Earnings Call: Q4 2011

Feb 23, 2012

2011 has shown, for the construction business, a similar tendency to the previous years, with uncertainty both in Spain and in several European countries. During 2012, we have focused internationally. We'll continue to increase our weight and resources. The international business has continued growing and increasing its percentage compared to total, having contributed already 60% of our sales and nearly 70% of our backlog, and more than 85% of the cash flow generated. With reference to the outcome of the earnings, the contributions remain balanced between our domestic and international markets. We have again achieved a good operating cash flow before taxes, EUR 300 million, greatly exceeding our forecast, and also together with an increase in earnings before taxes. Our major strategic markets, such as Poland, U.S., and U.K., have provided more than 90% of our total international sales. Our backlog remains in good levels, close to EUR 10 billion, a level quite similar to 2010, when we broke our record at the close of a financial year. This has been possible thanks to certain tenders that have been awarded to us in all areas of our business. I would like to highlight the three contracts of Crossrail in the U.K., our first design and build in Texas for Webber, several international water treatment plants to Cadagua, and last but not least, the DPC for Telefónica in Madrid. Budimex acquired PNI in November, one of the leading companies in the construction and maintenance of railway lines in Poland. This is a market that should be promoted as once highways were, as it will complement Budimex and help position it as the leading company in Poland. Regarding 2012, although it will remain being complicated year for Spain, in the international area, our aim is to transform into results our commercial efforts and the implementation of recent years in new markets. Also to take advantage of our experience where we are already leaders, as well as to detect possible acquisition opportunities to be a strength in strategic markets. 2011 has been an outstanding year, Ferrovial was able to generate more than EUR 1,400 million of cash flow. Activity cash flow, that's the cash flow that is generated with the recurring business and also with the investments and divestments of the company. It includes taxes. It doesn't include financial expenses and dividends, but it includes taxes. Therefore, it's very healthy, and I think that the company has always had, and more now than ever, a focus in cash generation and working capital management. I would say that is the number one highlight. Moving on, I would also like to highlight that the company has been able to tap the capital markets. BAA and the 407 ETR issued more than two billion bonds. You're looking at a year where almost half of the year was closed for European issuers. So you have very important companies accessing the markets. Even BAA did its first ever bond in dollars, and that shows how much appetite there is for good assets in the capital markets. Also, it is important to bear in mind that all this was a front-loading exercise. That means it was done well in advance of the financial needs that we might have and leaves the company in a very good position. Also, some corporate loans or the Ausol loan in the toll road in Andalusia was financed well in advance, and that means that the company finishes the year with a very comfortable position that has more than EUR 900 million in cash. No net debt, ex-infrastructure projects. Of course, additional liquidity with bank loans and additional liquidity facilities. The third point that I would like to highlight, and this is a very important one, is that Ferrovial has been able to divest some assets at prices that have surprised the market. The market was undervaluing many of our assets, and we traded well above them. We traded above those values in an environment where some companies are struggling to sell their assets. If anything, that would provide an indication of valuation and the company should narrow the gap it has in the marketplace, where the share price is really trading at a big discount to the fair valuation of our company. Last, I would like to focus on the main financial lines. The first thing that we have to bear in mind this year is that we are not consolidating the BAA numbers. Since we divested a controlling stake, what we are facing now is BAA consolidated under the equity method. That means that is not in our numbers. We are looking at revenues that are around EUR 7,440 million, that are pretty much flat compared to last year. In terms of profitability, the company has done well with a growth of 9% in the EBITDA in comparable terms. This is a mixture of the quality of our backlog, efficiency, cost control, and also growth in our tariffs in some of our concessions. So a very good number in terms of growth in profitability. In terms of net income, also the figure is quite relevant, with more than EUR 1.2 billion of net profit, and this is also helped by the divestment of BAA and other assets. So a very good year in a very complicated environment. Also very important, I think that the fact that BAA announced that it plans to start paying dividends, is also very