Earnings Call: Q1 2018

May 10, 2018

Quarterly report

Good afternoon, everybody, and welcome to Ferrogio's conference call. The 2018 first quarter results. The call will be conducted by Faroea CFO Ernesto Lopez Moto. Mesto, please go ahead. Thank you, Ricardo. And, well, sorry for the delay. I mean, we're having quite a queue of people waiting to join So, I'll make some, introductory remarks while the other people are joining. First, we won't be touching much on the provision related to Birmingham, given that we dedicated a call to that. And then also I would like you to have a look at some additional numbers we are providing this time. I mean, we have had a lot of requests for some information on a proportional basis. I mean, this is kind of an APM. I mean, all the conference call will be reviewing the, consolidated results and the main equity accounted affiliates. But please have a look at the proportionate numbers that clearly show more often where the business is heading and where the infrastructure is operating. Okay. So without further delay, I will go now directly into the conference call and hopefully we will have more people already with us The general overview would be that, again, and this might be sound like a repetition, but it's clearly an outstanding performance from, our main infrastructure assets. Both in traffic, revenues and EBITDA. We provide more color on that. The consolidated results in terms of revenues are showing a decline of 6.3%. And this is something that was expected by everybody, as we mentioned, when we had the conference calls regarding the Broad Spectrum outlook, in 2017, we were finalizing the immigration contracts. And therefore, we have lower revenues, but we'll see that we are starting a long, a long plan. Also, we are not consolidating Portuguese toll roads that were present in the first quarter of 2017. So if we look at the comparable terms, revenues would have remained pretty much flat in the quarter. Consolidated the EBITDA is, affected obviously by the Birmingham provision And this million negative is also going directly to the net income affecting it, right? So, the, excluding the impact of this provision, EBITDA would have amounted to 1000000 a decline compared to last year of 29%. And here is a combination of the lower Australia out of the immigration contracts, as I mentioned. And also, as we guided to the market, construction starting with a 1% margin. Okay. In proportional terms, I won't be commenting. You have the note to have a look at that. We have, now the comment on the order book for both construction and services. And here, the main message in the backlog for services is that, apart from being cautious in billing, we are seeing an overall behavior by clients in the, in all the three main countries where we operate, where they don't tender for renewal contracts, but they rather extend for a year. That has a mathematical effect of, a decline in backlog even though we are basically, with the same clients as we were last year, right? So it's a tacit renewal that is taking place, but the backlog shows a lower number. In terms of construction, also after winning some big contracts last year, that we have been more, let's say, conservative in our approach. And also, we are pending some important contracts I will mention later to be incorporated into the backlog. And finalizing the introduction with cash, we have a net cash position of 1,000,000 if we take cash and net cash the hybrid bond. And this shows a behavior that is very similar to last year in terms of working capital. And we have, combination of 2 effects that imply a lower amount. One of them is that we have dedicated 1,000,000 to bind by shares. This is not part of the visual program. Just treasury shares that we buy back also with the idea of amortizing them. And also, we didn't have any divestment in the quarter last year. And the other hand, we had the divestment of minor stake in the booty mix for around 1,000,000 as well. So taking both into account, there's like 1,000,000 swing, that has to do with financial activity rather than operational. Okay. So Let's go now into the main operations. I will start with highway assets. And of course, starting with the 407 ETR. I mean, you saw the results coming out. So I will focus on some points that I think are worth discussing. I mean, the quarter operationally has been very strong. But some of the conditions were really worse than last year, right? I mean, we had a total trips higher by 1.5%, but we have one less work day in, in this kind of short quarter that affects. Also, the average triple length went up and the new customers by 1% and the new customers are showing, longer right? I mean, 25.7 kilometers versus 20.7. Very important because usually traffic has been quite sensitive to this gas prices were quite high compared to last year. We had in March, gas prices at 125 0.6 per lighter, and that is more than 17% increase vis a vis last year. Also, it's important to know that the responder keeps increasing. I mean, we added 90,000 transponders. So to the total $1,400,000 that we have