Ferrovial SE (FER) Q1 2018 Earnings Report, Transcript and Summary

Ricardo Jiménez: Good afternoon, everybody, and welcome to Ferrovial’s Conference Call for the 2018 First Quarter Results. The call will be conducted by Ferrovial CFO, Ernesto López Mozo. Ernesto, please go ahead. Ernesto López Mozo: 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 also, I would like you to have a look at some additional numbers we are providing this time. I mean, we have had a little request for some information on a proportional basis. I mean, this is kind of an ATM. I mean, all the conference call, we’ll be reviewing the consolidated results and the main equity accounted affiliate. But please have a look at the proportionate numbers that clearly show more of 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 sounding like a repetition, but is clearly an outstanding performance from our main infrastructure assets, both in traffic revenues and EBITDA. We’ll 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 call, regarding the Broadspectrum outlook. In 2017, we were finalizing the immigration contracts, and therefore, we have lower revenues, but we see that we are starting along plan. Also, we are not consolidating Portuguese toll roads that were present in the first quarter 2017. So if we look at the comparable terms, revenues will have remained pretty much flat in the quarter. Consolidated EBITDA is affected obviously by the Birmingham provision, and this EUR 237 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 EUR 162 million, 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 is 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 bidding, we are seeing an overall behavior by clients in the – I mean, 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 declining 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, as I will mention later, to be incorporated into the backlog. Finalizing the introduction with cash, we have a net cash position of EUR 938 million. We take cash – 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 a combination of two effects that imply a lower amount. One of them is that we have dedicated EUR 60 million to buying back shares. This is not part of the official 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, on the other hand, we had the divestment of a minor stake in Budimex for around EUR 60 million as well. So taking both into account, there’s like EUR 120 million 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 the highway assets and of course starting with the 407ETR. 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 operation has been very strong, but some of the conditions were really worse than last year, right. I mean, we have total creeps higher by 1.5%, but we have one less workday in this kind of short quarter that affects. Also the average tube length went up, and the new customers – by 1%, and the new customers are showing longer trips, 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 $1.256 per liter, and that is more than 17% increase vis-à-vis last year. Also, it’s important to know that the transponder keeps increasing. I mean, we added 90,000 transponders, so – to the total 1.4 million that we have outstanding. And that shows also the kind of performance that we are seeing with the different segments performing well. The 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. Diligence, 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 NTE and LBJ, 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 a mandatory mood. That means that we had to price above the cap because 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 quarter 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 year. It has a small tranche open already. That is the NTE3A-3B. But of course, it’s surrounded by works and is not representative, but it still shows good traffic. And very important, the corridor has more traffic and is growing more than what our models thought initially, right. So that bodes well for the asset, and it should have different partial openings along the year. So the prospect there is very good as well. Okay. So I will pass [indiscernible] before reminding you that these Managed Lanes, NTE and LBJ, will start to pay dividends after five years of operation, so that means kind of end of 2019 and end of 2020 for NTE and LBJ, respectively. Okay. So we move into airports. Probably you saw the results at Heathrow but is worth going over again the kind of record-highs numbers in passengers that it achieved, record passengers for our first quarter also with very high standards, even though the weather was quite complicated. I mean, a lot of snow, but performance was remarkably good compared to other airports. And EBITDA grew also substantially in – around the 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. This is the kind of incentive that Heathrow provides for a sustainability purpose, where basically airlines that move their airplanes to quieter airplanes get a better charge. But of course, this is recovered in two years, so it’s – the financial effects of a two year delay. It’s great to see and to see this performance with this kind of incentive. Regarding the regional airports. We had Glasgow, Aberdeen and Southhampton growing in EBITDA. Of course, traffic was affected because Glasgow, due to very bad weather conditions, had to close for two days. And this is more than 2% effect in traffic, right. So with this kind of environment, the growth in EBITDA is quite remarkable. Okay. We move to contracting, 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 Budimex that published results has straighten with a tighter margin than last year. And this is still much better than the rest of the competitors, but the sector is affected by higher prices, in general, in the different inputs like cement, oil, iron ore and also workforce, okay. So Budimex is managing it well better than the competition. The sector has this kind of pressure in cost. Regarding other parts of the Construction division, we have Webber trading along 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 it evolving. I mean, we mentioned that the division would move from 1% to levels around 3% or even 3.5% at the end of the year on an accumulated basis. And yes, we still see that. What we were seen to provide that kind of guidance is that we are 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 NTE3A-3B. And you know that usually once we are in final stages, if risks are non-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 left that with Amey. And Amey, we mentioned that should be around 2% to 3%, except – I mean, taking away Birmingham. And that’s where we are starting that 2% EBITDA margin. You also know that usually the later quarters on the year show different effects. One of them is loss making contracts that still are being phased out at the end of the year are more clearly out. And also, 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, as 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 five 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 3% EBITDA margin as guided. And I mean, things are looking in line with expectations. If any, the only – the pipeline 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 is 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. 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 discussed the Birmingham provision that we were looking to perform some divestments, in particular, in Services non-core activity. We’ve done some of them already, but it’s in the second quarter, and we should see the results in the second quarter. As an example, a stake in RACL, an investment in renewable energy was cashed in Australia. That’s AUD 50 million that you will see in cash in the second quarter. Also, we are taking more dividends due to the good performance of concessions in Spain. The [indiscernible] is a good example with dividends around EUR 30 million, and probably we could end up with another round before the end of the quarter of another EUR 40 million. 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. You know that we’ve been discussing about having more weight in infrastructure and 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 Birmingham provision will be considered has been taken care of with that provision, and we’re looking at different developments that could happen there, a quarter where 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. All right. So with that, I’ll stop. Thank you for attending. Hopefully, we haven’t missed many people that were trying to join in they didn’t miss much of the speech, and we open the floor for questions.

