Earnings Call: Q3 2019

Oct 30, 2019

Good afternoon, everybody, and welcome to Farovia's conference call to discuss 2019 9 months financial results. Both in the results report and presentation are available to you in our website. If you have any questions, you may ask them to an email to irferovial.com. I will hand over the call to our Mr. Lopez Motto, Ferrobi, our CFO. Thank you, Ricardo. Good afternoon, and thank you for attending the 1st 9 months of 2019 results conference call. Starting with the highlights for the 1st 9 months, We go with the outstanding performance of our toll roads. The 407 ETR traffic was up 1.5% in this third quarter, leaving the traffic year to date close to neutral. Despite the harsh weather conditions in the first half of the year. And also in the quarter, it posted more than 10% growth in revenues. This strong performance allowed the full year 2019 dividend from 407 ETR to grow by 14% to Canadian dollars 1.50. Which is above the expectations of our high case presented in the 2018 models that we published. Regarding the Managed Lane, the Texas match lanes growth reached double digit in all three open assets. Boosted by new connections in the Dallas Fort Worth area. Ferreira reached the financial close of a new managed lane and the NT35 West 3C segment. Regarding the I7 7, there's a solid uptake after just 4 months and the the north segment that opened is up 44% in June to September in terms of transactions. The full opening is expected by the end of 2019. Heathrow continues to reach a new record high traffic levels with 61,000,000 passengers traveling through the airport. The strong revenue performance also supported by the performance of its retail revenues that were up 3.1%. In construction, as a reminder, in the first quarter of this year, there was a provision of 345 1,000,000 for onerous contracts and derivation currently is making no margin. The current focus is on reigning in risk management and cost control. Okay. So moving on to the overall view of the toll roads division, we see that the revenues are supported by the higher contribution from managed lays and the traffic growth at most assets. Like for like revenues are growing at 31.8 percent, while EBITDA is growing even more at 40.6%. And the contribution coming from the U. S. Reaches almost 60%. Also, the agreement on the sale of 65% take of our soul that is still pending administrative approval, but should close before year end. It continues to, add to the consolidated P and L. The news that if approvals, as I said, are expected shortly, and the cash in should also take place in 2019. The deal, as we already mentioned, we'll provide a capital gain of around 1,000,000, and this includes the fair value adjustment for the remaining stake. The implied valuation of the asset was 60% above market consensus, and it showed a strong appetite for this type of infrastructure. Moving on to the 407 ETR, the results were published last week, but I would like to highlight the outstanding performance in this third quarter. And despite the difficult first half a negative impact and has weather conditions. The fact that it's growing this quarter at 1.5% in terms of traffic and revenue and EBITDA above 10% has improved the performance of the whole year. The traffic gear today is practically flat. The 9 months EBITDA growth is up by 8.4%. And the EBITDA margin is at 87.4%. As we mentioned in the opening slide, the forum has paid CHF 750,000,000 dividend dividends, but it has declared that for the full year, it would be CHF 1,050,000,000. This implies a 14% growth and is 6% above our high case policy in December, as I already mentioned. Moving on to the managed lanes, the slide, the first one on this topic, we see the outstanding performance. And we can say that the ramp up period in TNLBA has finished, if we measure ramp up by the knowledge of the drivers in the area, about the asset and how it works and the way they use it. Still, it will keep, posting excellent growth. So ramp up is just about knowledge and all about growth in the asset. Regarding NT, the EBITDA, the third quarter 2019 is 32% up. Reflecting the strong traffic evolution. The NT traffic in the third quarter was up 12.8 percent. So revenues are growing higher with a better uptake of higher types. This NT traffic is supported by the full opening of NT35 West in July 2018. And it connects directly into NT's segment 1. Also, the opening of the 183 Express, the Midtown Express in October 2018, that connects directly to NPE segment 2. SBA had a stellar 3 third quarter performance with EBITDA growth of +28 percent. Traffic was up 13.8%. And it was impacted by 2 sources. So for example, one of them is the opening of the 183 textbooks in October 2018, which connections directly to LPGA segment, 1, providing a new and direct connection between NTN and LPGA. The latest opening is the increasing track from the U. S. 75 following the completion of construction at its intersection. With President George Bush Turnpike in the second quarter 2019. Regarding the latest arrival to the, profitability 35 West and and the latest addition in Texas. The third quarter of 2019 