Ferrovial SE (FER) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon, everybody. And welcome to Ferrovial's Conference Call to discuss the 2017 First Quarter Results. As usual, the results report is available in our website. And if you have any questions, you may either send them through an email to ir@ferrovial.com or be at this conference call in the Q&A session at the end of the call. And with this, I will hand over to Ernesto Lopez Mozo, Ferrovial CFO, who will be leading this conference.

Thank you, Ricardo, and good afternoon, and thank you for attending the 2017 first quarter results presentation. I am joined here today as well by the CFOs of the different business divisions of the group. Well, the main highlights before getting into the more in-depth analysis are that we have seen excellent traffic growth across our main infrastructure assets, toll roads and airports. And we highlight outstanding performance of the managed lanes, both NTE with traffic growth of 7% and LBJ of 32%, which are still in the ramp-up period. And this growth was combined with higher revenues per transaction, helping to deliver impressive EBITDA growth of 36% and 66% respectively. Also again, the 407ETR in Toronto, that released results some days ago, beating expectations with 5.6% growth in traffic and 17% EBITDA growth. And the Spanish assets also showed a strong growth. Even though last year, Easter took place in the first quarter and not this year. And the Spanish Toll Roads gets favorable traffic performance in the holiday periods. If we move into Heathrow and the regional airports, you saw grew at 2.2%, above expectations. And the regional airports Glasgow, Aberdeen and Southampton grew at 5.3%. So this good track and performance has also combined with a solid financial growth. And we've seen a good performance in dividends to shareholders from our infrastructure assets improving the trend that we also -- we're expecting. In terms of presence in core markets, we have had good awards in the U.S., in particular, and in Poland even though we are not reflecting many of them in the backlog gates. So we have something like EUR 3.5 billion of recent contracting that is not in the backlog yet. But the backlog combined, even though we haven't recorded this recent awards, we made some similar levels to the end of December. So very solid backlog and improving with the recent success in contracting. In terms of financing, we also across the board, took opportunities in the markets to issue a new corporate bond, eight years, with coupon of 1.375%, EUR 5 million; and also the 407ETR, launched a 16-year bond of CAD 250 million. The UK regional airports, refinanced the original debt of the acquisition, and this helped to give additional distribution to shareholders. So it's not only the additional operational and financial performance, but also the financial structure was optimized. And also we -- at the end of the quarter, we disposed of a 3.9% stake in Budimex. We maintained 55% under control of the assets. Other pending disposals are not reflected in this first quarter, and these are the toll roads seen in Portugal, Norte Litoral and Algarve. And Norte Litoral already closed, but as I said, it's not reflected yet. In terms of the net cash position, we closed with EUR 477 million of infrastructure projects. And we'll get into more detail on this at the end of the presentation. And we just, I mean we also announced the first discrete dividend and the share buyback program. Details of this have been made available earlier in the day. So now with the total financial results showing a 13% revenue growth and 17% EBITDA growth basically due to the incorporation of Broadspectrum in the perimeter. And we also have good growth in like-for-like terms, 11% in revenues and 4% in EBITDA. Net profit, I mean, if we take out the extraordinary results of the sales of Chicago, this capital gains and the average Toll Roads last year, the net profit would be at similar levels to very comparable to last year. Okay. So let's get into the detail of the performance of the different divisions. Starting with Toll Roads. In like-for-like terms, revenues went up 10%; and EBITDA, 24%. And here, we already discussed the managed lanes in the ramp-up process. But in Europe, I mean we have growth in Ausol I at 7%; Autema 10%; Norte Litoral 6.5%; and the Irish Toll Roads is 46%; and M3 10.9%. The 407, I already discussed the 5.6% growth in the quarter. The Toll Roads paid CAD 415 million in dividends to shareholders, an 11% growth vis-à-vis last year. In terms of the managed lanes, as I said before, the EBITDA grew substantially 36% and 66%. So I will stay short here of discussing more about Toll Roads, reminding all the people in the conference that we will have the Cintra Capital Markets Day on the 25th of May, where we will be doing an extensive review of all the assets and outlook. If we move into services, I mean after the integration of Broadspectrum, there's a lot of growth. Let's look into the different components. Spain is performing well ahead of our expectations growth in revenues reached 11%. And basically, this is held by private customers to some specific engineering products regarding wind energy installation. And basically, this growth comes with slightly lower margin. That's the reason why you see a slight drop in the EBITDA margin and also because of some additional cost on the rail contract where we do the onboard service. But I mean the outlook is strong, and we are seeing good trends in tons treated and the order book is quite stable. So Spain ahead of our expectations and looking good for the year. In terms of the UK, the UK is on line with