outstanding. And that shows also the kind of performance that we are seeing with the different segments performing well. Average revenue per trip went up by 9.5%. So the asset keeps performing really well also focusing on quality and providing very high ratings in terms of customer centers and quality of the road to our customers. Dividends, last but not least, went up by 9%. Looking into Texas, the managed lanes grew even more and the interesting events are developing there. I mean, the EBITDA grew more than 20% in, NT and LPG And the outlook is improving. I mean, we are looking at more days where we see congestion. I mean, this quarter, We have several days where we were in mandatory mood. That means that we had to price above the cap because of of congestion of traffic. Not really the speed was affecting. There was a good speed, but a lot of traffic and we had to get into mandatory mood, right? So the growth in the corridor is driving this sort of performance. And of course, our growth keeps outpacing the growth in the corridor. Also, we should remember that we have another managed lane that will open this has a small tranche open already that is the NT3a3b, but of course, it's rounded by work and it's not representative, but it still shows good traffic and very important. The corridor has more traffic and it's growing more than what our models thought initially, right? So that bodes well for the asset and it should have a different partial openings along the year. So the prospect there is very good as well. Okay. So I will pass to Apos, not before reminding you that these managed lanes, NTN LBA, will start to pay dividends after 5 years of operation. So that means, kind of, end of 'nineteen and end of 2020, for 'NTE and LBA, respectively. Okay. So if we move into airports, probably you saw the results at Heathrow, but this worth going over again the kind of record highs and numbers, say, in passengers that it achieved. Record the passengers for our first quarter, also with very high standards, even though there was quite complicated. I mean, a lot of, a lot of snow, but performance was remarkably good compared to other airports. And EBITDA grew also substantially in, in, around 5%. Level. It's important to see that dividends also went up by 20%. This was a number that was probably known because of the guidance that Heathrow provided, but it's interesting to see that performance. Also it's interesting to see that, aeronautical revenues had some sort of deal dilution. And this is the kind of incentive that Heathrow provides for a sustainability purpose where basically airlines moved their airplanes to quieter airplanes get a better charge. But of course, this is recovered in 2 years. So it's still the financial effects of a 2 year delay. It's great to see this and to see this performance with this kind of of the incentive. Regarding the regional airports, we had, Glasgow and Dean and Southampton, growing in EBITDA. Of course, traffic was affected because Glasgow due to very bad weather conditions had to close for 2 days. And This is more than 2% effect in traffic, right? So with this kind of environment, growing in EBITDA is quite remarkable. Okay. We move to contracting in, starting with constructions. We are in line with the guidance that we provided, we said that the first quarter should start at 1% EBIT to sales And we have different performance in the different divisions. You see also that Badimius that published results is trading with a tighter margin than last year. And this is is still much better than the rest of competitors, but the sector is affected by higher prices in in general, in the different inputs, like cement, oil, iron ore, and and also workforce, okay? So within mix is managing it well better than the competition, the sector has this kind of pressure in costs. Regarding other parts of the construction division, we have Weber trading our own expectations and then the rest of the group trading on a more negative basis, something that was kind of expected by us given the current production. So basically, the question is, how do we see the volume? I mean, we mentioned that the division would move from 1 per percent to levels around 3% or even 3.5% at the end of the year on an accumulated basis. And just we we see that. What we were seeing to provide that kind of guidance is that we are, I accelerating production on some of the big awards last year, like Grand Parkway or the Denver Airport and those have margins that are better than the average that we're seeing now. And also, we will be finalizing the works of the NT3A3B. And you know that usually once we are in final stages, if risks are not materialized, we could have higher margins, right? So it's working along our expectations. And we will be moving now to the services division. In services, we'll start with Amy and Amy, we mentioned that should be around 2% to 3%, except, I mean, taking away booming them. And that's where we are starting at 2% EBITDA margin. You also know that usually the, later quarters on the year show different effects. One of them is, those making contracts that