showed traffic up 44%. This third quarter is the 1st full quarter we can compare as the asset opened in July 2018 fully. As drivers are returning to the highway, exceeding pre construction levels and the increase in share of, traffic that is choosing the the managed lane and also commercial traffic is having a very good performance here. We ported figures are impacted by the award of the NT3C, an award which took place in August this year and that we would explain in more detail in a minute. This impacted because there was 20,000,000 success fee paid by the concession. And this will be consolidated within NT35 West it is an extension. So this success fee, I mean, we basically have taken it out in the slide to show the growth in the EBITDA. A substantial part of this success fee will go to Sintra. A strong element supporting this good performance of the 3 managed lanes is the improving connectivity in the whole corridor. The Dallas Fort Worth Metroplex has a 100 mile connected system of Texparate lanes and 20 miles of additional management and capacity will be added in next 5 years. One part of this is the construction of the NT3C to the north of, NT35 West Segment's 3 HBB. And also, the 635 East to the east of LBJ. Okay. So moving to the next slide, we get into more detail on the NTM 3C. This was as we said awarded in the summer. And it follows the 3 very successful managed lanes that we own and operate in the area. In response to the demand to improve traffic flow in a very busy area, which has a booming economy that is outperforming the U. S. Economy at large. It was a world in August, as I mentioned before, and it includes development, design, construction and operation of the segment. It is a 6.7 mile northbound extension of the NT35 West 383 with 2 managed lanes in each direction. As well as the reconstruction of the existing general purpose lanes, construction of access ramps and frontage roads, the construction of IH H820 I35 West Management Direct Connector and the installation of intelligent transportation systems and turbine systems. Will be completed by the end of 2023 and the concession terms, ends in 2061. The total enterprise value will reach more than $900,000,000 and the our state owned by Syntra will be 53.8%. If you look at the slide, I mean, you see the proportion that it means compared to 383b and how it connects to the Fort Worth Alliance Airport. This is an area of high growth from our commercial and logistics, the point of view and issued, I mean, our expectations are high regarding this asset. Moving on to our Android managed lane. This is another region. This is DI77, from Texas to North Carolina. It opened the Northrop portion on June 1st this year and we expect the full opening before the end of the year. The results since this partial opening have shown that drivers are adapting to the value proposition of the managed lanes very fast. Traffic in the segment of the managed lanes has grown by 44% since opening measured in in transaction. This is just 4 months of operations. Okay. So as we said in the beginning, a solid uptake and we'll keep monitoring this asset. Moving on to airports from From toll roads, we move into Heathrow. The results were published last week. But this was to quickly go over some data like the record high passenger numbers in Achieve. 61,000,000 passengers that traveled through Hitzel in the 1st 9 months of the year, implying a growth of 0.7%. And leaving the airport on track to achieve its 9th consecutive year of traffic growth. Financial performance revenues were up by 4.1% with a strong growth in both aeronautical revenues, up 5.5% and retail revenues up 3.1%, led by concessions and catering. Adjusted EBITDA was up by 6.3%. Helped by IFRS 16 without the impact of this new accounting rule, it would have been up by 3 point 6%. It is worth pointing out that these results have been achieved while Heathrow maintains extremely high service quality. With an overall score of 4.12 over 5. And with 82% of passengers rating their experience as excellent are very good. Better immigration following investments in decades and upgraded passenger WiFi facilities. Departure punctuality and baggage connection have also improved year on year. Dividends amounted to 300,000,000 urling pound for 100% in the 1st 9 months of 2019. We move on with Heathrow to the next slide where the main point is the expansion that lies ahead and here sustainability is the key. Heathrow is advancing on its Heathrow $2 sustainability plan, which has 3,000,000 targets. Carbon neutral airport operations from 2020, 0 carbon airport operations by 250, 2050, and carbon neutral growth from the new runway. In terms of the airport expansion, Heathrow remains committed to it being sustainable in the long term. In its export expansion consultation, it has presented its proposals for an environmentally managed growth framework. Explaining how its growth would be managed in accordance with environmental limits on air quality, surface access, noise and carbon. And supports growth in flights at the airport while ensuring HITra's environmental performance stays within maximum limits. Moving