus on the 8 core markets that will be the main efforts in terms of our commercial activity despite continuing to analyze good opportunities in other markets. Moving to Slide 10. Here you can see that the company made a total CapEx of EUR 108 million, with growth in long-term contracts representing 51%, mainly channeled to Africa, the railway project in Mexico, Tren Maya, and in EGF, a waste treatment company in Portugal. Important to mention that despite the significant increase of the operational performance, the company has a stable level of CapEx aligned with the guidance and reflecting a careful selection of contracts with focus on size and profitability. Moving to Slide 11. Here you can see the balance sheet at June, and we can see that the company reinforced its equity by 34%, leading to a positive -- very positive evolution of the equity ratio. Important also to mention here, the consolidation in the recent years of the improvement on the working capital evolution. Moving to Slide 12. Here, we can see that even with the seasonality effect, we managed a reduction of the net debt with a solid operating cash flow of EUR 143 million. And looking to the debt position, we can see here that our gearing improved to 2.6x with the combined effect of increasing EBITDA and reducing debt. Worth to highlight from the debt with maturities less than 1 year, that EUR 339 million is already refinanced or be refinanced shortly that represents roughly 53% of the nonrevolving financial needs for the next 12 months. Also in June, the company reflected an increase of the average cost of debt aligned with the recent evolution in the international financial system. For last, I would like to mention that the financial strategy, we will continue to focus to strengthening the balance sheet, improving the gearing and extending the debt maturities to support the growth perspectives for the next years. Let's see and move to Slide 15 to move -- to see the overview and outlook for each business unit and starting by Europe in Slide 15. The turnover in the engineering construction division in Portugal showed a strong evolution with a growth of 18% year-on-year. At the EBITDA level, the company achieved 6% with a negative impact of higher costs related with the present context of inflation. Nevertheless, and after the implementation from the government of a very important mechanism of price revision, the company and I would say that all the industry expects that the compensations established by the regulation published can turn a reality and with due compensation in the second half of '22. In Poland and with the existing scenario in Europe, Mota-Engil is implementing a very selective criteria in project tendering due to a strong volatility in the region. As we mentioned before, the sale of the U.K. and Ireland business reduced the contribution of Europe in the first half of '22, but allows the company to a greater focus in the main markets, in line with the strategic plan goals with a backlog of EUR 974 million and with positive prospectives, mainly in Portugal, the company expect to boost activity in the upcoming years, having, at the moment, the cost control as a priority and being focused on new opportunities after the recent award of the new hospital in Lisbon. Moving to Slide 17, in Africa, the turnover registered a very strong performance in the first half of '22 with an increase of 54% year-on-year and with an 18% margin, reflecting the initial phase of some contracts, namely in Angola, Uganda and Ivory Coast. Another item to highlight is the very positive results from the business development department reflected in the recent contracts awarded that bring the backlog in Africa to a record level after the awards achieved already in the first quarter of this year. These record levels allows the company to have a very positive outlook for the next years, considering the average size of the contracts awarded. Although the focus will be in the execution, the pipeline remains strong with the commodities price opening new opportunities in Africa. Moving to Slide 18. Latin America showed an impressive growth of 36%, with Mexico domain market in the region, posting an increase of 41% year-on-year and with Peru also achieving a very positive growth of 55%. With the growing execution pace of the first stretch of the Tren Maya railway project in Mexico and the positive contribution from the energy business, the company expects to achieve a strong performance in the second half of '22. Looking to the future, it's important to highlight the achievements also in Latin America of a record level of backlog in the region with EUR 3 billion, setting higher activity levels for the upcoming years and the consolidation in the top 10 in Latin America region where Mota-Engil is nowadays the seventh biggest construction company in the region. Moving to Slide 21. In the Environmental Services, the turnover was up 9% year-on-year to EUR 220 million, and EBITDA was up 19% year-on-year to EUR 71 million, reflecting mainly a higher contribution from the international activity, namely in Africa that allows all in all, to achieve an EBITDA margin of 32%. Important to mention that international activity in the international activity that the company obtained in the first half of '22, a permit to operate its first landfill in Brazil and is a good example of the work done to increase the footprint of the environmental business in markets where the company has already presence, growing in this sense with cross-selling of services. Mota-Engil capital that is in Slide 23, we can see the contribution of EUR 48 million for turnover. And here, you can -- we should consider the implementation of the strategy to sell the noncore assets and Mota-Engil achieved this goal with the sale of Takargo and hospital concession. And to the future, Mota-Engil Capital reshaped its business with the creation of 2 new brands, one in real estate and another one in maintenance landscape and sustainability to envisage the improvement and higher profitability of this division. Finally and moving to the final remarks and outlook and starting by the final remarks in Slide 25, the company achieved a record level of turnover and EBITDA and with the best net profit of the last 6 years. Also, a record level of backlog of EUR 9.2 billion that supports higher levels of activity for the upcoming years. The controlled debt is important to mention, with the improvement of the gearing and the net debt reduction despite the business seasonality. And for last and has approved in the Annual Shareholders' Meeting, the second tranche of the dividend will be paid with the full achievement of the milestones required for the net profit in the first half of '22. Looking to the outlook in Slide 26 and with the achievements in the first half of '22, the company updated the guidance of turnover for the full year of '22 to the range of 10% to 20% and comparing to the high single-digit growth that we presented at the beginning of this year. Here, I would like to remind you that the strategic plan for '22-'26, we estimate an annual growth rate in average of 8%. And with the production pace that the company achieved in the first half of '22, we will surpass with [indiscernible] for the goal of the full year of '22. EBITDA margin is expected to be stable in full year of '22 in line with 2021 levels despite the inflation pressure. Backlog is expected to stand at record level as it is, but we expect to sign additional contracts in relevant dimension until the end of this year. And before we move to the Q&A session, I would like to mention that together with the entire earnings release, the company shared today to the market a detailed presentation of its concession portfolio. As we have mentioned ending of 2021, when we presented the strategic plan, we informed the investors that we will give more visibility of our concessional assets. With this purpose, Mota-Engil presented today its portfolio of 17 concessions and all the relevant information. We can see in the detailed presentation and specifically, in the Slides 6 and 10 of the document, all the assumptions that allow us to have an internal base case valuation of EUR 715 million for 100% of the assets, considering 3.4x the book value and using an average discount rate of 10.3%, in which we considered a valuation of EUR 472 million attributable to Mota-Engil. The company, of course, will be available to provide information and answer to any doubts to help the analysts and the investors in general to understand what we consider a very relevant and hidden value in our portfolio of concessions. Now we will start with the Q&A sessions. Thank you.

