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

Good morning. I'm Manuel Manrique, Chairman and CEO of Sacyr. Joining me today, as usual, is Carlos Mijangos, the company's CFO. Thank you very much, dear analysts, media representatives and investors, for attending this financial results presentation of Sacyr for the first half of 2022. In a context of macroeconomic uncertainty like the one we're wading through, Sacyr's operating results are highly positive, showing the soundness of our business model and a very high profitability. This is a resilient model focused on the concessional business that provides us with both recurrence and stability from results and therefore recurrence and stability in terms of return. Today, we are in a high-inflation environment that has a direct impact on our concession revenue while managing cost increases. Both our revenue and EBITDA have grown steadily 20% and 32%, respectively, over the 6-month period of 2021, year-on-year. And the margin-over-EBITDA exceeds 20%, an all-time high in both in our history and in the sector. So through the 2 scrip dividend payments made during this period, shareholders' remuneration is nearly 5%, and this is the commitment we have undertaken. During this first half of the year, we have made steady progress in commissioning some of our most important concessional assets, which lie at the foundation of the high valuation of such an asset, thanks to the cash flows they are starting to generate. We are referring to Américo Vespucio Oriente in Santiago de Chile. This project was commissioned in the country on July 23. The ceremony was attended by the country's president. Another project was Pedemontana-Veneta. We finalized the excavation of the Malo tunnel, and we have commissioned an additional 14 kilometers. Therefore, 80% is already up and running, with all secondary lines already completed and commissioned. Mar 1 in Colombia is another project. This project is also fully commissioned. And Rumichaca-Pasto in the South of Colombia, that will come into operation before year-end. I would also like to highlight the award to a consortium led by Sacyr of the new cancer treatment hospital of Velindre in Cardiff, Wales, which represents a major step forward in fulfilling our strategic plan since this is the very first concession that we will operate in the United Kingdom. This contract shows Sacyr's consolidation in the English-speaking markets as a key player and will enable us to address even more ambitious objectives. So this new cancer treatment hospital will consist of a top-notch building that will be fitted with energy efficiency and will be sustainable. In addition to the progress we formed in these works and new awards, we have also arranged several refinancings for these assets, such as the one we obtained about Pedemontana with the GIP fund in the amount of EUR 450 million for an 8-year term, which shows the high value of our assets and how appealing they are to the market. Some of our corporate milestones, as you very well know, include the fact that we are once again relisted on the IBEX 35 stock index as a result of the company's moving towards a concession-focused model. We also reported the fact that we were going to sell our stake in Repsol. Recently, we announced the fact that we were going to reinforce our capital structure by refinancing our corporate debt, by lengthening maturity terms and by getting prepared to face a high interest rate scenario. With regard to the recourse debt, you know that reducing this debt is one of the main targets under our strategic plan for 2021, 2025. Therefore, we maintain our commitment whereby, by year-end, we should stand below EUR 500 million. As we said, we shall do so, thanks to our business flows as well as by reviewing prices that is already committed, not yet paid. Also this will be done through dividends coming from the businesses in the second half and the rotation of some mature assets. We continued to make progress with regard to sustainability. Just a few weeks ago, we were considered to be one of the best companies in Spain in this regard. And we were ranked fourth in the world by Sustainalytics, which is one of the leading ESG rating agencies in the world. In summary, we can say that revenue went up by 20%, reaching nearly EUR 2.6 billion. EBITDA, as we said before, grew by 32%, totaling EUR 530 million. EBIT (sic) [ EBITDA margin ], 20.5% against 18.6% the year before, therefore going -- growing by more than 150 basis points. Also, EBITDA from concession assets accounts for 85%, against 82% in 2021. EBIT accounts for a 34% climb, totaling almost EUR 430 million. And profit after tax, EUR 42 million against EUR 40 million year-on-year. Operating cash flow stood at EUR 284 million, slightly above fiscal year 2021 because there was an increase in raw material prices. Therefore, in many cases, we incurred costs to comply with our contracts. And even though this income or revenue was already recognized, it has not yet come into our treasury, so we normally keep this trend throughout our actions. Finally, our backlog went up by 8%, nearing EUR 50 billion. So such positive figures from our business, with 85% EBITDA coming from concession assets, ratify very clearly the full concession focus Sacyr has. Therefore, we no longer depend on construction cycles in order to increase our profitability. That is, and let me insist, our reliance on the construction cycle is already very, very, very limited. Finally, I would like to underscore once again that the success of these economic results we are reporting; and our successful, sustainable balance sheet is due thanks to the work performed by all of our team. All of our people, through their efforts and commitment, enable us to be better every day. So now Carlos Mijangos will provide you with the key financials of our company and of each of the business divisions of the group and the holding.