on to construction, the next slide, as announcing the first half results, We registered a 1,000,000 provision for estimated future costs or onerous contracts in U. S. Projects. In the 9 months results that are in line with the first half of twenty nineteen, that is a negative 348,000,000 EBIT. With a boutiques and we're representing a positive performance and profitability similar to recent quarters. A sale in the 3rd quarter's stand alone posted a minus 1,000,000 euro EBIT mainly on overhead costs allocated to owner's contracts in the U. S, around 1,000,000 and ongoing costs in some projects where we expect to offset and discuss with income from claims or rights in the contract. For compensation. Okay. So, no potential income from those claims is included in the results. So this is a different timing between cost recognition and revenue recognition. Moving to the next slide on services. The divestment process is progressing following 2 separate routes. One of them is Spain, Australia and the international partners of the world. And then another one is, is Amy. The sale is taking longer because the transaction is more likely to be based on subsets of the renal perimeter. And this is taking harder to prepare. And also, it's worth mentioning that Frogial could potentially retain several PFI projects that are infrastructure type business. Moving on to the to the P and L results, We see that the main impacts on the Frobio's P and L. So some of the operations impacts have been already discussed and I will focus on other lines. So you have the financial results, the infra financial results with higher expenses. And this is because of the opening the full year opening of NT35 was compared to 6 months last year. So we have 9 months versus 6 months this time. And the opening of a segment of I77. This has been partially offset by better remuneration of the gross cash position. Exinfra projects, we have a 1,000,000 of financial income in this 1st 9 months, again, thanks to better remuneration of cash position and also the performance of the equity swaps linked to performance share plans. And these hedges led to a 1,000,000 profit in 2019 versus 2,000,000 users profit in the 1st 9 months of 2018. Then in the equity accounted results, we have a lower results, 1,000,000,000 after tax compared to 206 last year. And here, the main impact is At Heathrow, we have the fair value adjustment of inflation derivatives. And this is linked to the curve at the end of September expecting higher inflation with the higher priority of a non deal Brexit. Now at the close of October, this impact would be positive with the curve of the 30th October, right? So very much inflation expectations seem to be driven by the likelihood of a negotiated deal or a non deal, Brexit. In terms of, Altima, we also had the provision of our goodwill just in case our appeal is not successful. And in the discontinued operations, we have results that show a net income of EUR 28,000,000 compared to a net profit at the end of June of EUR 135,000,000. Results from discontinued operations were increasing the book value compared to December 2018, mainly because there is no amortization charge following IFRS 5. An adjustment in carrying value has taken place. Okay. If We move to the next slide. We can have a review of the X infrastructure cash flow evolution. We have the bridge with a a year end. And here, the main drivers of the change in the net cash position are, 1st of all, the positive input of dividends from projects. This is 1,000,000 that includes 1,000,000 from services projects. And then in terms of the EBITDA from exit structure projects, we have working capital impact that is the payout of the provision from construction that we have a payout of around 1,000,000 and the rest of the working capital Revolution, we have the conception that to the next also around 119 and 80 ex trimming up at 100 and and food and at and 54. These numbers, except, I mean, are very similar to the ones we were seeing last year in terms of cash outflow this part of the year. What is different is the payment to Birmingham. I mean, Birmingham the program employed has implied a cash outflow of 166,000,000 €ureaus, including £113,000,000 of the settlement payment. And The rest of the cash outflow is related to investment, 1,000,000 with no significant divestments. And here, it's important to mention that, our source should be coming in before year end in terms of, divestments and the other positive impacts we expect at the end of the year is higher dividends from infrastructure. The 407 already announced that. We expect the 1st dividend from NTE, and we'll have to assess, also the a possibility of, Heathrow, improving the dividend more in line with last year. But that's something that the Heathrow Board will have to decide at the end of, of the year. Okay. So after the review of the cash, just the final remarks, we have 6 squares here that show the main highlights for conclusion starting with the bottom right corner on the slide regarding contracting, we are addressing the sale of services and working to improve the outlook and construction focused on on risks. And