still are being phased out at the end of the year are more clearly out. And also, do you have milestones in different contracts where we get recognition of revenues more at the end of the year, right? So it's trading according to plan. Regarding Birmingham, I mentioned in the conference call regarding the provision Part of it has an accounting effect that is not really an economic effect because it's about bringing CapEx forward for the next couple of years instead of the next 5 years, but the overall amount is not substantially, different, right? And then of course, we have a charge that we took for higher deductions. This kind of a scenario is assuming that the contract is ongoing, but we see that the different stakeholders could be amenable to different solutions and we'll keep you posted of changes that could occur in this regard. Talking about Australia, we reached a 3% EBITDA margin as guided. And, I mean, things are looking in line with expectations. If any, the only the pipe that is a little bit delayed, but it's a little bit. It's quite lumpy. So, some of the big projects we cannot mention because, there has been some delay, but it's according to plan. And then last but not least, Spain is performing really well. I mean, it's growing revenues with private clients and it's maintaining margins. So it's a good performance. But regarding cash generation I already mentioned in the introduction, the different effects, it's important to bear in mind that I also mentioned when we discuss the Birmingham provision that we were looking to, perform some divestments in particular, in services, non non core activities. We've done some of them already, but this is in the 2nd quarter, and we should see the results in the second quarter. As an example, a stake in Rockwell and investment in the renewable energy, was cashed in in Australia. That's a USD 50,000,000 that you will see in cash in the 2nd quarter. Also, we are taking more dividends due to the good performance of concessions in in Spain, a 2 is a good example with the dividends around 1,000,000 and probably we could and with another round before the end of the quarter of another $40,000,000. So this kind of initiative is quite interesting and we are also reviewing other PFI projects. At this point in time, I cannot comment any further that we've been discussing about having more weight in the infrastructure and then reducing exposure in contracting. That's all I can comment for now. And, finally, I would like to leave you with a summary that this quarter, I think, is the quarter where the building and price should be considered in taking care of with the provision and we're looking at different developments that could happen there. A quarter we're operationally contracting is moving along expected lines. I mean, we wanted to be clear of how we view the move of these divisions along the year. And everything seems to be along our expectations. And then last but not least, a quarter where infrastructure assets are performing again above expectations and continue to bode well for the value of the company. But so, with that, I'll start. Thank you for attending. Hopefully, we haven't missed many people that were trying to join in. They didn't miss much of speech and we open the floor for questions. Our first question today comes from Mehdi Baducahan from Raymond James. Mehdi, please go ahead. Yes. Good afternoon, everyone. Thanks for taking my questions. So I have 3, if I may, starting with the construction. So you mentioned that profitability should improve throughout the year. So it was, I think, in February. So do you confirm that guidance? And do we have to expect the same kind of profitability than, in 2017? Secondly, on the BD Mex. So profitability has been higher than fierce average for a couple of years now. Could we consider the level reached in Q1 as being broadly in line with some kind of normative levels? And last one in toll roads. Can we get an update of the pipeline and notably on the West Connect project, please? Thank you. Okay. Thank you. And for the questions, we'll start probably order and Pacoclemente, the CFO from Cintra will discuss WestConnex and pipeline. Thank you, Ernesto. In regards of our Arctic pipeline, and by geographies, we will start in Australia with with West Connect, we are expecting to, to present to submit a proposal at the end of July. We are currently working on that. Moving to, North America, in the US, we, we have, Change over ordering in our Dallas project segment free see, and we are expecting to reach an agreement with the N DOT during the rest of the 2008. On addition to that, in the U. S. As well, we have, we are working on in La Prairie in Alabama, in I-ten, and we are expecting to make our proposal in the first quarter of next year. And finally, in that market, mail and congestion relief program that has is about to be launched by the state. We estimate that the request for proposal just for qualification will be, will be launched at the end of this year and the request for proposal will be during the next twenty 19. Moving to Europe, which is some projects