Sacyr, S.A. (SCYR) Earnings Call Transcript & Summary

Good morning. I'm Manuel Manrique, Chief Executive Officer and Chairman of Sacyr. Joining me today at this financial results presentation are Carlos Mijangos, the company's CFO. Thank you, dear analysts, media representatives and investors for attending this financial results presentation of Sacyr for the first 9 months of fiscal 2021. Through this report, we are reporting for 15 consecutive quarters a profit increase of the company, thanks to the strategic approach of our business plan. There's still some macroeconomic uncertainty, therefore, I believe that Sacyr's economic results up until now are highly positive, showing quarter-on-quarter the company's strength and soundness, reporting a 19% profitability increase and a cash flow increase of 12%. On October 7, we held our annual Investors Day. At that time, we provided some details, about EUR 2.8 billion that, according to our models, are allocated to our concessions business model. We once again ratify our commitment of setting our recourse net debt at 0 by 2025. Along these lines, and we know that this is very important for the market's assessment of Sacyr, I can once again underscore that we are determined by year-end, our recourse net debt will be below EUR 700 million. As I said at the time, we are coming from EUR 1 billion just in March 2021. As for this EUR 763 million in recourse net financial debt at present, we are already including EUR 104 million from cash flows obtained as a result of Sacyr green energy management securitization fund as well as the biomass management contracts tied to this fund was not included in the concessions assessment that we reported on our Investors Day held once again on October 7. On the other hand, the operating cash flow with recourse plus dividends coming from our concession assets amount to EUR 114 million. I would also like to highlight, from a more corporate perspective, 2 other aspects. First off, our fulfillment of our shareholder remuneration commitment with a 4.6% remuneration. And also with regards to our stake in Repsol, as you all very well know, over the quarter, several maturities have been taking place, arising from derivatives that we decided not to renew. As a result, our stake is already below 4%. From an operational perspective, the highlight is -- will continue to be in the forthcoming quarters, the progress performed in some of our major concession projects and the commissioning of some of these projects, as we already informed during the Investors Day. There was a concession revenue increase and all the dividends coming from such projects lie at the foundations of our high profitability and future growth in those countries that we consider to be strategic to the company. I would also like to highlight the financing instruments that we have tied to sustainability goals that we launched over the past 6-month period. Green financing in Valoriza Servicio of Medioambientales up to EUR 160 million carried out in 2 phases that is directly linked to the attainment of targets of our sustainability agenda and the fulfillment of new green KPIs. Secondly, the social bond issued in Latin America tied to an infrastructure project in the amount of USD 209 million for the Montes de Maria project in Colombia, which is very important due to its highly positive social impact in that Caribbean region. Next, the securitization fund in the amount of EUR 104 million that I mentioned before, the GENMSF fund. Thus, our revenue went up by 3%, reaching EUR 3.310 billion. Our interest does not lie in increase in revenue but rather profitability. Therefore, EBITDA is growing by 19%. Therefore, we reached EUR 630 million, out of which 82% is also in line with our strategy. And therefore, this comes from concession assets. As for EBITDA margin, it stands at 19% vis-à-vis 16.5% in the previous fiscal year. EBIT amounts to EUR 512 million, with a 33% increase net profit standing at EUR 60 million with a 28% increase. There is also an operating cash flow increase all the way up to EUR 402 million accounted for the 12% increase year-on-year. Whereas the backlog compared to December 2020 went up by 16%. Therefore, our -- this valuation amounted to 16%. So this shows once again the softness of our results. But if we exclude extraordinary results, this would have increased up to 42%. I'm talking about EBIT. I would also like to say that the group's EBITDA back in 2019 was EUR 680 million throughout the whole pre-COVID year. Now we already stand at EUR 630 million as of September. So by year-end, we're going to surpass this amount considerably. At that time, it was EUR 441 million back in 2019. In 9 months only, we have surpassed such an amount. We are already standing at EUR 512 million. Next, our CFO, Mr. Carlos Mijangos, will provide you with further details about the cost response broken down by division and the overall holding.