Thank you. [Operator Instructions] Our first question today comes from Mehdi Boudokhane from Raymond James. Mehdi, please go ahead.

Yes, good afternoon everyone. Thanks for taking my questions. So I have three, if I may, starting with the Construction. So you mentioned that profitability should improve throughout the year, so it would, 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 Budimex, so profitability has been higher than peers 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 Westconnex project, please? Ernesto López Mozo: Okay. Thank you for the questions. We’ll start probably in reverse order. And Paco Clemente, the CFO from Cintra, will discuss Westconnex and pipeline. Francisco Clemente Sánchez: Thank you, Ernesto. In regards to our active pipeline by geographies, we will start in Australia with Westconnex. We are expecting to present – to submit a proposal at the end of July. We are currently working at that. Moving to North America in the U.S., we have changeover order in our Dallas project, Segment 3C. And we are expecting to reach an agreement with the NDOT during the rest of the 2018 [ph]. In addition to that, in the U.S. as well, we have – we are working on a project in Alabama, I-10, and we are expecting to make our proposal in the first quarter of next year. And finally, in that market, Maryland congestion relief program that is about to be launched by the state, we estimate that the request for proposal – request for qualification will be launched at the end of this year, and the request for proposal will be during the next, 2019. Moving to Europe, we see some projects in Spain according to the – within the program that is about to be launched by the Spanish government. First project will be most likely in the Murta region at the end of this year, we expect. The sale of the former Radiales, we expect that it will be launched at the end of this year, early next year. And finally, in Europe, different projects in the U.K. The areas will be the Silvertown Tunnel, and we expect that in the third quarter of 2018. We will be submitting a proposal, and there are a couple of other projects in the UK expecting to be coming early 2019. Ernesto López Mozo: 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 the 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 speech, basically better margins from big projects being finalized in Texas and also an acceleration of production of some big projects like Grand Parkway or the Denver Airport, right, in the U.S. And this guidance incorporates also Budimex that has higher profitability than the sector in Poland, right. So rather than talking about a normalized level, we think that Budimex keeps our premium in the market, and we expect that to continue and is part of the 3% to 3.5% guidance that we mentioned.

