Ferrovial SE (FER) Q2 2019 Earnings Report, Transcript and Summary

[Operator Instructions]. Our first question today comes from Elodie Rall from JPMorgan.

Can I start with Heathrow and the fact that the Brexit contingency has been reduced? And I was wondering if it would have an impact on the dividend that we should expect for the year from Heathrow? That's my first question. Second question would be on the news that we've seen from the CNMC in Spain, which has opened an investigation into bidding for roads for potential practices that may have restricted competition. I was wondering if you could comment on that news? And my third question would be on Construction. Sorry to ask, I know you talked about that a bit. But can you clarify the guidance that you are giving for H2? And lastly, sorry if I missed that, but do you have an update on the 407 stake sale process? Ernesto López Mozo: Elodie, okay, thanks for the questions. It's four of them, let me go through them. The first one is the Heathrow dividend. Well, Heathrow in their interim report, they reiterated the guidance. They have commented on £400 million full dividend for the whole year. As I mentioned before, the Brexit contingency has been reduced because airlines are more ready to fly. So the impact from passenger should be less than initially expected. And yes, it should be smoother. Let's see how it goes. And at the end of the year, Heathrow will comment on the dividend. One of the things that also could be helping us I said is the levering from inflation that comes with this kind of Brexit uncertainty and the pound devaluation. So no, we don't see risk of dividend payment. We see more opportunity. But as I said, it's something that will be exposed by Heathrow at the end of the year. Then you mentioned on the initial investigations of the competition commission regarding road maintenance. Well, this is a wide sector investigation. All the companies are there pretty much for that. I mean the main ones that have been in the last 15 years, and also the ministry of public works. So is initial stages, and we don't have any comment to make. It's the whole sector. Regarding the Construction guidance, we said that we have recorded a loss in this first half and that this same number is our best estimate for the full year. So even though there's opportunities for improvement, there's also some risks. We prefer to look at the number in that regard. So around this, the number we have published in the first half is like if the second half was 0 result, okay? And then you asked about the 407 stake process, yes, I covered that in the call. Well, we are waiting for the review from the judge and see how they found about this process, we don't have an idea of timing, I'm sorry. We don't have visibility on that. And we'll update the moment we get the information, obviously. So I think, Elodie, I think I covered your questions. Let me know if I missed something. Okay. Operator, probably before taking the next question, we have another one in writing, coming from Marcin Wojtal from Bank of America Merrill Lynch. And these are the questions. Do you have plans to still publish your internal valuation of the toll roads portfolio with detailed projections for the main assets? Is the publication hold until there is clarity on the 407ETR potential stake increase? Well, we are discussing internally. We haven't taken a final decision yet. Of course, this is an information that is sensitive even for other businesses that we could be publishing. So we are discussing the release of this information, is something that we should provide clarity to the market after the summer, I guess, probably after the potential stake increase in the 407. The second question from Marcin is, as Construction continues to be somewhat challenging for the quarter, would you consider perhaps exiting some countries, regions or segments to reduce the size of the Construction business in order to reduce the risk profile of the company? If we could consider this, yes, we could consider this. The focus is clear for this and where we have to deliver. But we don't have any specific comment on that. But yes, we could consider that. And I think this is all -- these are all the questions from Marcin. So we open the floor again for the phone queues.

Our next question comes from Filipe Leite from CaixaBank.