in Spain, according to the within the program that is about to be launched by the Spanish government, the first project will be most likely in the Murcia region, at the end of, of this year, we expect the sale of the former Radials, we expect that it will be launched. The end of this year, early next year. And finally, in Europe, different projects in the UK, the Yes, this will be the SilverTowne tunnel, and we expect that in the third quarter of 2018, we will be submitting a proposal and a couple of of all the projects in the UK expecting to becoming early 2019. Thanks. And regarding the first two questions, I will kind of merge them in the same answer. Yes, in February, we said that we expected margins to improve along the year and finalize around 3% even at 3.5%. This, guidance take into account the improvements that I mentioned in the, in and the speech, basically, better margins from big projects being finalized in Texas and also an accelerating of production of some big projects like Grand Parkway or the Denver Airport, right, in the U. S. And this guidance incorporates also a Buddhist mix that has a higher profitability than the sector in Poland, right? So rather than talking about a normalized level, we think that within this keeps our premium in the March and we expect that to continue and is part of the 3% to 3.5% guidance that we mentioned. Okay, thank you. Next question today comes from Stephanie Duff from RBC. Please go ahead, Stephanie. Hi, good evening, everyone. My first question is regarding the extension of the contracts you mentioned earlier. You said that the backlog number was impacted by the fact they were not renewed. Could you maybe give us an indication of where the backlog would be if instead of being extended, those contracts had been renewed? My second question is regarding the share buyback and your dividend. So for the full year. So you said you did, about EUR 260,000,000, sorry, of share buyback in the first quarter. What's your thinking in terms of capital allocation? And would you be confident you can at least deliver the same dividend as last year for this year. And then finally, in terms of the outlook for the full year, you seem to say that infrastructure assets are performing better and contracting assets are performing in 9. And you reiterated all your guidance in terms of EBITDA for UK Services in Australia and EBIT margin guidance for construction. So if you could give us a bit more flavor on, yes, where we could have positive on this surprise. Thank you. Okay, thanks. Well, the first one, Fernando will take what would be pro form a for instead of, casket due to renewals, if they could be extended with the same length, Regarding the share buyback, yes, I mentioned we've done $60,000,000 roughly. And we are after the scrip dividend, we will be initiating the official share buyback up up to 1,000,000 or 19,000,000 shares along the years. So just we don't see any reason to change what we announced on the February call and that, they also, is referred to, to dividends, right, Regarding, yes, contracting in line and infrastructure, better, positive surprises. I expect from, infrastructure, but clearly the economy is doing well and the assets have dynamics that are quite interesting. So good news would come from there. Any other news in terms of portfolio streamlining, as I mentioned, PFI, so all this stuff could also be interesting, but we will have to update the market as we go along rather than before anything is done, right? So let me pass it on to Fernando to take on the backlog question. Good morning. Good evening. Well, I'll take this question. I have to answer it by country, but it's not the same defined opportunities. About, for example, in Australia, we are renewing at about 20% of the backlog. If it is not renewable, it is extended, the value of the stand is around $600,000,000, you know, the the amount of value we are missing, if we change the the new app service extension, you know, in Spain, for example, in contrast, like, big contrast with the poly authority was value of the content and volume could be $50,000,000 to $25,000,000 speaking that the average length is 4,000,000 for years. You can be speaking about $100,000,000 or $200,000,000 per contract. So the figures are significant. And as the clients are keeping getting process open for a long period of time, the backlog reduces, but we are keeping the business on the client. So it's a little bit confusing. Is what is really happening. If you see the figures, the revenue holds on the margins, but the volume is dropping down. Thank you. Our next question today comes from Bruno Silver from Kitezer Bank. Please go ahead. Good afternoon, everyone. I have three detailed questions. The first one, could you please tell us what is the operating cash flow, quick tax, in this quarter for the services? As well as for the construction unit. The second one, could you please clarify the year on year change in others, revenues and others, EBITDA as detailed on the on page number 2, of the relief. And, sadly, if you don't mind, what has been, if if any, the level