relevant. The analysts will start getting more to grasp the capacity and potential of dividend generation that our main assets have. We are really looking forward to that and also looking forward to the possibility in the medium term that also the 407 ETR would have a growing dividend path. The results in 2011 have been very positive despite the difficult market conditions. Our revenues increased by 9%, and we've improved our operating results by more than 5%. This is the consequence of our focus on long-term contracts, where we differentiate from our competitors through innovation and operational efficiency. Some examples of these type of projects are the Birmingham highways PFI, the building and operation of treatment facilities in Toledo and Barcelona, or the provision of environmental services for the city of Murcia. I also wanted to highlight that we have completed this year the disposal of Swissport, and we've been able to sell the company for more than double the consensus of the analysts. One of the key elements in our strategy is the provision of value-added services. From that point of view, our project of intelligent cities is one of our main priorities. One very good example is our contract with Birmingham. We've been now more than one year in the contract, and we've been able to reduce the cost by more than 20%. We have created jobs for the city, and we have reduced the CO2 emissions through the reduction of energy consumption. We are also working in increasing our services in energy from waste projects, and also, we are implementing energy efficiency programs. Our strategy is the value creation through profitable growth. From that point of view, our position in Spain and in the U.K. is very solid. Our order book is more than EUR 12 billion, which is around four times our revenues, and that give us a very strong position and visibility in the medium and long term. In fact, we have guaranteed more than 70% of the revenues in 2012. We also want to grow internationally. In 2011, we have started operations in Poland and in Qatar. Going forward, we will also explore opportunities in Latin America and the U.S.A. 2011 has once again been a turbulent year for the major developed economies, and particularly for financial and capital markets. Without a doubt, 2011 has been a demanding year from the management point of view. In terms of traffic, the consequence of the crisis have been felt especially hard on European highways and particularly on the Spanish ones. However, the 407 ETR highway in Canada, which is our flagship asset, has maintained traffic levels similar to those of 2010. Furthermore, thanks to the increase in tariffs, not only on the Canadian highways but also on the Chicago Skyway and the Indiana Toll Road, our portfolio continues to contribute to Ferrovial's growth. In short, looking at our 2011 results as a whole, I believe that we can talk about an all-round satisfactory performance. This reflects both the quality of our assets and the result of our day-to-day work. As far as the main events of 2011 are concerned, I would highlight the following ones. We have built 16 miles of new road surfaces on the 407 ETR, and they are actually ahead of possible future needs that might arise. We have also finished building our highways on the Azores islands. After five years of work, finally opened to traffic last December. We have satisfactorily renegotiated the concession contract for our shadow toll highway on the Algarve. On the Texan highways, building work continues at a good rate, both on the highways in the Dallas-Fort Worth area and on the SH 130. The opening of the last one is scheduled to take place in 2012. Our financial activity has also been intense over the past year, and in this area, I should mention the extension of the financing for the Autopista del Sol highway, the refinancing of the debt of the 407 ETR, and the financing of our car parks in Serrano Park. In the divestment area in 2011, there has been two key operations. At the beginning of the year, we completed the sale of one of our Spanish highways, the shadow toll Trados M-45. In the last few months, we have completed the sale of the remaining 40% of our Chilean concessions. As far as our business development activity is concerned, the number of projects coming onto the market has gone down. In 2011, we have tendered four projects, and we've come first in three of them. In summary, I'm confident that thanks to the resources generated by our selective rotation of mature assets, we're going to be in a good position to take advantage of the opportunities that will be generated in the future. Finally, I'm convinced that thanks to the talent and the effort of our teams, we will be able to continue growing profitably. 