then regarding the infrastructure assets, we can just stop good news with Managed Lane's continued booming the 407 solid performance and growth in dividends, new record high at Heathrow in terms of passengers. And we can see that in general, our portfolio is highly coveted by, investors in this type of business. So news here should remain upbeat regarding the financial position with a net cash position of EUR662 1,000,000 before the result proceeds and diligence for the projects, the position is very robust. Okay. So that concludes the presentation and we get into the Q And A session. Ladies and gentlemen, if you have a question, if you could please send them in writing to irferovril.com. Hi. So the first question, which was sent via email, came from Jenny Ping from Citigroup. Question is, would you be able to provide an update on where you are on the disposal of the services business, the press talking about combining bids from 2 bidders, what is the timeline and when can we expect to hear on the deal and the proceeds? Okay. Thank you, Jenny, for the question. Well, we are progressing with discussions. We won't get into details regarding timing and we are in the kind of 12 month period that we were giving ourselves for this, well, it's advancing well, but I cannot give you any specific, any specific date. Okay. 2nd question, can you also confirm that you wrote off further assets in the book value of services? If so, what is the amount of the write off? Okay. As I mentioned, I mean, book value was in going up, especially with the fact that you don't amortize the assets, and with the IFRS 5, So yes, we took a €170,000,000 should, but I cannot give more specific at this time because we are negotiating with dealers and this could be sensitive information. And lastly, regarding Heathrow, what do you see as an appropriate level of return for H7? The 2.6% talks about by the CIA's consultant. Is that sufficient in your view? Okay. I won't comment on a specific level for the, return here because also there's a different moving pieces and the risk of the asset now is very different without the construction involved and new capacity, right? So, I mean, things will be discussed. We won't be providing guidance are what we see as sufficient now because also the regulatory building blocks are moving. Thank you, Ernesto. Next set of questions come from Guillermo Fernandezaro from Kepler Cheuvreux. The question is on the services divestment. How material would be the business you would potentially retain in UK PFS in terms of EBITDA and net debt if they are globally consolidated? Thank you. I cannot provide you much, the color here because it's been discussed. And it will be clear if, when we have our transactions, so I cannot give details now, but it will be fully explained up on reaching an agreement. Thank you, Ernesto. The next set of questions come from my team, what Hal in Bank of America, The first question, would be, can you comment on the pipeline for Incentra and specifically on the Maryland congestion relief program? When do you expect the first awards from this program? And what is the size of the potential investment for Zintra? Yeah. Well, this is Paco Comintas seeking. The first Maryland project that we are expecting is the high 270 South Maryland. We expect that the request for qualification will be launched at the year end. And the request for proposal during 2020. And the amount of investment is roughly 2.6 $1,000,000,000 at the equity that could be potentially injected by Fintra will be around 3.75 Also, I missed the part of the prior answer, sorry, questions, sorry about that. They were talking if PFIs were located in the UK. Well, I was talking about all their geographies, but as I said, we cannot be specific now, I mean, in early stages. 3rd question also from my team, Do you currently expect the construction division to be profitable at EBIT level in 2020? We are not providing guidance for 2020. We will have more information on the close of a year conference call in February. The next set of questions come from Stephanie Daff in RBC. On the 37 ETR, on the stake increase, what is the update on the legal procedure? Well, again, I think it's public that Fintra has made an appeal of the on the process, we do not expect any any news, up to the year end next week, next year. Thank you. Could you please comment on the joint bid with SNCF for a concession to operate one of Spain's high speed rail trains. Okay. We have analyzed this opportunity. We they haven't made a decision yet if we go for this business is stabilizing that. Could you comment on the progress of discussions with airlines to shift the agreement based contract away from regulated asset base? Getgo is, I mean, the possibility of that happening, there's no open negotiation at the moment. It's still the number one of the discussions regarding expansion and more about providing the initial business plan and the regulator on the Hintro side and the regulator providing building blocks for the regulatory period. So then there's no discussions really at this point in time, but I guess that all parties remain open. And the last