[Operator Instructions] The first question comes from Filipe Leite from CaixaBank BPI.

I have 3 questions, if I may. The first one regarding results presentation and looking at your cash flow page on Page 12. If you can elaborate on EUR 32 million [indiscernible] if you can give us any details regarding the EUR 32 million? Second question on tax and if you can explain to what the reason for the high increase in tax rate in the first half and your view on tax for full year? And last one regarding the concession portfolio presentation, if you can provide us the required equity investment in those concessions for the upcoming years, which I believe is already included in your NPV calculation and if you can give us also the expected dividends to be collected by Mota-Engil in this year and next one from this concession?

Thank you for your questions, and thank you for your very -- always very attentive. First question, others is related with the sales of a small stake in Gran Canal concession in Mexico, basically, that all the volume is related with that. The second question about the tax rate, yes, I feel the same, it's very high, but it's what is -- we are very conservative when we do the calculations for the first half and of course, we try to optimize as better than we can, of course, under the rules and laws applicable because we have a lot of additions in which we have activities, some of them with higher rates than we have in Portugal and some results are done on those jurisdictions in which we don't have formal agreements with Portugal in terms of taxes. So normally lead us to this very high tax rate that we are, of course, estimating now. But again, it's a very conservative -- it's a very conservative estimation. I think we are going to be able to optimize that to the end of the year. The second point is important as you know, a lot of costs are not considerable costs, tax costs eligible for tax costs. And otherwise, you know all the jurisdictions to maximize their tax collection, they create alternative ways of autonomous taxes methods in order to regardless that if you have profit or not, they will charge and they will tax some costs that the company has, again, regardless that we have losses or profits. The third one, yes, you are right. Of course, the commitments that we have for our equity in some concessions that are not free of them, not yet in financial close process or still already with -- have already the financial goals then, but yet with some commitments of equities are considered in -- of course, in the NPV, of course. The valuation considered, of course, not only the equity that we will have in invest, but equity that we are having to invest in the future. The amount I don't have here with me precisely, but I think it's less than EUR 100 million for sure.

[Operator Instructions] The next question comes from [ Diego Macio from SCM ].