2011 has been an excellent year for Ferrovial. We have a strong operational growth in all our business units. From a cash flow generation, 2011 was a very strong year for us because I think that on the combination of our operational growth and The impact of the divestment that we done during the year, the BAA stake, Swissport, M-45 in Spain, the remaining stake on the Chilean roads were very good. At the same time, that divestment bore on the context that clearly, I think the market expectation were well below the real price that we got for those divestments. I think that in 2011, I think we were with the same strategy to reinforce our balance sheet position. I think that clearly, if you see 2011 and balance it, as you compare with 2010, the balance sheet of Ferrovial changed dramatically because in 2010, we had around EUR 20 billion debt. By the end of 2011 and after that divestment of assets and the strong operational growth in terms of cash flow as well, I think that we have now a range between EUR 5 billion to EUR 6 billion debt. For 2012, we are positive. I think that we have a very good position to compete in the different markets that we are present. We see opportunities in our current businesses. At the same time, we are looking for opportunities in new markets. I think that we are going to expand our operations to new markets like Australia, where we were present in the past, so Sydney Airport. Why not to consider to be in countries like in the Middle East? They are now investing a lot of money on infrastructures, and I think that we are in a very good position to compete in those new markets. At the same time, I'm always taking into account that for us, it's very important, the financial discipline. I think that we have a strong cash flow position, and clearly now we are now more proactive looking for new opportunities. Never we are considering in the current markets, looking for very big opportunities, but why not to consider opportunities that we already done last year with the acquisition of PNI in Poland, for example, to expand in Poland to the rail industry. This is the strategy for 2012 as well. Why not to look for opportunities, mid-size opportunities in the different markets that we are present to growth or thinking in growth for. At the same time, I have to say that we've received recognitions from the market. I think that the performance of the share price of Ferrovial jumped by 25% during 2011, and if you compare it with the IBEX 35, we're 38% outperforms of the market. I think in Ferrovial, for us, and sometimes that is not easy to see on the profit and loss accounts, is the social responsibility and innovations. We're very focused on both concepts. I think that for the last five to six year, we were investing money and time from our people on a voluntary basis to invest in projects like in Tanzania, a year ago, something like that. We already approved, at the board of directors of Ferrovial, two new projects on the social responsibility field. We have the idea to spend part of our time and why not to support with money, those new concepts or projects to develop in new markets. In terms of innovation, I think that 2011 was a very important year for us. I think that we decided to reinforce our strategy in innovation. I think that now we are in a much better place than five years ago. Clearly for 2012 and for the time being, it's one of our priorities as well. The airport activity, we can say it has been a positive year. We have seen a recovery in our traffic levels, especially in Heathrow, our main airport. We have seen a historical record broken with over 69 million passengers going through our airport. Regarding profitability, it has also been a great year with an improvement of approximately 18% in our EBITDA over the previous year. Regarding operations, it is also a year where we have seen most of our service levels improving over the previous year. I would point out that in 2011, we have continued with our very significant investment program to improve the service levels in our airports. We have been able to finance this intensive capital program with bond issuance in the capital markets, and we can point out, especially the first issuance that BAA has issued in the U.S. market. The year has also seen the divestment of a small participation, minority participation by Ferrovial in BAA with the objective of obtaining a fair value in the market for our participation. We have achieved this objective with a significant capital gain and a very good impact in our profit and loss statement. I would point out also finally, that Ferrovial Airports has been very active in participating in investment opportunities that have developed in the market, especially following the privatization programs in Spain and in Brazil. For 2012, we expect the market to remain slow. We are setting low targets for traffic growth. However, for profitability, we have set some ambitious targets, and we are expecting an EBITDA growth superior to 10%. In terms of other events that we expect in 2012, well, we will proceed with the disposal of Edinburgh as, let's say, obliged by the Competition Commission. Also, we will see during the year the celebration of the Olympic Games in London. Heathrow will be the main gate of entrance for all the athletes to the country. This is a very significant challenge, but also an opportunity to demonstrate to the world that how we are able to operate our airports. Finally, from Ferrovial Airports, we will continue to explore opportunities with our strategy of diversifying our portfolio. We are expecting privatization processes to continue in the United States, specifically in Puerto Rico, and probably in Europe, we will see more privatizations, probably in Portugal and in Spain.