Thank you very much, Mr. Chairman. Okay, as for the global figures, we see stable and predictable growth. Therefore, we can say that concessions reached EUR 294 million and 407 -- therefore growing by 57.7% (sic) [ EBITDA margin is at 57.4% ]. For engineering and infrastructure, EBITDA reached EUR 193 million, EBIT EUR 175 million, with an EBITDA margin increase of (sic) [ to ] 13.3%. As for services, we totaled EUR 46 million in EBITDA, EUR 20 million in EBIT, with the margin standing at 9%. Let us now take a look at the contribution broken down by activity. In this case, revenue is particularly important in engineering and infrastructure, 55% (sic) [ 51% ]; in the case of services -- and as for the distribution of EBITDA, 55% comes from concessions. 36% comes from engineering, and 9% comes from services. However, if we group all concession assets together under all 3 divisions, we reached EUR 448 million in EBITDA, which accounts for 85% of the total group. As the Chairman said before, this clearly shows the concession-oriented focus of the group. As for the backlog, almost EUR 50 billion, 80% coming from concessions, 13% from engineering and 7% coming from services. Let us now take a look at the distribution of this backlog. EUR 40 billion corresponds to concessions; EUR 6.5 billion engineering and infrastructure; and the remaining, to services. These are the main awards that were obtained in Europe, in Sweden, in Portugal and also in the U.K., also in Chile in South America. And in the English-speaking market where we are expanding our activity, we have several projects that were awarded in Canada and in the United States. Let us take a look at net debt evolution. It went from -- it increased by EUR 100 million (sic) [ EUR 1 billion ], up to nearly EUR 6 million (sic) [ up to over EUR 7 billion ]. Here you can see the evolution of debt. And you can see how it contributes to -- operating results, EUR 184 million (sic) [ EUR 284 million ]; net financial result, including margins -- or interest from project finance. We have invested over EUR 1 billion over this half, first half of the year. This 1.5 million (sic) [ EUR 1 billion ] corresponds to A3. This is an investment, a single, a unique investment, in this asset because we had to pay the administration. And then we have ordinary investments in other projects. Finally, we have especially said in this period -- you know that we sold our stake in Repsol. And we had a variation and ForEx. Therefore, at the end, we reached EUR 7.137 billion. Therefore, [ with this -- to ] recourse net debt evolution. We went down by -- from EUR 798 million to EUR 767 million. With the EUR 23 million increase, we had to take into account the effect of working capital. This is going to continue to go down as we begin to collect [ compensation of prices ], especially from engineering and infrastructure. Finance costs, in the amount of EUR 21 million. We have invested EUR 52 million in assets this period. Dividend paid to the shareholders amounted to EUR 10 million. And we have EUR 58 million (sic) [ minus EUR 58 million ] coming from Repsol. And then we have the transaction in Italy. EUR 83 million (sic) [ Minus EUR 83 million ] came from that transaction, into our cash flow. Out of these amount, EUR 205 million was used in order to pay a local debt. And therefore, EUR 170 million was allocated to our shareholders. Therefore, we still have EUR 75 million outstanding by the year-end. That will also enable us to reduce this recourse debt. Regarding business areas. In the case of concessions, operating margins went by 39% (sic) [ EBITDA went up by 39% ]. Therefore, we see a significant and solid growth, mainly due to the commission of different highway tranches, the 78 road that we also put into operation as of March; also improved traffic volumes; and the fact that this activity is tied to deflation rate. The water business also grew by 21% in terms of revenue, 22% in terms of EBITDA, therefore contributing -- therefore with a significant contribution from Australian and Chilean assets. All in all, the margins account for 60% (sic) [ 65% ] and 19%, respectively. EUR 40 billion is total backlog, with a 9% increase. We should also mention that we have invested an additional EUR 1.4 billion. These are capital contributions, EUR 1.3 billion infra concessions. And then we have another significant amount in water. As for the milestones of this division. In January, we closed a bond issue in the amount of EUR 518 million. This amount has -- already being used to pay some settlements. We also refinanced the Rumichaca-Pasto project. There is one portion that corresponds to a social bond. And then we have financing on dividends from the Pedemontana-Veneta highway in the amount of EUR 450 million. We also started the