I have 3 questions. Basically, the first one refers back to Slide 12 regarding the level of debt. If we look the gross debt globally, we reached EUR 1.8 billion with an additional EUR 658 million, which would be -- will represent roughly EUR 2.5 billion. The question is, with this current instability and expected rate I mean, hiked rates from Central Bank, what would basically be the impact on your financial every 1% raise? And will you still be able to maintain the dividends for shareholders in the next 3 years? That's question 1. Question 2, when I look at the debt more closely, you can see that there are some assets that are listed for, I mean, liabilities and assets held for sale regarding some investments, notably in subsidiaries -- linear subgroup and subsidiaries. The question is, does this investment carry any level of debt? And if yes, would the impact basically Mota's balance sheet? And what would be the EBITDA ratio, if they're not managed to be sold? Question 3, is there any plan or strategy to increase the liquidity in the stock trading as volumes have been on average quite low for the last years?

Okay. Sorry, you asked 3 questions. I missed the second. The first one is about the debt and the impact of the increase of the taxes, the rates and the second, I --

So the second one is regarding the debt more closely in Section 28 of your annual report of 2021, you have some listed assets and liabilities that are held for sale, concerning some investments there, obviously, today registered as equity consolidation. The question is, does this investment carry any risk for the group in terms of debt? And if yes, how did it impact the obviously Mota Group?

Okay. Thank you. First question is that we -- almost half of our debt is fixed rate. So the impact of the fluctuation will -- obviously, we will have some. But we estimate, even if the interest rate could be higher than imagine 1.5%, 2% higher, the impact will be roughly 6% of our financial costs today, something like that. So it's totally bearable. The second point is about if we are going on -- if that impact with the future payment of dividends, no. We, even with this context, if the next second half is going as we forecast and the numbers that we have already from July and August, there is no risk whatsoever that the company will not be in a position to pay dividends, but that, of course, will be the final decision of shareholders. And the other point is some listed assets that we have held in for selling, if there is any possible constrained liabilities towards the balance sheet of the company? No, there is none. And third one, of course, if they are holding for sale, we can do that in order in the future with no pressure whatsoever. But in order to optimize the assets of the group, sure we can go to the market, if you have a good proposal in order to sell them and to, of course, apply the proceeds from these sales to reduce debt. The last question is all -- sorry, about the free float, the small free float. It's the story of the company. Of course, we can -- the lower liquidity of the shares, of course, is related with the small free float that we have and the special position of the market -- the shareholder geography that we have, we have not envisaged or we are not planning to do anything related with that.

The next question comes from Luis Delgado from Banco Finantia.

Congratulations for your results, first of all and a couple of questions, quick questions. The first one is what will be your forecast in terms of operating cash flow for the second half of 2022 year and -- with the current inflation situation? And the second question could be -- can be -- can you provide a little bit more light about the plan to do with the rest of your debt because you said that EUR 339 million you already refinanced, but you have EUR 294 million and EUR 147 million pending to be refinanced. So you can be -- you can do -- you can provide a little bit more light with that.

Thank you for the questions. Let me be very clear about the first question. You are asking for a guidance for the second half cash flow -- operating cash flow for the company, we never do that normally. What I can comment on that is that always the trend of the company for the last I mean, forever, since I have memory of that. Normally, the second half is always stronger than the first one. So at least, we are expecting -- we are forecasting a better cash flow than the one that we have -- we got on the first half. Regarding the refinancing plan, we, of course, we are addressing and we are doing that what we'll do normally every year. We have some cash availability. We have revolvers with the bank. We have a liquidity facility that we can -- that we are managing in order to have -- to optimize the best maturity with the best cost of funding in order to see financing, but we do not envisage any kind of problem to refinance the debt as already forecast for the end of the year is EUR 294 million.

The next question comes from Daniel Gandoy from JB Capital.

Yes. 2 questions, if I may. The first one is if you could provide us with the implicit price to book multiple in the sale of the Gran Canal disposal that you announced? And second, if you can tell us if you have some plans to crystallize the value in the concessions business, I mean thinking about maybe selling a minority stake in the concessions business or selling some of the more mature assets to help in terms of crystallizing value?

Daniel, thank you for the question. We cannot give the details of the sale of the Gran Canal as that's very small stake that we did, as you can imagine, because that will disclose some grounds for evaluation and of course, it's for us a little bit difficult to share with you. But what I can say about it is that as we announced in our business plan is that we are going to have a very, very opportunistic and [indiscernible] asset management towards our concession portfolio. And as you know, what we have been done for the last 5, 6 years after we sell [indiscernible] is to build slowly again -- rebuild, I would say, our cost concessions portfolio because our experience -- our 20 years of experience concession is that the big premium, the big value is in the greenfield, is when you go to a tender, a public tender, a concession tender and we have -- we support and bear all the risk to finance, to design and to build, -- and when you complete that phase of the concessions, of course, the value that you can extract for that is the [indiscernible] as we have seen here, and that is what we are trying to show to the market today. So what we are going to do in the future is to have a very -- again, very opportunistic look and asset management towards this portfolio. We can keep it, we can sell it, we can sell part, we can open to partners, I don't know what we are going to do is important volume that we have, and let's do this management of these important assets, the better way that we can and we -- as we did in the past. And basically, we are proud, of course, to show to the market how we rebuilt this portfolio in such a short time after the selling of imported assets, as you know, in the past, as [indiscernible].