The next question today comes from Stephanie D’Ath from RBC. Please go ahead Stephanie. Stephanie D’Ath: 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 for the full year. So you said you did about EUR 60 million 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 line. 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 – if we could have positive earnings surprise. Ernesto López Mozo: Okay, thanks. Well, the first one, Fernando will take what would be a pro forma instead of tacit renewals if they could be extended with the same length. Regarding the share buyback, yes, I mentioned, we’ve done EUR 60 million roughly. And we are – after the scrip dividend, we will be initiating the official share buyback up to EUR 275 million or 19 million shares along the year. So yes, we don’t see any reason to change what we announced on the February call and that also is referred 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 as well as other 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. Fernando González de Canales Moyano: Good morning – good evening. Well, I’ll take this question. I have to say by country, but it’s not the same, different opportunities. For example, in Australia, we are renewing about 20% of the backlog. It is not renewable. It is extended. The value of that is around $600 million, the amount of value we are missing if we change the renewal distinction. And the same, for example, in contracts like big contracts with public authority where the value of the contract annually could be $50 million or $225 million, taking that the average length is four years. You can be speaking about $100 million or $200 million per contract. So the fees are significant. And as our clients are keeping the bidding process open for a long period of time, the value reduces, but we are keeping the business and the clients. So it’s a little bit confusing, but that is what’s really happening. You see the fees , the revenue holds and the margins, but the value is dropping down.

Our next question today comes from [indiscernible] from CaixaBank. Please go ahead.

Good afternoon everyone. I have three detail questions. The first one, could you please tell us what is the operating cash flow pretax 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 in others EBITDA as detailed on Page number 2 of the release? And thirdly, if you don’t mind, what has been, if any, the level of provision reversals in the Construction unit this quarter? Ernesto López Mozo: Okay. Well, regarding the level of reversal of provisions in the Construction division, it was EUR 27 million. Then the others 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?

A more general question, what is the operating cash flow pretax for the Services and for the Construction unit, the way, for instance, you have reported at the end of 2017 presentation? Ernesto López Mozo: Okay. We usually don’t disclose that on a quarterly basis. We do that on full year and more information on the six months. I mean, you’ve had the normal drain on the working capital 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 because it’s around EUR 300 million. I will give back the exact number. It’s roughly EUR 300 million without getting into more detail, okay. And then the other questions that you were asking, well, I think that those were the main ones. Or did I leave anything out?

Just the others in revenues and EBITDA and the earnings. Ernesto López Mozo: Oh, yes, yes, yes. The others amount in revenues is – revenues from real estate in Poland basically. Budimex publishes this on their accounts. Since for us, it’s a different business unit, we put it in others because it’s not Construction, right. So it’s real estate in Poland.

Our next question today comes from Thomas Van der Meij 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 in the subdivisions? Secondly, reducing your exposure to contracting, will this be done gradually over time, so actually being less competitive in tenders and helping the margin of the order book? Or will you take also more active approach by selling divisions? And thirdly, you highlighted again the potential opportunities and portfolio optimization. Does it mean that you have to sell assets to put the acquisitions? Or should we see them separately from each other? Ernesto López Mozo: 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 designs, so that also means that kind of level that we’ve seen at the end of the year is kind of below than we’ve seen on the order book, always with a 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 hard bidding 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 and less to contracting. I mean, in terms of bidding, yes, we are slightly more risk-averse. We’ll be more risk-averse, and that should be reflected in 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 are 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 the risk. But they are more like created exposure, and therefore, we are divesting them. We have investment capacity. We have an interest in pipeline, but it’s not that we need to do divestment. It’s part of the portfolio rotation once they have been derisked, okay. So I guess I’ve addressed all you mentioned. Anything else?

No.

Our next question today comes from Olivia Peters from Macquarie. Please go ahead Olivia.