question from Stephanie, regarding Heathrow and the potential potentially improving dividends in full year 2019, what is the sustainability of this given run rate 3 investments ahead? Well, we are not discussing feature dividends from the from the asset. The asset has healthy to run with your operations and could could be providing dividends some money here is quite tangible and you, as you probably are suggesting, so this dividends could be reinvested. It would depend on the on the business case. And as I said, the business case will be more clear to the market end of this year and more at the end of 2020. Thank you, Ernesto. The next set of questions come from Nabil Ahmed from Barclays. Please, can you provide an update on managed lanes when do you expect NT and LBJ to pay their 1st dividend? Well, NT at the end of 20 18 and LPGA at the end of 2020, this should be their first dividend. Thank you. What about the refinancing potential for the managed lanes? Could you provide an idea of the timing and potential benefits of the refinancing? Well, in regards of NPE, we have a call date at the year end this year. And we are, expecting that we will be able to reach financial financial close before that date. And in regards of, LDA, the call date is scheduled at, mid next year. And we, again, we expect that we will be refinancing the, at least, tax, the tax expense the second half of next year. Thank you. And the last question from Nabil Could you provide a guidance for net cash position by year end? Well, we usually don't provide guidance the 4 year end when we talk about the building blocks that could compose this end of cash position. Right? So we should be getting the sale proceeds from, from our soul, also the dividend from NTE And then construction will depend on the, getting some advanced payments on, and some projects that are closing in this last part of the year. Also, at the end of the year, we should see cash improvements in, in Amy and and from spectrum that are usually seasonal. So we should see some seasonal effect probably not as strong and stable as other years, but we have these other impacts that should help beside the building blocks, we don't provide a specific guidance, but it looks like improving this current level for sure. Thank you, Ernesto. The next question comes from Ellen Albafeld from Daffen Phelps Investment Management. How will proceeds of services sale be spent? Would it be used to fund an equity injection into Heathrow to help fund the expansion CapEx? Well, we don't have a different guidance here. What we said Since the results conference call in February, we are looking to invest in infrastructure that could be attractive. We could also do shareholder remuneration. So those are the are the main, uses, of course, Heathrow expansion. Should be an interesting project. And, yes, we could be looking at at that. As I said, Heathrow itself is capable of generating, dividends, but yes, it could be a possibility to injecting in Heathrow. But this, will be happening later on. I mean, start of construction probably is 2 years ahead easily. Thank you. The next question comes from Jacobodinardo from Macquarie. Hi. I just wanted to understand what the EBITDA is on the I77 unfolds this quarter. This quarter, the total revenue of the I-seventy $7,000,000 is $8,400,000 and out of them, we got Editiles. And APAC is 42. So the EBITDA is, it's 50,000,000 Okay. So, I mean, just to provide the exact breakdown, revenues are 20, of which toys are $3,000,000. The vendor 17 from, liquidated damages. This is something that, Syntra is charging the construction DB for delays and is support to replace toll revenues, right? And then, there's also something EBITDA is is favorable because there's some capitalization, of course, due to construction is still going on. And the capitalization, of course, is I mean, the the exact number of a capitalized cost is, $5,000,000. Okay, so that is helping to improve the EBITDA margin, this capitalization of the asset. Thank you very much question comes from Jose Manuela Reyes from Santander. Weather conditions were particularly bad in Dallas for worth in the third quarter of 2019 with heavy rain. Were the managed lanes there hurt by the weather? No. Not really. We cannot say that it wasn't underperformance due to weather in the in the managed lanes. And the last question from Costa Manuel, the cost of funding from NTN L BJ carries very high coupons close to 5.3%. And the assets are performing well. Is there an opportunity to refinance these assets anytime soon? If so, when, and have you received any quote thus far? As I said, we are expecting that we, at least, we will be refinancing the PAPS in NTA at the year end, maybe TC as well will be refinance, we will see. And in regards of the everyday, again, we will try to refinance once the call date will lapse, which is next June 2020. And in both cases, we will, we will expect to reduce substantially the cost of funds of both brands. Thank you. And a follow-up question also from Cozemannual. You will receive the first ever dividend from NTE the asset is outperforming your business plan by about 20%. Is there