The next question comes from Joao Vermelho from JB Capital.

First of all, congratulations for the results, that's very good, including the cash flow. I have 2 questions. One is more a simple one, which is related to working capital and the level of advanced payments from clients. So Mota-Engil managed to continue to have negative working capital, which is quite an achievement. So the question is, is this negative level of close to 0 working capital, is it sustainable in the long term or do you expect some deterioration so that working capital gets to a more normalized level? And related to that, I would like to know how much the advanced payments were in the first half of the year? The second question is a more [indiscernible] one, and I think Goncalo will like to answer that question. It's regarding the Lisbon Airport, the new airport. We've learned or read a lot of contradictory news regarding the airport. The question is, do you think the tender will start in 2023? Do you think there is a chance that an award will be made in 2023? And how likely do you think that Mota-Engil is to win that award?

Joao, it's always my pleasure to talk with you and to have you here. First of all, as you know, we are managing to have this negative cash flow which is quite an achievement in this business, as you know, very well. And what I can say is that, of course, we have a goal in our business plan that the cash flow should be negative but not higher than 7%. So we are far from that goal. As far we can be from that goal is the better way to proceed. Nevertheless, we have that goal because, of course, the needs of investment for the future for this growth will be a larger [indiscernible]. The second point that related with this point as well, the net advance payment between what we see and what we pay for our suppliers is EUR 150 million in this first half of the 2022. Airport, it's -- I don't have a crystal ball, but what I can say is that if there is going to be an airport in Mota-Engil, then under the concession of VINCI for sure, Mota-Engil will participate. Because we have agreements as a contractor with VINCI Concessions, we bid for the price. We have a contract agreement signed, all agreed. So the question mark here is there is going to be an airport in Mota-Engil or not, of course, I think there is no other solution. In a very pragmatic way, if we look for the alternative, the only one that can address the incredible speed up of the traffic in Lisbon is Mota-Engil. They can talk about how good those would be [indiscernible] or how logical is or whatever, those locations. But the only location that could address the most quickly possible, this huge increase of demand of the air traffic in Lisbon is Mota-Engil, but no one can assure that that will happen. But our expectation is if it is going to happen and the concessions of VINCI the expectation to have -- to be involved in construction this is very, very, very high.

But could it be otherwise, so not under VINCI's concession?

I read what you read as well. If you had -- these people talk about the new -- totally new airport investment, someone say that could be outside that concession, which would be a very complicated legal dispute. But of course, it's very, very difficult to be outside that airport concessions, as you know, for 50 years after the signing has the monopoly of all the airports in Portugal and [indiscernible]

Dear speaker, there is no more questions.

Okay. If there is no other question, yes, thank you so much to attend. More questions, please go ahead.

Yes. We have one more question. The next question comes from Kim Bolton from Portfolio Solutions.

My questions are that considering that Mota is principally financed by Portuguese banks and given that these banks have limited capacity for funding single clients, what is CCCC doing to help Mota diversify its financing sources and at what cost? And also, if CCCC is bringing in new finance, is this to refinance existing projects or to fund new ones?

Okay. I'm Xiao and I'm happy to answer your questions. The answer from my side is, yes, we will bring more finance opportunity and channels to Mota-Engil. And actually, we have already completed some cooperation from China, from the supply chain perspective. And also our most important strategy is to finance the project and to find more synergy between the Chinese investor like CCCC and also Mota-Engil in the third country like Africa and also in Latin America. And actually, we have already started the negotiation of more opportunities and we cherish this opportunity, and we are foreseeing large potential, a huge potential of our future cooperation.

Thank you. There are no more questions.

So if there is no more questions, I would like everyone to thank you to attend our call. Some of you are long-time friends. And I hope that you have all the information that you need about the company and this first half results. Nevertheless, personally, I'm always available for you, if you have other questions or our team of Investor Relations, Pedro -- We are always available to answer any questions or give you some clarifications that you need. Thank you so much again to attend. Bye-bye.

Thank you. Bye-bye.

Ladies and gentlemen, thank you for your participation. You may now disconnect your lines.