what we were expecting. So we reiterate, we confirm our outlook that we should be reaching out between 3% and 4% margin at the end of the year. The evolution will be more reflected at the end of the year. And the reason for this is that we are closing some contracts that were not performing, so we are incurring the cost for that. And at the same time, we're having some higher cost related to maintenance machinery that has an operating lease. But the net effect of this is that along the year, this should be diluted a long time. And therefore, we should achieve what we announced in the year-end conference call. Also touching on Birmingham, Birmingham has better contribution than last year, but is still showing some negative contribution of EUR 3.8 million. And this is due to the fact that while the negotiation is advancing in good terms, we have to keep more overheads and advisers that are bringing this additional cost together with some additional works. And this kind of performance should improve once we reach an agreement. We have not released any provision. This is still pending the final negotiation. And hopefully, we'll be able to get that done before the end of the first half looking forward to that. In terms of the order book, the order book is down in local currency. But we are more conservative in terms of bidding. But we think that the countries in some sectors like rail and roads, should have interesting growth prospects going forward. It's not our focus now, that's the reason why the backlog is coming down a little bit. Then we have Australia and we are reporting Broadspectrum. I mean we started consolidating that in May 2016, and we are consolidating the Australia and New Zealand part on one side and then the Americas, that is mostly U.S. and Chile, is reported within the international section. So it's performing well, and it's still early to comment on some of the initiatives that we are looking at there, but we are looking at efficiencies. Of course, we're looking at very wide pipeline. So we are looking at pipeline that could reach EUR 30 billion, and we'll be updating on how we do with contracting. And as I said, this sort of cost reduction and also we are looking at contracts that were not performing basically to try and get out, half of it are transferred in this contract. So there's a lot of initiatives going on there. The performance of the asset is some of our expectations at this point in time. So we will move for now to constructions, constructions sales are up 18% in like-for-like terms. And basically, we are having a higher production in Webber, Australia and the UK. And it's still early stages in very big contracts. But I mean, we have higher production now. You also know that basically, when we start all the big projects, we tend to basically have very prudent margins. So one of the reasons why Ferrovial Agroman and Webber having the lower margins is also because we are starting big projects. And also there's less of our engineering value added. So there's a little far design influence in this contract. So we have this kind of lower margin, still above the sector margins. Then we have Budimex, Budimex is having a fantastic performance, I mean the fantastic performance is due to the fact that works are being finalized without risks materializing. And we expect this solid performance to continue. And just wrapping up in construction, backlog going up 1.6%. And as I said, a lot of new contracts yet to be reflected in the backlog. So contracting has been very active, in particular, in the U.S. that is our priority market at this point in time. So if we move into the airports division, I mean, you probably saw the presentation of London Heathrow results with traffic going up 2.2% and intercontinental traffic increasing by 2.6%. With excellent performance in the BBA held by good retail revenue performance and good cost control, right. So I mean we have received -- I mean our share of the dividends from London Heathrow, the 100% of the dividends paid out by Heathrow in this quarter were GBP 94 million. And is in line with the report that Heathrow released last year at the end of the year. Basically, the report indicated a number of GBP 375 million to be paid in the total year. Of course, the performance is better than what we were budgeting, so let's hope that this trend continues. In terms of AGS, where we saw increasing traffic of 5.3% and EBITDA by 23%, I already discussed that there was a refinancing that allowed additional distribution to shareholders. So AGS has paid the same amount to its shareholders, GBP 94 million in distributions. Dividends saw a repayment of financing. And our share of this is EUR 54 million. So as I said, it seems that the performance has been excellent of the divisions and ahead of our expectations at this point of time. If we look at the net cash position, we see that we reached EUR 477 million ex-infrastructure at prior level. And here, the main factors that came in were the dividends from projects we received EUR 154 million from our infrastructure projects, either dividends or other parts of distribution. In terms of investments, we invested EUR 58 million, but our divestment of the 3.9% is taking Budimex and reach EUR 59 million. So the remainder is the working capital evolution. And here, we have a reduction in the factoring of EUR 55 million and the rest is the seasonal one that – reaches something like EUR 435 million. And it's basically an advanced payment received at the end of last year, right, so according to the seasonal expectation for this time of the year. Okay. So with that, I'll probably stop there and open the floor for the Q&A session.