Sorry. I have three questions if I may. The first one is regard to Construction. And if you could quantify the additional [indiscernible] impact of negative adjustment at the [indiscernible] work you're doing for the quarter [indiscernible]. If I [indiscernible] correctly, you expect [indiscernible] for construction activity in the second half, is that right? Second question [indiscernible] reported construction during the first half. What is your expectation for full year? In other words, if we can assume that all the construction will be recovered in the second half or not? And last question, [indiscernible] close to €300 million [indiscernible] as was mentioned by the local players [indiscernible] was completed, because looking at net cash of service units [indiscernible] when compared with Q1 and now one additional one from €55 million net cash position [indiscernible] what is the amount [indiscernible]? Ernesto López Mozo: Felipe, the sound was very poor. I got the first one. Probably -- I mean, if you could send an e-mail to the IR e-mail address, that would be great and we could make sure that it gets answered with precision. I mean you were asking about the detail on the results on Construction this second quarter? I won't be specific about the name of the projects, but I would mention some stuff here, right? So we are talking about works in Portugal, for instance, that are -- we are incurring €10 million additional cost. And yes, we expect to be asking for compensation on those. We have recorded the cost, not the benefit. Also, we have some works in Australia. I won't mention the specific project where we are doing works ordered by the client, but not signed off. This is something that we should recover with final certification, as I said, something like €6 million. Then we have other 2 where we have are taking €14 million and €4 million provisions, and here also, we think that we have some extra cost incurred, which should be compensated for, but it's something that these claims had to be validated, signed off by the client, right? So this is the bulk of the things that were recorded here. And also, as I said, we haven't charged to the projects some overheads and that this could change a long time with new projects. And this is around €5 million that is additional cost. So this is the bulk of the result in Construction for this quarter, okay? So regarding the rest of the year, as I mentioned, we expect the second part to be providing 0 EBIT the second half of the year, right? So that means -- but as I said, this is an estimate, and therefore, the result for the full year should coincide with the first half, okay? I'm not more specific, I would ask you, Filipe, if you could write them down, because the sound was really poor, and I didn't get anything else. Well, sorry, I got just a question on the services cash evolution. It makes no sense to discuss the cash evolution. The cash evolution will have to be discussed or adjusted in formulae. It depends with the buyer of -- or buyers of the asset, right? So I wouldn't get into that detail at this point in time. So please, if you could send that over, if that's okay with you, Filipe? Okay, well, thanks, Filipe. We're just waiting. If you have further clarifications, we can take them on the e-mail. Okay. So I would be moving to another bunch of questions we received from Stephanie D'Ath from Royal Bank of Canada. Well, the update on the 407ETR potential stake. I already mentioned, the 407ETR dividend growth rate deceleration from DD to 7% in the third quarter. But -- I mean you mentioned because of traffic, it's lower. What are your mid-, long-term dividend growth expectations, please? Well, in the end, you see that dividend follows the operational performance. Traffic is improving, but I wouldn't take that as the final guidance for the dividend, because it's also true that is in a very solid financial position. So there should be discussion among shareholders to see what is the final dividend, because there's room from a financial point of view. And as I said, also traffic is improving in July. Okay? So I think that the dividend path, we are very comfortable with the numbers provided in our models in the past, and we -- I mean we've remained really comfortable in that path going forward. Then the last question from Stephanie is an update on the Heathrow regulation. Well, in this second part of the year, after the summer, we have also comments from the CAA on how they view returns, also comments on different initiatives or the look at commercial agreements that they encourage. They should be commenting on the economic framework for expansion. You know that this interim period is already taken care of with a commercial agreement with the airlines, so up to 2021. But the second part of the year, later would be providing more views on returns and other aspects. Regarding business plan, that is also key. We will be looking at Heathrow, probably providing at the end of the year an initial business plan, that in 2020 in the first half should become more kind of final. Okay. So there's moving pieces. And of course, this is such an important project for the country, all privately financed, that I guess it will have to find a balance between financeability and affordability, and we think it will be struck. I mean bear in mind that we are discussing £2, £3, £4, £5 per ticket compared to other charges that are way different. Okay. So as I said, more comments from the regulator will come in the second part of the year. I think I've taken care of all the Stephanie's question. And now the -- we have another round of questions from Alexis Miller from Praxis Partners. So the first one is now cash outflow for working capital is negative €588 million. Can we expect you to recover to at least minus €300 million this time? Well, the minus €300 million that is mentioned, we don't get into that specific details. We just really comment on different items that could move the needle. And Construction could be closing projects where we have inflows. Clearly, also while you do take into account the numbers from Services that is the numbers that I mentioned in the slides, there's always working capital recovery from collections from clients that certify milestones and pay at the end of the year. So yes, there should be improvements. I wouldn't mention any specific number and nor I will mention for the fiscal year '19. I would focus again on the potential for better news from dividends from infrastructure. The next question from Alexis is which business is consuming cash? Well, right now, Construction is consuming cash. There is working capital consumption in Services also with the payment of the Birmingham contract. Services should recover the normal status of cash generation. And Construction basically is consuming cash, as we mentioned, from the provisions we took in the first quarter. And it's not expected to improve, but not to be positive in terms of cash generation. Then the second question from Alexis is how much provisions do you have accumulated to date that will result in cash outflow in the future? And here, the main one that I mentioned is the one from the first quarter, the €345 million that as I mentioned in the rundown of the slides, already €56 million have gone out in the first half, okay? So we have less than €300 million on that specific provision that is a cash provision. Regarding the costs incurred this quarter, all of them are costs incurred. So it would be an opportunity for cash rather than -- inflow rather than for outflow if we get certification signing off or compensation. Okay. Then we have the third question from Alexis is the ForEx cash impact is minus €66 million is what currency is this? Well, probably we are talking about different levels, okay? One of them is the hedges we have on the net investment are rolled forward. So that means that all the hedges we have in Canadian dollar or U.S. dollar for our net equity position. That is fairly small. We are net very, very long these currencies are rolled over, and every time there's a rollover, there's a cash outflow here, right? So we shouldn't expect something like this coming forward. And now we should be materializing hedges we have in the pound investment, okay? Then the question #4 is your dividend from Heathrow hedged and for how long? Yes, we have a good amount of hedges in pounds. In total, we have something like £500 million. It's a mixture, I just hesitated a