of provision reversals in the construction units this quarter. Thank you very much. Okay. Well, regarding the level of reversal of provisions in the construction division. It was 27,000,000 euros. And then the other stuff that is quite detailed, let me see if we can cover part of this as the call goes on. I mean, the questions on operating cash flow, could you ask them again, is the operating cash flow of construction and services, the working capital effect? Are you asking that? And a more general question. What is the operating cash flow pre tax for the services and for the unit, the way, for instance, you have reported at the end of 2017 presentation. Okay. We usually don't disclose that on a quarterly basis. We do that on full year and more information on the 6 months. I mean, you've had the normal drain on the working capital in this in this quarter. And basically, when you look at these kinds of reduction, you're looking at working capital. Let me see if I can be a little bit more precise. If I remember correctly, the kind of working capital drain is around, let me hold a second. It is around $300,000,000. I will give back number is roughly $300,000,000 without getting into more detail, okay? And then the other questions that you were skin, well, I think that those were the main ones. So did I leave anything out? No. Just just the others in revenues and EBITDA and the year on year. Oh, yeah. Yeah. Yeah. The others, the others amount in revenues, is, revenues from real estate in Poland basically. Boudemix publishes this in their accounts. Since for us, it's a different business unit, we put it in other set because it's not construction, right? So it's real estate in Poland. Okay. Thank you very much. Our next question today comes from Thomas Van Denige from Kempen. Please go ahead, Thomas. Good afternoon. Actually three questions from me. First of all, is the expected margin of the order book confirming your margin target into subdivisions? Secondly, reducing your exposure to contracting, will this be done gradually over time? So actually being less competitive in tenders and helping them the margin of the order book, Or will you take also a more active approach by selling divisions? And thirdly, you highlighted again the potential opportunities and portfolio optimization does it mean that you will have to sell assets to fund acquisitions or should we see them separately from each other? Okay. Well, regarding the margin of the order book, I mean, in general, we have now in construction, a higher proportion of business with sister units and with own design so that also means that the kind of level that we're seeing at the end of the year is kind of the level that we've seen on the order book always with the caveat that the market is competitive at those levels, right? So the market is trading between 2% and 3% EBIT to sales margin. And in any heartbeat in that should be the expectation, right? So yes, the backlog is okay and in line with what we are providing, right? Then other questions that you were asking is regarding the pace of more exposure to infrastructure unless to contracting. I mean, in terms of bidding, yes, we are slightly more risk covers. We'll be more risk covers, and then that should be reflecting on the level of contracting for sure. But we think we can remain competitive in some complex issues. And regarding the pace of other stuff, I cannot make any further comment, when we make decisions, we'll provide them. Regarding the portfolio streamlining, we are commenting, some of them are basically because they have been derisked and we're optimizing the cash flow generation, right? That's what happens with the dividends I mentioned from some concessions. And then the others are investments that have been practically reduced reduce the risk, but they are more like a credit exposure. And therefore, we are divesting And then we have investment capacity. We have an interesting pipeline, but it's not that we need do the assessments as part of the portfolio rotation once they have been derisked, okay? So, I guess, I've addressed all, and you mentioned. Anything else? No, thanks so much. Thank you. Next question please. Our next question today comes from Olivia Peters from Macquarie. Please go ahead, Olivia. Good afternoon, everybody. I've got 3 questions, please. Firstly, I wanted to get a better understanding of why clients are extending support services contracts for a year rather than retendering them for the usual 3 to 4 year period. Secondly, could you provide an update on to Wumber? I saw in the local Australian press that there has been, some delays to the option phase there. And then thirdly, it seems that there was a headline also suggesting that the dividends in the managed lanes could be brought forward, to 2019, I think. Can you remind us when they were due. I think it was 2020, 2021. Thank you. Okay. I will take sorry, Fernando will take the one about the extension of the contracts in services while it's just a renewal and not tendering? Okay. And the way it works is the starting point is you have a contract, for example, that