Thank you very much, Mr. Chairman. We will now analyze each division. If we take a look at the performance of all 3 divisions in terms of EBITDA margins, we can see that all such divisions have reported an increase in margin. For example, concessions amounted to EUR 329 million; EBIT, EUR 275 million, reaching this EBITDA margin of 54.9% coming from 53.9%. Engineering and Infrastructure reached EUR 242 million; EBIT 220 million, with the margin going from 11% to 12.3%. So this is reported EBITDA in the amount of EUR 79 million; EBIT, EUR 39 million, and the margin going from 8.8% to 10.4%. So this is one of the highest margins in this sector because it amounts to 19%. As for the contribution by activity in terms of revenue, Engineering and Infrastructure is the one with the highest weight with 55%; concessions with 37%. And as for revenue, EUR 630 million. EUR 516 million comes from concessional assets accounting for 82% of the group's total. They are distributed as well EUR 329 million in concessions, EUR 173 million Engineering and Infrastructures. This is from the Pedemontana asset, EUR 40 million from the operational plans. As for the backlog, 78% cash from concessional assets, 15% from engineering and 7% comes from the services division. If we now take a look at this backlog, which accounts for more than EUR 45 billion, we can observe that in North America, we are in Canada, for example, with 2 key railway projects. We folded into this market this year. This has been a strategic step for the group. In the United States, we were awarded 3 highways in Florida, one in Texas. Chile is another important market. There, we have been awarded a hospital as well as a motorway, several maintenance projects and the wind farm. In Peru, we have another project for the airport terminal and [ Chimpode ] motorway. Then we have, in Brazil, the 287 project award in Rio Grande do Sur. In Europe, we have 3 major contracts in Italy. The first one is one project in Northern Italy in the Como lake. And then we have 2 other concessions, the A3 highway from Naples to the Multi Coast. And the A21-A5 highway around Turin and from Turin to Piacenza. In Portugal, we have been awarded some projects. And in Spain, we have been awarded several projects. For example, the 12 de Octubre hospital as well as several speedway tranches as well as many other logistics plants maintenance. As for services, we are reporting some successful projects as well. For example, we have been awarded waste collection contracts in Barcelona, also in Torrejón de Ardoz. And regarding facility, there has also been a significant increase. Now that we are back to normal, and there are several relevant contracts such as the conservation or at keeping of all buildings at a national level and in other -- well, in several capital cities. If we now take a look at the net debt evolution, we stood at EUR 5.212 billion in December 2020. We were able to create EUR 402 million in operating cash, working capital of EUR 255 million. And then we have a financial asset adjustment. As a result, we reached this operational cash that you see here. This is concerned with some debt of concessional projects, and we continue to invest EUR 619 million over the past 9 months. Besides in February, we are -- we had to pay for our Panama Canal award. Therefore, we have this net debt of EUR 5.717 billion. And this is going to be allocated to reduce our record net debt. So all in all, we are standing at EUR 5.717 billion. If we now take a look at the recourse debt evolution, we were EUR 836 million in December. This is VSM. This is no longer part of the nonrecourse scope. We have 12 in terms of tax payment, 43 in terms of dividends. We have a finance cost in the amount of EUR 46 million and an investment of EUR 117 million, EUR 23 million corresponds to concessions and EUR 24 million corresponds to the machinery required in order to carry out engineering services. On the other hand, we have a payment for the Panama Canal award and also the VSM first tranche. Here, we still have an outstanding amount of EUR 40 million once all contracts are formalized, which are so important and that have been awarded to us. And then we have some final adjustments. So we reached this EUR 763 million. We discount the securitization fund and the collection rights from all plants located in Andalusia. We, therefore, come to this final amount of EUR 763 million. If we now take a look at each of the divisions. Concessions reports a 2% increase in terms of the global revenue. But if we talk about the Concessions revenue, we are talking specifically about a 21% increase with some significant improvement in conditions in infrastructure and concessions and the water activity. Here, there has been a 23% and a 16% increase, respectively. As for construction revenue, for accounting purposes, this is posted in the accounting records of the construction division. We carried out several important projects such as the Porta de Hierro project and many other projects that are about to be completed. Like, for example, in Italy, EBITDA grew considerably by 25% also across activities. But particularly in the water division, that made a significant contribution. As a result of our assets in Chile, the average margin in this case is 55%, and the backlog also increased considerably by 15%, reaching EUR 35.524 billion. The equity invested is EUR 1.254 billion, equity invested EUR 1.160 billion. The equity invested in water was EUR 94 million. We have several new awardings. For example, the Buin Paine hospital in Chile; the RSC-287 toll road concession in Brazil; the A3 Naples-Salerno highway; and the A21 Highway Italy, which is the Turin to Piacenza highway. As for the current performance of current projects. We are about to complete the Puerta de Hierro project as well as Rumichaca Pasto. 95% of the project has been completed with 23 kilometers being already operational. Pamplona Cúcuta is completed by 55%. We have already completed the most important panel and 72 kilometers are already operational. As for Mar 1, 95% of this project has been completed. This is at the exit of Medellín. This is a tunnel going to the area Antioquía. Then we have the Américo Vespucio Oriente. This project has been completed by 84% with 1,126 pre-slabs of the new El Salto viaduct having been completed. And we have Pedemontana, which has been completed by 99%. And the last tranche will be commissioned before Christmas. Then we have Rutas del Este, which has made steady progress over this period. We have opened some new tranches. And then we have Ferrocarril Central, which is the area where several factories are located in the region. It has been completed by 50% already. And it's expected to be fully operational by 2023. As for the breakdown for concessions. In this case, we're not including Italy because it's included under infrastructures. So Spain come, and Chile have the highest weights. Here, you can see the breakdown by EBITDA, by the number of assets allocated concessions and water accounts for 65 assets, 52 are already operational, 13 are under construction. So this map shows very clearly where we are working. For example, Australia, Southern Europe, the United States or Latin America, respectively. With regards to Engineering and Infrastructures of this division also performed very well in this quarter with a 3% variation quarter-on-quarter, reaching EUR 242 million in EBITDA with a 16% increase. And with a significant effort having been made in contracts, we have been able to increase the backlog by 19%, reaching EUR 6.693 billion. If we analyze the effects of the Pedemontana concessions in our engineering financial statements, revenue was EUR 317 million and EBITDA, EUR 173 million. So Engineering and Infrastructure shows revenue of EUR 1.644 billion and 4.2% in EBITDA margin, EBITDA being 69%. So most of this backlog is for concessions accounting for 31 months of activity. So this increased profitability has been reported by the different projects in which we have been working. And some of the highlights are, for example, the Railway Toronto project, some new contracts in the United States, 4 motorways have been awarded to us. And new projects also being awarded in Italy. If we now take a look at the services division in this quarter. There was also a 2% increase in revenue. And there has also been a significant increase in profitability with a 21% increase vis-à-vis the previous year, with EBITDA standing at EUR 179 million. This is particularly important. In the case of environment, we have new contracts that have been formalized, like, for example, the Villalba new waste collection projects as well as some new contracts that have been formalized as a result of the Filomena storm in Madrid. And as for multi services, there has been a significant improvement in EBITDA as a result of new contracts that have been -- old contracts rather than have been resumed after they have been put on hold due to COVID, And therefore, better margins have been reported here. And this is also due to the [ Casa Estorre ] restoration service. We have been able to grow by 16% in terms of backlog and the EBITDA margin by 160 basis points. Once again, here, we're talking about the waste collection services in Barcelona, also batch 2 in the city of Madrid for waste collection services, among others. So now let me hand the floor back to the Chairman.