Thank you very much. [Operator Instructions] The first question comes from Olivia Peters from Berenberg.

Good evening, everyone. I have three questions, please. Firstly, just on the Birmingham contract at Amey, I was under the impression that the deadline for an agreement was actually the 31st of March, so I'm slightly surprised that that process is ongoing. When do you expect to reach a final agreement with Birmingham City Council? Secondly, on Ferrovial Agroman obviously there's been a large decline in the margin there and you commented on the mix. Now your UK peers and U.S. peers make much lower margins in the region of say, 1% to 3%. Is that something you would suggest we assume going forward? And lastly, what is the optimum leverage in your mind at the 407?

Olivia, well actually, we didn't have really a deadline that was set on the stone with the Birmingham Council, okay. So the idea was to advance and get things done in the first quarter. If -- I mean most of it is done, so we are working with the aim of closing in June. But as I said, there's a negotiating process. There's no, let's say a legal, hard deadline. And therefore, it depends on advances. I mean there's nothing out of what we expected. We have kind of third party helping in the negotiations. So we'll keep you updated, no hard deadline. We expect this to close this second quarter, hopefully June. Then regarding the margins in construction, as I said, it's driven by mix and timing, right. So probably in the coming months, we should see this sort of performance. We don't provide guidance, but I'm included -- the situation is not that we have big contracts starting, less of our value-added design. Some of these will come to the pipeline in the future. But I mean yes, there's sort of margins in the coming months. And then regarding the optimal leverage of the 407, I mean we usually don't comment on this. But this is a typical topic that will be discussed in more detail in the Cintra Capital Markets Day. So probably we'll show some numbers there, and basically address that kind of question. I mean you know that these are solid investment-grade company. And basically, the driver of value is more the operational performance and that the risk that happens a long time, right. So I will stay short there, and we'll have more discussion with the Cintra guys on the 25th of May, if we may.

Sure. Ernersto, could I just follow-up, please, on my Agroman question. Could you give me a sense of a proportion of the work that is starting better where you're implementing your design capabilities versus just building management?

We don't have that exact detail here, but I'll give you an example. For instance, projects like the I-66 where everybody was competing, we a different design that is not yet in the backlog. And we will start production months later, right. So this kind of project, I mean we have less of that at the moment. We're not providing the breakdown and we'll have more of this in the future. At the moment, we should expect margins in line of what we are seeing there right now.

Super, thank you.

Thank you very much. The next question comes from Filipe Leite from BPI. Please go ahead, sir.

Hello everyone. I have two questions, if I may. The first one on working capital and if you can quantify the working capital consumption during this quarter. Second question on construction activity, it's just a clarification if there was any provision reversal during this quarter? And last one Budimex and the recent stake that you sold. I would like to understand the rationale for the divestment, if you are planning further cuts in your stake that's currently, I think, close to 55%? And if the decision represent a different strategic approach to Central Europe or if you continue -- committed with your presence in the region?

Okay. Well, I'll start with the last one. No, we haven't changed our strategic view with Budimex. We like the market, we have control, and we had been receiving from some long-term investors, local investors, queries about the asset in the past. And basically, we thought that it was a reasonable value. And having this kind of shareholder long-term, local shareholder as part of the group is something we welcome, right? So no change of strategy and a reasonable transaction, nothing strategic about that. In terms of release of provisions, yes, there's a release of EUR 54 million in this quarter. And regarding working capital, I already made the comment that we have no factoring at the moment, right, so that means a reduction of EUR 65 million. And then it's true that the end of the year, we have some more advanced payments ahead of our expectations and that usually recover seasonally, right. So there's nothing more to comment. I mean no issue with collections or payments. It's just the seasonal effect of the advance payments at the end of the year.