has a another group of, I don't know, $500,000,000 and it has, it comes to market. When you are at the end of the contract, the order book is squeezed. So you finished the order book. And if you go for attendance and you renew the order book, you get the same amount of ore wood that you consume in the past. Question why the claim is doing that. Maybe there are different reasons, but I think the first one is high competition. So the claims, the companies are offering different alternatives and especially in the Australian market. There is a openness to new proposals, and that makes the client change their view on what they want. And that is the first one. And second is the increasing training outsourcing that makes the contract leaders sometimes. And increases the scopes and the complexity of giving back the the contract to the market. That could be two reasons. In other places could be the budget constraint that the client's faces. And in some cases, they prefer to renew the contract and wait until the half to be somebody yet to go for the new one. I think both are the main reasons, okay? Right. In regards of the expected dividend from the Managed Lane, on 2019, NT, we expect that, for FINRA, we will receive roughly $125,000,000 In 2020, in LPGA, for Fintra as well, we will receive roughly CHF 140,000,000. The point is that we are not expecting to to paying an early dividend, because of the restriction that we have in the financial documents. And on top of that, and due to the, to the nature of the, of the debt that that we have issued, the PAPS, we are expecting to make a refinancing on the day of the or roughly on the on when we will be paying dividend, we will be making a call and refinancing the whole structure of those concessions. Okay. Thank you. Related to Bumba Priyatt, we consider that this is a partial, a very small impact in the whole period, and we don't estimate any variation in our expectation for the for the performance on the project in the future. So just to confirm, has construction started again on that project? No, no, it's true that there is a stoppage, a part of the project, there is more power it. But the project, the rest of the project is continuing the normal process as we plant and we burn in the next months. Okay. Thank you. We currently have no We have a question on the line from Guy Mackenzie from Credit Suisse. Please go ahead. Yeah. Hi. Thanks for taking my question. Just a quick one on the managed lanes, NTE and LBJ. Specifically, just noticed there's a slight decline in the EBITDA margin that you delivered from the L BJ in Q1. Just wondering if that's saying anything about the run rate, if that's simply timing of the ramp up, or if it's something else And then secondly, on NTE, traffic grew at about 6.5%, but your revenue was up by just under 3%. I'm assuming that's primarily just FX translation related on the weak U. S. Dollar, but was just wondering if you could comment on your average tariffs there as well. Thanks very much. Well, both in Managed Lansing in both concession, we believe that we are still in the ramp up. So the decline in margin and LDA is marginally. So it's negligible. We do not see any point here. No, I would say, I don't know whether it has been tiered by the audience, but we'll repeat it in any case. Now I was saying that, in regards to the managed claims, we still believe that mostly in LPGA, but both in LTA as well. We are still in the ramp up phase. And the difference in the decline in the margin in LPGA is negligible. So it's a we do not see any any real real issue here. So it's No, we do not see any anything relevant in regards of the margin of both. Right. On the NTE, it was more a question of your traffic growing by about 6.5% revenue growth was just under 3%, if I'm reading it correctly. I assume much of that is simply the U. S. Dollar depreciation but I was just wondering if you could comment on your average tariff growth for the NTE as well. You mean the tariff growth? Yes. Just trying to understand the disparity between the revenue growth that you delivered on NTE of 2.7% and the traffic growth of 6.5%. Yes. Just one second, please. Yes, I think you have in page 5, you have the page 5 and 6, you have the figures in, in, in local currency. And And well, I think that the margins in both are growing, well, slightly below in, as I said, in LDA, but it's eligible. And, well, it's nothing to do with the the the different with the previous pages is is because of the ForEx. So again, I insist that both concessiones are still ramped up, and we believe that in the coming quarter and years, both the EBITDA and EBITDA margin will be growing. In both, in both concerns, we do not see any factors that could impact in either of them. Yes. Okay, that's clear. Thanks very much. Thank you. We currently have no further questions on the phone lines. I'll hand back to the team. Well, thank you all. And I'm sorry a while to connect everybody. Thank you for attending and we'll be seeing you. Thanks. Bye. Ladies and gentlemen, thank you for joining today's conference call. You may now disconnect your lines.