Well, before we start with a Q&A session, let me inform you about something that is important. As we already mentioned in our financial statements, there was a pending resolution regarding the lawsuit that has been started in 2019 that had been fined by Pfizer had bought debt against the R3 and R3 shareholders, including Sacyr. So at that time, funds were claiming an early payment of our debt. So according to the Madrid court in charge of this, a provisional judgment has been handed down in favor of the funds. But this is not a firm judgment. This is part of a global dispute involving shareholders, the funds and the public administration concerning the construction of this radial ways. So we have to determine who is going to be responsible for paying the relevant liability once the payment of the asset is established or the responsibility that the state has, the so-called RPA. So this asset that is not owned by the state is being operated, and it's providing the service for which it had been designed. So opportunistic funds through different legal procedures want to anticipate the recovery of this debt without waiting for the final procedure to be finalized with regards to the equity responsibility or liability held by the public authorities. This is our first instance judgment that was handed down and that was issued in federal funds. In the case of Sacyr, we talked about EUR 150 million being involved, but it's still a procedure that has a long way to go. As I mentioned before, it accounts for just one event in a very lengthy process. There were other judgment, 2 judgments of past -- of shareholders, these were firm judgments. And these are the judgment that has been handed down in favor of the funds. But that can be appealed. There are other judgments still to be passed to determine what I mentioned before, the so-called RPA determination. So I said, this first instance judgment is a decision similar to the one that was issued in the prior process that was also filed by funds back in 2013. In first instance, the judgment was passed in favor of the funds. But then shareholders were actually set to be right. Of course, we shall proceed to appeal this judgment with high courts that are relevant. So now having said that, we would like to allow for questions from the analysts.