Okay, thank you.

Thank you. The next question comes from Marcin Wojtal from Bank of America Merrill Lynch. Please go ahead.

Yes, good afternoon everybody. I've got a few questions. The first one is on Broadspectrum. You mentioned that there is a pipeline of contract, if I understood correctly, EUR 30 billion. So can you be a little bit more specific? I mean over what period that is? And in what sectors do you expect to win most contracts at Broadspectrum? My question number two is on the AGS Airport. If my calculation is correct, your net debt-to-EBITDA is around 8 times right now. So would you expect to keep the leverage at this level going forward and to distribute any cash flow over and above through dividends at AGS? And lastly, just coming back on provision reversals in construction, I'm not sure if I understood that currently. Did you say there was a EUR 54 million of provision reversals in construction? Can you just clarify that?

Yes, hi Marcin, let me try and address all of them. Well in Broadspectrum, I said that the total pipeline of opportunities could reach EUR 30 billion. In terms of what we are bidding out at the moment, it's around EUR 12 billion. Regarding what we expected -- we expect to win we never disclose that. But I'll give you an idea of the sectors and type of contract that we are seeing. So we are seeing highways maintenance that could be around EUR 1.7 billion. We are looking also at facility, management and logistics services in defense of around EUR 1.2 billion, and this is taken into account in New Zealand. And then also we have in Australia another EUR 1 billion. So in defense, maintenance and logistics, we have something like that. We also have schools, facility management of 0.9. That is some of them. But then of course, we have orders in transport as well and resources. So this is an example and more than seeing what we expect to win. We'll comment when we win since the type of contract that we win. Then regarding the AGS, the leverage is around 7.5 net debt-to-EBITDA. Of course, the assets keep growing and performing. And yes, we should have in the remainder of the year more of the scheduled dividends. So the asset is performing well. And the cash flow generation should help distributions. In the future, the kind of leverage should be around this level now. And then regarding the reversals of positions, yes, we released EUR 54 million of provisions in construction.

Okay, thank you.

Thank you very much. The next question comes from Thomas van der Meij from Kempen and Co. Go ahead please, sir.

Good afternoon, gentlemen. Basically two questions. First of all, do you have in your portfolio more refinancing opportunities like we've seen with your UK regional assets? That's one. And the second one, could you remind me what the Broadspectrum margin was in Q1 '16? And then for the whole group, not only like Australia and New Zealand but also your other international activities.

Okay. So basically in terms of the Broadspectrum margin last year, we were not consolidating that, right? So probably we'll have to look at the reported material of the time. I mean we don't have our own numbers for that. And then regarding refinancing opportunities, there's -- I mean there's going to be activity, of course, a regular one at Heathrow that you'll see. And then in the other infrastructure projects, it will be a long time, more than us expecting anything really specific for this year. And if there's something that's probably for this year, I'll ask Paco to compliment. But initially, we don't expect anything as significant as AGS for this year. Yes, there will be in the future. In the future there will be refinances in the managed lanes and so on, but you're talking 2019, '20 and so on.

Okay, thanks.

Thank you. Next question please.

The next question comes from Bosco Ojeda from UBS. Please go ahead, sir.

Hi, good afternoon. Two quick questions. One of them, the ETR 407, the level of traffic growth and revenue growth. Is there any sort of one-off effect there that we should take into account? Or that is a good reference for the full year growth? And second on the Budimex, just to follow-up, would you anticipate to accelerate any other divestments, not necessarily in Budimex, but elsewhere?

In terms of divestments, no we don't have any plans. As I said, this reflected our query. The only thing that we have at the moment pending administrative approval is the remaining Portuguese toll road in Algarve. And regarding traffic, Paco will take that. In regards of the traffic growth in 407 for 2017, we will like to remind that the east extension has been open back in June 2016. During the second half of 2016, this piece has been not tolled by the government, so that's only start at the beginning of February in this year. So supposedly in the second half of 2017, we will be expecting a decrease in traffic because of the comparison between one year with toll and one year without toll.