little bit, because it's a mixture of direct FX forwards and options on that, but the rough number is £500 million, okay? So there it should be okay. We expect a lot of gamma in that currency, if I may. I think I covered all Alexis Miller from Praxis Partners questions. We have -- okay. Yes. Now we have Filipe Martins from CaxiaBank that is -- has sent his questions in writing. Okay. So Filipe, the first one I already answered. I'll repeat it for the public. Can you quantify the additional accounting impacts negative adjustments that you mentioned were booked during the second quarter? Okay, this I covered. Then you have the second question from Filipe is after the €600 million reported consumption at working capital during the first half, what is your expectation for full year? Well, I already covered get on another question. We don't provide detailed, both Construction and Services should improve. And then the main focus is the cash coming in from dividends and from divestments in infrastructure. The third question from Filipe says if it's true that Ferrovial capitalizing intercompany loan of €300 million at Services division as mentioned by the press and when it was completed? Well, yes, this is a part of the close of the first 6 months. So it was completed at the end of June. And in the end, between intercompany and equity, any amount we could receive would be coming from the divestment of Amey, right? So it could be neutral between loan and equity somehow, right? So I guess, it was done at the end just to keep the net worth level of Amey for operational purposes in good shape. The fourth question from Filipe, from CaxiaBank is from the total of €55 million net cash position of Services division, what is the amount related with Amey? Well, I don't have that detail with me here, but Amey should be in a net debt position at this point in time, not net cash, okay? As I said, we are not providing specific details. This is part of the moving parts in the sale of Services. Okay. So I covered all Filipe's questions in writing. I have more coming. This one comes from Charles Maynadier from Kempen. Two questions. The first one is regarding the 407ETR stake. Could you walk us through the process time line after the court outcome? Well, it would be very quick. I have Paco Clemente from Cintra here, but I think it's a matter of days when the process is out when you have to secure the sale. Francisco Clemente Sánchez: Yes, that's true. It's only 10 days, 10 working days that we have to complete the transaction. Ernesto López Mozo: Okay. And then there's a follow-up question from Charles on this topic that says, is it correct that the cash out and stake transfer will take place directly, but could be reversed in case of appeal from the losing party? And the question -- the answer is yes. I mean if there is an appeal, then you have to basically sell that back. Will you appeal if you lose? Likely, we'll see. In case the process could drag on for months, well, no, as I said, the process won't drag for months after the outcome of the current trial. Then the last question from Charles is in terms of the pipeline of infra assets, could you give us an update, where do you see opportunities? Okay, so here I would pass on first to Paco Clemente, CFO of Cintra, and then some comments on airports, even though in airport, the main item is always Heathrow. Francisco Clemente Sánchez: Thank you, Ernesto. Well, in terms of the pipeline, for the first time line of 24 months, we are -- we have screened between 25 and 28 projects amounting of €50 million investment. 25% of that could be potentially in Managed Lanes. We believe that we will be either bidding or completing the request for qualification process roughly in 5 projects during 2019, and the rest will be in 2020 and 2021. Geographically speaking, 50% of the projects will be in the U.S., 20% in Europe and the rest in the rest of the world. More precisely, in terms of which will be the coming projects in the next -- in the very next future, we will have -- the first one will be the I-10 in Alabama, which we will be hopefully presenting our submission at the year-end -- this year-end. After that, we will -- hopefully we'll be in the RFQ of the projects in Maryland and some of the projects in Georgia, all in the U.S. There are some other projects expecting in Chile and in Poland, but it's -- all of them are in less mature stage. Thank you. Iñaki García-Bilbao: Thank you, Ernesto. This is Iñaki, CFO of Ferrovial Airports. Well, I cannot give you very much details on process that are not -- whether it's not a formal process. But as you know, I mean, we are now focusing on the U.S. market and we are in conversations with airports administrations due to the growing interest in [indiscernible] projects, also with airlines and private investors since we opened the office -- commercial office in Austin in 2018. Probably the only process that you have heard about is San Luis that we are looking carefully, but there are many others that we cannot disclose more details. On Europe, we are following ADP. As you know, the process is on standby, waiting for the results of the consultation for referendum of privatization. This process won't finish before March 2020, but we are working on that and building the consortium. And of course, I mean, the quality of the assets is something that we could be interested in. And finally, I mean, we have opened a commercial office for the Asian market. We are going to have a look at what is happening in Asia, particularly in India, Indonesia, but I cannot give you more color on specific countries and assets. Ernesto López Mozo: Okay. Thank you, Iñaki. Now we have also written questions coming from Nabil Ahmed from Barclays. The first one is, do you intent to publish a business plan for NTE 35 West? If not, could you provide the guidance for fiscal year '19 for the main financial metrics? Well, what we just will do is wait for some years of operation until we publish a business plan, okay? Here it's the same thing is -- well above our expectations also, and it comes part of the overall discussion that we were mentioning before regarding commercial reasons, okay? So we have to come to a final conclusion internally. Question number two is a clarification question on Construction. You are talking about €5 million incremental cost taken in Q2, but that's the actual EBITDA loss in Q2 versus a normal positive EBITDA, which could have been in the €35 million to €40 million range. So shall we understand that incremental to the cost was €44 million, €55 million in the quarter? Well, that's right, I already provided that answer in more detail in a previous question. The third question is could you please reexplain why these costs cannot be booked alongside the provision in Q1? Can you be confident now such events will occur in the remainder of the year? Well, the -- as I mentioned during the presentation, there was a consultation to IFRIC, the interpretation committee of the IASB regarding losses for -- future losses for contracts. And the answer to that consultation was that you should take costs specifically related to the project, not other like central overheads, right? So the central overheads in the Construction division are charged to the different projects, right? When you get more projects onboard, you can charge more of that fee or you can take some efficiency initiatives, right? So the growth in profitable contracts that some of them would be coming and we will be updating in the second part of the year should be taken part of this effect. Question number four, in Services, regarding the Birmingham contract, will the future settlement payment be executed by Ferrovial or by the future acquirer of Amey? In other words, will this liability reduce the disposal price of Amey or stay with the Ferrovial group? No, there is no guarantee from Ferrovial whatsoever in this settlement. So it is Amey's liability. Of course, Amey's liability is something that the acquirer has to handle, right, and taken into consideration. And as I mentioned in different moments of the presentation, this settlement has had no impact in our accounts, because we took a very similar number in our fair value assessment. So that settlement is already part of the fair value assessment we took in the year-end of 2018 account. Okay. So that takes care of Nabil Ahmed written questions. I don't have anymore written questions. So I open the floor back to the operator.