construction and commission of the Santiago-San Antonio highways, yes, or the Route 78 in Chile; and A3, from Naples and Salerno, in Italy. And after the financial closing, we also commissioned the Américo Vespucio highway in Chile and Mar 1 in Colombia, respectively. Let us now take a look at our main assets. You can see in this slide, in light blue, those assets which are already operational. All in all, they are 5. We also have others under construction, which are quite completed. In Colombia, there are 2 assets that have already been commissioned. Puerto del Hierro (sic) [ Puerta de Hierro ] is one of them. Then Mar 1, this is a road goes from Medellín to Antioquia, going through the Antioquia valley. Then we have Vespucio Oriente highway. This is a complex infrastructure in the amount of 1 billion that consists of many tunnels. There's a park above. It's a very complex construction work that was quite successful all the same. And then we have the A3 highway in Southern Italy that was also a successful project. It's going to be fully commissioned as of April 1. There are other roads that are also well advanced. Rumichaca-Pasto in Colombia, it has been completed by 98%. The Pamplona-Cúcuta project, that is 77% completed. It's in inner part of the country. It's going to be commissioned as of 2023. In Uruguay, we have the central railway system. 30% of all the railway tranches have already been executed. It's 78% completed. And then we have Rutas del Este, running from West to East. 77% has been completed. And Pedemontana, as we mentioned before, has -- the tunnel has already been completed and it's going to be put into operation in the forthcoming months. Let's now take a look at the main weights of the concessions activity. Well, this table is missing Italy due to some accounting reasons. This information is posted under the engineering divisions account of records. The first country is Colombia, followed by Chile, Spain, Uruguay and the remaining countries, reaching EUR 294 million. All in all, regarding Italy specifically, it contributes 226 million and 148 million in terms of EBITDA. Let's now take a look at engineering and infrastructure. We have EUR 1.455 billion with a 36% increase; and 23% in terms of EBITDA due to the execution of some large projects that we have in our backlog, particularly in Colombia, Chile, Peru, Paraguay, the U.K., et cetera. And this is also due to Italian concession assets. Such assets contribute 226 million, as I mentioned before, and 148 million, yes, on account of EBITDA. If we now take a look at the concession assets effect. Margin stood at 3.7%. And the -- it was, however, impaired due to the current commodities prices situation. The backlog is EUR 6.5 billion. 50% corresponds to the concessions division. The milestones include the following. We started the works at the Sótero del Rio Hospital in Chile, which has a surface area in excess of 200,000 square meters that will benefit 1.5 million inhabitants. We also opened a new building at the Tenerife South Airport. And we have the -- well, 78 road for EUR 456 million. We also have the Bio Bio river in Chile project. This is a total investment of EUR 174 million. Also another project is Santiago de Chile with the supply and maintenance of catenary sections for line 7. In the U.K., we are going to have new infrastructure for transport in Belfast. Then we have in the Canary Islands another project in the amount of EUR 46 million to retrofit some of the [ roadways ]. And then we have the Grandview Children's Centre hospital in Ontario and -- other projects in amount of 9 billion (sic) [ EUR 49 million ]. Or we have just been awarded another road for EUR 150 million in the United States. As for the services division, it has also evolved quite favorably. Revenue went up by 5%, EBITDA by 4%. Here we should take into account that, in the first months of activity, different contracts have been awarded. In terms of facilities, there was a decrease of the impact of the pandemic, therefore activity [ painted up ] after the pandemic and hence these figures. And then with regard to waste collection and management, we were awarded [ some ] important projects in Torrejón as well as section 2 for cleaning services in Madrid and landscaping services. We were also given an extension of a waste collection contract in Melilla. With regard to the main awards, we have home assistance in Madrid for EUR 108 million then some cleaning and security services contract for the metro of Santiago de Chile in the amount of EUR 38 million, the extension for the -- for a 2-year period for the street cleaning services in Melilla, different cleaning and monitoring services in the amount of EUR 16 million and other home assistance contracts. And that's all with regard to the operating results.