a potential for higher dividend than the $125,000,000 you guided for earlier? I mean, you're right, and Jose Manuel and the asset is performing better. So there's more excess cash. Yes, it could be a higher dividend, but maybe it spills into early 2020. So, I mean, we'll get more clarity here during the end of this quarter, but yet definitely the expectation is that either this year or between this year 2020, we should have a better performance. Thank you. The following question comes from Charles Meinadia from Kempen. The 37 ETI dividend growth highlights again that your forecasts were too conservative. When could we expect an update on the toll roads value including models or at least some more visibility on NT35W and the I77? Okay. We are debating this in particular on the NT35 West you will start seeing construction in the north end and the I77 still has to open, right? So given these facts and we usually wait a little bit to see more the performance of the asset before updating I mean, we won't be doing it now. So we we are debating internally. We'll keep you posted. Thank you. Following question comes from Elodie Browal from JP Morgan. Can you give us your view regarding 2020 construction margin? Masas, I already took this on a prior question. I mean, we'll probably talk about this in February. With the year end results of 2019. On the 3 C portion of the 5W, what kind of pricing are you expecting? Would it be similar to the other managed lanes, or is there better potential? We think it's quite similar, but it will have to open. I mean, we think it's quite similar because there's a lot of, commercial industrial activity to the north. As I mentioned in the presentation, there's the, alliance airport over there. So, there's no reason to expect a different mix in terms of traffic, but it's early to tell. And finally from LED on Heathrow, can you give a bit of color on the moving parts below EBITDA as the equity contribution is negative for 9,000,000? Well, as I mentioned before, This has been affected mainly by the impact on the hedge on inflation, right, the close of September. Faced and occurred with very high inflation expectations given that the likelihood that the market was attaching to a no deal Brexit was quite high. That has reverted now, right? So we could see basically in our accounts an improvement given the curve today that could be around €80,000,000 improvement, right? So is based on on this. And as I said, it's an economic hedge, and it will depend on how the, Brexit saga evolves. I mean, a deal Brexit should bring this kind of inflation expectations and a deal would have the same impact that we've seen at the end of September. Thank you. The next question comes from Jean Charles Belvoir from Inocap. Is the construction of A66 going according to plan when do you expect it to be launched? It's it's going there. According to plan, and the opening is expected 2022. It's a big pleasure. That's our expectation now. We will keep updating you on this project given the magnitude, but right now our expectation is 20 22. Thank you. The next question comes from Nicholas Morda from Morgan Stanley. In construction, you continue to rack up 20,000,000 to 30,000,000 years of losses per quarter at Ferroglage Roman. Something to continue into the fourth quarter of the year? Well, I mentioned in the prior call and, in the explanation this year, it would depend, oh, sorry, this call. It will depend on the signing off of clients to claims that we believe we are due by Right? So if they keep coming, it could improve. If not, we could see this similar situation. So, we keep updating due to no reason to change the outlook for year end at this point in time. Thank you. The following question comes from Robert Crimes from Insight. Why did you pay the special dividend at 407 ETR? Is there potential to be repeated in 2020? Yes. This is Pago again. Brother, as you know, in the photo serving, since 2017, we have been updating reviewing and revising the final, dividend at the year end each year. We did it in 2017, 2018, and we did also, in this year. It depends how the performance of the concession has been involved during the rest of the year. So it's could be or could be not. Thank you. The following question comes from Bruno Da Silva from Caixa Bank. Could you please give the contribution of discontinued activities to the net cash position of September 2019? Okay. The net cash position of the discontinued activities is 17,000,000 at the end of September. On construction, on Ferrovya Lagraman, is there any reason to believe of a risk of a new provision going forward? There is no change from the expectations we've, we've had, right? So here we'll keep updating things are evolving along our expectations and for the time being in construction. Well, I think we've taken care of all the questions. There were more questions on details regarding services that, as I mentioned, we cannot provide at this point on time, but, expect to be providing, in, in the near future. So thanks for attending the call. Ladies and gentlemen this concludes today's call. Thank you for joining. You may now disconnect your lines.