We now have a question from Jenny Ping of Citigroup.

Just one question from me, please. I just wondered whether you can talk a bit more about your definition of what is an infrastructure asset, which you're looking at to invest in. Based on my understanding, you recently bid for some power transmission asset in Chile. And obviously, there has been talks about the French and Spanish fiber assets. I just wondered whether you can go into that in a bit more detail on the scope and the size of [indiscernible] outside of the traditional toll roads infrastructure? Ernesto López Mozo: Well, thanks. Very good question. Actually our focus is on transport infrastructure where we could have differential capabilities, and therefore, earn extra return. And you know that the market is flooded with funds dedicated to infrastructure investment. So we need to focus in our differential capabilities. We have differential capabilities in terms of pricing the dynamic tolling in congested areas in the U.S. That's our main focus. When we have the greenfield space, we can combine with Construction, and there is less competition in these projects. So that's a key part in our strategy. Also in airports, we can derive from the know-how also in Heathrow and in our division to look for projects where we could have value added. And the summaries that we are looking for transport infrastructure as the main priority, and that's what it should be. If other projects come that we think make sense, we could look at them, but really, really the focus, and the market should bear that in mind, is assets at transport infrastructure, unique assets where we could have our capabilities put into play. Thank you. I have another written question. Thanks for all that, guys. It's easier than when the line is breaking down. So the -- we have a follow-up question from Stephanie D'Ath from Royal Bank of Canada. It says, could you please update us on timing of Amey disposal? Having done much progress on, could we expect the sale by the year-end too? Well, here, the -- for obvious reasons, there was all these negotiations with the Birmingham City Council. There was only some preliminary work. So the work is at full speed now. And I'm not commenting on timing, because it's [indiscernible] we have to put a lot of information and it should be spilling into 2020 probably. But let's not stick to that specific date. We are working to do it as fast and efficiently as possible. Okay. So I don't have any more written questions. So I open the floor again for the telephone questions.