[Operator Instructions] The first question is by Luis Prieto from Kepler Capital.

I have a couple of questions, if you could allow me. First of all, could you please elaborate further of the legal arguments concerning this radial motorways? And to which extent the state is responsible for that. And to which extent a final decision by the state could have an impact here. And second, could you please provide us with some idea as to dividends and equity from concessions in Q4 in 2021? And to which extent the closings of the derivatives of Repsol contribute to results in order to fulfill your targets for the fourth equity. So these are the 2 questions I have. So to which extent the dividend of Repsol will have an impact on the debt by year-end.

Luis, as for the first question, I'm not a legal expert, but I try to put it as clearly as possible. We are talking about an asset with a certain value. The asset is established by the equity liability of the public administration that owns such an asset. And on the other hand, we have a liability of the debt that is being claimed by the funds that intend to pay in advance before the asset is actually paid. And that is when we need to balance out. So that conceptually speaking, as for the legal arguments, my apologies, but I'm not a legal expert on the matter. But I believe that the concept is quite clear. Carlos, would you like to take the second question?

Yes. As for dividends and equity, we have EUR 40 million pending to be allocated, and dividends will be about EUR 100 million or EUR 110 million approximately. And with regards to the contribution of Repsol, we know that we have a derivative of 25 million in shares with a flow of 8.5%. So once the derivative is closed, we are going to report the final results that is going to be a positive one.

The next question comes from Alej Vigil from Bestinver Securities.

This is Alejandro Vigil from Bestinver Securities. I have 2 questions about the radial ways. Even though we're talking about the first instance judgment, this will not imply some short-term cash outflows. But perhaps you will have to allocate some provisions, and perhaps you will have to assess that for the purposes of your balance sheet. And in connection with this, are you going to be below EUR 700 million by year-end? I believe that this is the business cash flow. Manuel said there are no special transactions that you envisage. Here, you're talking about dividends plus the business cash flow, right?

Well, as for the first question, regarding the short-term impact, if any, the group has generic provisions. Therefore, we believe that the impact will not be a significant one. As for the second question, we said that debt will be reduced below EUR 700 million by the end of the year. So during our next presentation of results in February, we hope we will be able to inform that. But we know that it's going to be below EUR 700 million for sure.

The next question is from Fernando Lafuente from Alantra.

I have a couple of questions about operational trends reported over the quarter, because it seems that everything is clear about the net recourse debt that is going to be below EUR 700 million. Let me talk about Valoriza. There was one quarter that was very good compared to previous quarters. Carlos, you provided an overview about multi services. Could you provide us with further detail about that? And in addition to this quarter, could you please provide us with some visibility or some guidance going forward for the next quarters? Do you think that these margins for Valoriza are sustainable overtime or something that the market could expect, for example, in 2022? And as for the construction division, the margin without considering Pedemontana was a little bit lower, slightly below 4% compared to the previous quarter. Could you please explain why that happened, whether it was a cost related issue? Or whether it was supply-related issue, and what we should expect with regards to margins from the construction division for the last quarter and also for next year.

Fernando, let me answer with regards to multi services. We believe that, that is sustainable. And we believe that we'll be able to report more or less the same growth as reported up until now. As for the slight drop in margins, in fact, as I explained some time ago, there were some effects coming from supplies and raw materials. But in our case, let me remind you what I mentioned at the time. We have 10% of the group's EBITDA sitting here. We take a conservative approach. And whatever is currently being negotiated, is reported at 0. So I would like to emphasize that we have reviewed the pricing of several private contracts. The Ministry of Development has already sent to the Ministry of Economy an attachment in order to reverse some pricing reviews. We report all that as 0, and that's why perhaps there has been this slight impact on the quarter reported for this quarter, but we expect to reverse that.