Good afternoon everybody. I’ve got three questions, please. Firstly, I wanted to get a better understanding of why clients are extending support Services contracts per year rather than re-tendering them for the usual three to four year period. Secondly, could you provide an update on Toowoomba? I saw in the local Australian press that there has been some delays to the construction phase there. And then thirdly, it seems that there was a headline also suggesting that the dividend in the Managed Lanes could be brought forward to 2019, I think. Can you just remind us when they were due? I think it was 2020, 2021. Ernesto López Mozo: Okay. I will take – sorry. Fernando will take the one about the extension of the contracts in Services why it’s just renewal and not tendering. Fernando González de Canales Moyano: Okay. The way it works is the starting point if you have a contract, for example, that has an order book of $500 million, and it has – it comes to market. When you are at the end of the contract, the order book is squeezed, so you’re finished, that order book And if you go for tender and you renew the order book, you get the same amount of order book that you consumed in the past. And the question why the client – sorry, I missed your question. I understand you want to understand why the client is doing that. Maybe there are different reasons, but I think the first one is high competition, so the clients – the companies offering different alternatives. And especially in the Australian market, there is openness to new proposals, and that makes the clients change their view on what they want. That is the first one. And second is the increase in trend in outsourcing that makes the contracts bigger sometimes and increases the scope and the complexity of giving back the contract to the market. That could be two reasons. In other places could be the budget constraint that the client faces. And in some cases, they prefer to renew their contract and wait until they have sufficient budget to go for a new one. I think both are the main reasons, okay. Ernesto López Mozo: All right. In regard to the expected dividend from the Managed Lanes, on 2019, NTE, we expect that, for Cintra, we will receive roughly $125 million. In 2020, in LBJ, for Cintra as well, we will receive roughly $140 million. The point is that we are not expecting to pay another dividend because of the restriction that we have in the financial documents. And on top of that and due to the nature of the higher bond [ph] that we have issued, but we are expecting to make refinancing on the day of – or roughly on the – on when we will be paying dividend, we will be making a call and refinancing the whole structure of both of those concessions. Fernando González de Canales Moyano: Related to Toowoomba project, we consider that this is a partial – a very small part in the whole project, and we don’t estimate any variation in our expectation for the performance of the project in the future.

So just to confirm, has construction started again on that project? Fernando González de Canales Moyano: It’s true that the – stopped a part of the project. But the project, the rest of the project is continuing the normal process as we planned and we programmed in the next month.

Okay, thank you.

We currently have no further questions. [Operator Instructions] We have a question on the line from Guy MacKenzie from Crédit Suisse. Please go ahead.

Yes, hi, thanks for taking my question. Just a quick one on the Managed Lanes, NTE and LBJ, specifically I just noticed there was a slight decline in the EBITDA margin that you delivered from the LBJ 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 I was just wondering if you could comment on your average tariffs there as well. Ernesto López Mozo: Yes. Well, both in Managed Lanes, in both construction, we believe that we are still in the ramp-up. So the decline in margin in LBJ is marginal, so it’s negligible. And we do not see any point here. I was saying – I don’t know if it has been heard by the audience, but I will repeat it in any case. We’re seeing that in regards of the Managed Lanes, we still believe that, mostly in LBJ but both in NTE as well, we are still in the ramp-up phase. And the difference in the decline in the margin in LBJ is negligible, so it’s – we do not see any real issue here. So it’s – no, we do not see anything relevant in regards of the margin of the – 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. Ernesto López Mozo: 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%. Ernesto López Mozo: Yes. Just one second, please. Yes. I think in Page 5, you have the – Page 5 and 6, you have the figures in local currency. And while I think that the margins in both are growing – well, slightly below in phases in LBJ, but it’s negligible. And – well, it’s nothing to do with the weakening with the – previous pages is because of the ForEx. So again, I insist that the both concession are still in ramp-up. And we believe that in the coming quarter and years, both the EBITDA and EBITDA margin will be growing in both concessions. And we do not see any factor that could impact for all.

Okay, that’s clear. Thanks very much.

We currently have no further questions on the phone lines. I’ll hand back to the team. Ernesto López Mozo: Well, thank you all. And so we took a while to connect everybody. Thank you for attending, and we’ll be seeing you. Thanks. Bye.