Thank you very much, Carlos. Now we are at the disposal of all analysts to answer any questions you may have.

[Operator Instructions]

Well, it's impossible to tell. We believe that 75% -- [ 70% to 75% ]. Actually this is ongoing. This is due to increased raw material prices. This is a recognized revision mechanism. Customers recognize that, but we believe that they will be ready by year-end. It's impossible to give you any further details. However, the remaining 25% that has not yet been recognized has an associated claim, and we actively continue to work in order to reach the total target. With regard to the sale of assets, Carlos will answer.

We have already shown and we explained on several occasions that we have the capacity to both do asset rotation and do finance restructuring in order to harness the assets value we have in order to increase flows into our holding while reducing net debt.

We have always used both drivers, in fact.

The next question is the following. Could you please provide me with a breakdown of your investments, taking into account your recourse debt? Could you please explain what you have included by way of allocation and breakdowns? Then we have EUR 4 million in the last column that refers to financing loans. Could you please provide me with some details about what you have included in that figure? So that's question number one. Question number two is the following. In order to understand this going forward, how are you going to report on the A3 highway project? I understand that this is a highway that today is already up and running. Therefore, will such results be reported under the umbrella of the construction division? Or what should we expect?

In answering question number one. Net investments in the amount of 52 million, 31 million corresponds to capital contribution, accounting for [ 96 million ] over the first half of the year because this is the quarterly evolution. And the net was allocated to services and machinery. As for ForEx, variation and financing and debt adjustment, we have some effects from the last Valoriza Medioambientales tranche that we arranged last year. So that is a positive impact in order to reduce debt, but then we have the downside. And that is [ leasing ] in the case of construction and services; and ForEx, variations and some changes in scope. Those are basically the ones that you see there. And as for the A3 highway, it's true that SIS is the responsible companies. So from a business perspective, we have to include that under the consolidation of construction. So we had to make a distinction between the concession assets and construction assets, but we have no choice. Thus, under Italian law, we have to include that under the scope of consolidation of the Italian business.

I have another question, if you would allow me. I understand that, according to the new structure with GIP, the Pedemontana concession will begin to be reported by the concessions division. I know that this is a detail, but it's something that will -- adds a lot of complexity to the overall analysis. And let me also double check whether the [ SCMX ] transaction accounted for 40 million.

Yes, 40 million, in fact. And with regard to the GIP transaction, we are under exactly the same circumstances. Pursuant to Italian law, for good or for worse, we cannot actually change things. And until this is fully operational, we will have to report it under the scope of SIS. Afterwards, we will be able to post it under concessions.

The next question is by Fernando Lafuente from Alantra.

I have 2 questions. The first question is concerned with dividends coming from concessions that you expect this year. Since you have increased such dividends, I believe that this is because of foreign exchange, variations. I would like to confirm that. So in this backdrop, which is the potential impact that ForEx could have on your dividend estimates for concessions this year and next year and also in 2024? And the next question is the following. With regard to the asset sales and potential investments, I would like to know what you think about the investment environment of the concessions division. What do you think that your peers' position is which is the investment outlook of other peers in the next 2 or 3 years? Do you envisage any changes from country to country, in North America for instance? So that's my question.

Fernando, as for foreign exchange, volatility is extreme at this point in time. So even if there's a lot of activity, we normally tie our foreign exchange rate to the U.S. dollar and other Latin American currencies. So as the euro is re-appreciated, there will be some movements, that if we transfer that volatility over to dividends, we would say that we'll -- it's going to be low. We expect to receive about [ 190, 170 or 190 ]. We're not talking about a 50% or 70% impact at all. So potential devaluations that we had will be adjusted according to the U.S. dollar. Those are scenarios that we can manage. And with regard to the concession's top line, as part of our strategic plan and -- today, we have announced that we have achieved the first concession in an English-speaking country. Our goal by the end of 2025 is to have 1/3 in Europe, 1/3 in Latin America and another 1/3 in English-speaking countries. Here we include Australia. We are normally awarded 2 or 3 concessions per year, and that remains to be our expectation.

We have finalized all questions over the phone. Now we are going to receive questions via webcast. We have one question from Filipe Leite from Caixa Bank BPI. He's asking us about the impact that inflation rates have had, how that affects engineering and infrastructure revenue by year-end. And what margins do we expect by the closing of this financial year? The second question has already been addressed. This is contribution of Pedemontana to engineering and infrastructure and when it's going to be transferred over to concessions. And the third question is whether we expect any awards from the 5G program in Colombia.

As to the impact [ of ] infrastructure and engineering by year-end, the answer to this question can be found in the information we have presented. We are talking about a 3.7%. 2 years ago, it was about 5%, so we are talking about a 1.2%, 1.3% impact on the EBITDA margin. If we extrapolate that over the period, we are talking about 14 million, 15 million. If we multiply that by 2, the impact will be about 30 million, 32 million, so it's quite manageable. And we already announced that in the prior quarter, but let me insist once again that our target is to bring this down further because, every day and across the projects that have not -- whose impact has not yet been recognized, we are in close contact with customers. And we hope that claims will be kept to a minimum. We don't want to go into any litigation procedures. Therefore, the impact is manageable, let's say. And then you asked about the 5G project. The 5G project has already been -- or is starting to be awarded. We keep an accounting prudence approach. We trust that we will be successful in some of our projects concerning this 5G project. It was the case with the 4G project. Remember that we were one of the first concession awardees, with 4 projects being awarded to us. We hope that this year is going to be the same, but you never know.

There are no additional questions through the webcast, so now let me give the floor back to the Chairman.

If there are no further questions: Please keep safe. Thank you very much for attending this presentation of results. And we look forward to meeting you again at the next presentation of results. Have a great summer break. After all the efforts we have made over the past days, we all deserve a break, so enjoy and have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]