The next question is by Joao Safara from Santander.

I have 2 questions. Going back to the judgment issue, could you please remind us of the 2 judgments or certainties you mentioned that were issued in favor of shareholders, just to have it clear. So that's my first question. And the second question. Based of the EBITDA reported by Pedemontana, I believe that this quarter, you are reporting EUR 64 million by contrast with EUR 40 million and EUR 50 million in prior periods. Could you please provide us with more details as for the run rate we should expect for the forthcoming months?

As for the first question, this dispute funds started in 2013. There was, first, a statement procedure that was rejected. Then they, therefore, continue with the proceeding that was approved by the judge that was subsequently declined by the upper court. So this was just another development as part of this dispute. As for the second question. It's quite technical to explain how we calculate the financial asset for concession project since this depends on the investment made. When you have months of high investments, you report more EBITDA. When you have less investments, and Pedemontana is about to be completed, EBITDA comes down. However, on average, we are talking about the same values over this quarter.

The next question is by Filipe Leite from Caixa Bank.

I have 2 questions. The first question is concerned with Services. Could you please elaborate on the news that apparently, there are some operators that might be interested in your Services division. Might you be keen on selling your Services division? And second. I would like to know about the evolution of the first 9 months with regards to the performance of the recourse net debt and also talking about labor.

Well, if you mean that yesterday a fund contacted us to express their interest, actually, such a fund never contacted us. Such news was not correct. So we said, however, that Services -- the Services division is not for sale right now. But we are always analyzing new opportunities that may come along, depending, of course, of the price put on the table and depending on the market terms and conditions. And we mentioned this already during our Investors day in Seville. And as for working capital. Right now, there was cash inflows in the amount of EUR 11 million. Usually last quarter reports a higher figure. Therefore, if you take a look at this difference between the group's working capital and the recourse working capital, this is, therefore, related to working capital from concessions. But we have a cash inflow of EUR 11 million right now reported after these first 9 months of the year.

There are no further questions. We have one question coming via webcast. The first question has already been addressed by the Chairman. The question was about raw materials or commodities. Then there is another question, and the question is whether we are keen on infrastructure concessions with demand risk implicit to them. For example, there are other competitors or other successful competitors of ours in North America that deal with this kind of assets that have an implicit demand risk.

Well, as we have mentioned, 97% of our concessions are not tied to any demand risk. So that shows which our approach is. 94%, 95% is demand risk-free. Or such demand risk is highly offset. So that's our approach. Nonetheless, sometimes demand risk, since it has such a big track record, risk may be very low. So we might consider those scenarios when there is very little actual risk.

We have received some other questions from some shareholders that we are going to address afterwards. We will send you a response from the Investors Relations office. But let me combine some questions about the radial issue. I believe this has already been answered. The question is whether this judgment might be appealed and whether things might change through the RPA and what Sacyr expects. And based on what the Chairman said, we should not allocate provisions for the total amount being claimed.

I believe I have already answered. We will have to net out what we get from the RPA, all the value assigned to the asset. The asset is there. These roads are being operated. Right now, they have a certain value. So that value has to be netted out with a debt value. And if there's any difference, in favor or against, that would be the ultimate value. And then we have our proportional share of about 25%. Whether this judgment can be appealed or not? The answer is yes, it can be appealed, but we still need to analyze the judgment more thoroughly. We need to obtain some clarification about the substance of the judgment. And then our legal and external legal counselors will carry out an assessment on the situation. Of course, we need to obtain some further clarification again about the substance of the sentence. This is a lengthy process. This is just an incident in what we call a generic context, where we already had some incidents before that were eventually worked out in favor of shareholders.

There are no more questions coming via webcast, so I give the floor back to the Chairman.

If there are no further questions, once again, I would like to wish you good health, and thank you very much for your interest in attending this financial results presentation. We shall meet you all at the next presentation when we will be reporting our annual results. Thank you very much, and have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call]