Okay, so sorry if I can't understand. So you would expect total traffic in the ETR in the second half to come down?

Well, we will see, we will see. But we will have a different base comparison because we will have a piece of the road that will be tolled this year and has not been tolled in the previous years. So supposedly the traffic growth will stop, but will be slowed down.

Okay, understood. Thank you.

Thank you very much. [Operator Instructions] And the next question comes from Santiago Molina from CaixaBank.

Good afternoon. I have two questions, if I may. The first one is on Amey. On 2016 results you pointed out an EBITDA margin of 3%, 4% for this year. Could you give us some visibility regarding when you expect or when do you expect to reach this level of margin? And second one is on Broadspectrum. Could you give us some sensitivity or color on the profits that you generate on the immigration centers? Thank you.

Okay, thanks for the questions. Well, regarding the Amey margin, we said that you reach the 3%, 4% percent level at the end of the year for the cumulative year, right? The reason for that is that as I said before, I mean we've come to agreement to get out of some contracts that are not performing. So we are taking that out along the year, right. And also in some of the divisions like rail and consulting, you have milestones that are recognized at the end -- in the Last quarter of the year. And basically, there you get additional bonuses, right, so third and fourth quarter, but more fourth. So expect this to be trending towards the end of the year with a significant improvement in the last quarter. And then regarding Broadspectrum, sorry, we cannot share that detail.

Okay, thank you.

The next question comes from Joaquín Ferrer from Kepler Cheuvreux. Please go ahead. Joaquín Ferrer: Hi, good afternoon. Actually, it's two follow-ups. One is about the 407. I would have expected that with the direction of tolls in the east extension traffic was going to slow down already. So can you share with us how this performance compares to your forecast? Is traffic performance also in terms of the calendar? And then back to -- apologies for going back to construction in this provision. So this release, this provision release is accounted at EBITDA level because the EBITDA in the first quarter was EUR 56 million. So just to confirm that point. Thank you.

Yes, you are right. It's affecting the EBITDA level. Absolutely true. And then regarding the traffic, Paco, do you have that data?

Yes. Well, we believe it's hard to say, but we believe that out of the 5.5%, 5.6% traffic growth that we had in this quarter, 80% of that is because of the extension. It's slightly above our expectation to be frank. But apparently, in April is still going well, so we believe that this is at least will be remain up to the end of first half. So the question will be after the second half. Joaquín Ferrer: Okay, thank you. And back to the construction segment. So I understand that, of course this is not recovering this provision. So what should we expect in terms of margins for the rest of the year for the construction business?

Well, actually, I mean we don't provide guidance. But I've said that basically, margins for the division for, I mean ex-Budimex could be around these levels for the coming months, right? And Budimex will be probably performing very well. The combination should be very similar, okay? So for the coming months, I mean it's not, let's say, a long-term guidance at all. Joaquín Ferrer: Okay, thank you.

Thank you very much. The next question comes from Robert Crimes from Insight. Sir the floor is yours.

Yes, hi. So Ernesto just going back to the reversal of the provisions, did I hear you correctly that it was EUR 54 million and all of that was in construction? Have you got an approximate geographic distribution of the EUR 54 million? And what was the comparable figure for the first quarter 2016?

Yes, Robert. I mean let's suggest gathered the number. We have the distribution here. It will take just a couple of seconds. If I could take the next question please.

The next question comes from on Antonio Rodríguez Vicens from the BBVA. Please go ahead, sir. Antonio Rodríguez Vicens: Hello, good evening. Just one question regarding Australia, is there any seasonality that we should be aware of that should lead to any acceleration or deceleration on the EBITDA, obviously excluding in Agroman's contracts?

No, we are not considering any seasonality. Antonio Rodríguez Vicens: Okay, thank you very much.

Now we have the answer to Robert Crimes' question. I mean the reversal of provisions has been 22 in Budimex, 22 in Budimex, 15 in Spain and 15 in the U.S.A. And then I mean we'll get back with the number last year, what that was. It was, I think, close to EUR 30 million, something like EUR 29 million, something like that. And it was more based in Spain.

Thank you very much. There are no further questions in the conference call. We now hand over to the speakers for final remarks. Thank you.