Our next question comes from Nicolas Mora of Morgan Stanley.

So two from me. And just regarding on Nabil's question on Construction margin. Do you expect the EBIT to be flat into the second half? Obviously, it implies profitable in Spain, profitable in Poland, profitable at Webber. You've got still some pretty heavy loss-making contracts. And again, I [indiscernible] to understand why you are provisioning all this [indiscernible] instead of waiting for the second half to incur these losses? And then the second point is you are teasing us on the dividend from the infra assets? When we look at your starting point at full year '18 where you received €623 million, should we be expecting something more generous in terms of dividends from infra assets to be paid to the infra holdco, i.e., a bit of an effort from 407ETR, from NTE and maybe at the end of the year from Heathrow? Ernesto López Mozo: Okay. Thanks, Nicolas. Okay. Let me take these questions. Regarding the projects I was mentioning, as I told you, the concepts where we are taking the cost and not the revenue, and these projects where we have been asked or ordered to do things, but you cannot recognize in the accounting until you have a final sign off or certification, right? Other are events that we think are subject of compensation, but we are not taking the claim as, let's say, work-in-progress as many other construction companies do, right? So our work-in-progress is very low in Construction. So we don't expect the contracts not to be profitable. We expect them to be profitable, but the timing of cost and revenue recognition are not at the same time, okay? The reason I'm saying neutral is just to take a prudent approach, just in case signing off or claims don't come at the end of the year, okay? But as I said, our expectation is that these contracts make a profit, otherwise, you are right, we should be taking the hit already. Regarding the dividends that you say we were teasing, well, the main concept in last year that made last year dividend higher in the first half was also one extraordinary dividend from Services concession on maintenance of highway called A2 in Spain. What we have in the second part of the year -- this year is the NTE, okay, that we expect an improvement on the number that has been around, that is $125 million our share. Then we have Heathrow that Heathrow has guided for €400 million. But depending on the Brexit inflation and so on, maybe there could be margin. That's something we have to wait here to see. And then the 407, as I said, it's quite delevered. It has solid balance sheet. So it's a matter of discussing with shareholders. So all these things could bring improvements to the main numbers that the people are -- the different analysts are discussing. So I won't get into any specific number, because they are subject of discussion among different shareholders, many of them, right? So we will have to walk the path. Next question, please?

Our next question comes from Robert Crimes of Insight.

Just wondering, a bit of a positive surprise on the I-77, €9 million of EBIT here. I thought it was just opened for June in the first half. Can you make some comments on the performance of that asset? And how should we think about it for the full year? Ernesto López Mozo: Well, I will pass that on to Paco, just described, we have something like half of the whole length open. Construction was delayed a little bit for the opening of the remainder. So let me pass it on to Paco for the update on that. Francisco Clemente Sánchez: Thank you, Ernesto. Well, as Ernesto has mentioned, it's only 1 month of operation is still very, very early. But I think that so far, the traffic has grown quickly. We have recovered -- we have recovered the preconstruction level of traffics. The ability to speed has increased 18% on the morning, and in the afternoon 37%. We are, right now, for the first 6 months in a scheduled mode, which means that dynamic mode is still pending to be implemented. It will be done hopefully on November. But so far, the 4 weeks that we saw so far is 20% each of the first week on operation. And July traffic is in the same page. So we are expecting to open the remaining tranche of the infrastructure at the year-end, and it will be something that will improve our traffic. And well, we believe that this roughly our summarizing, we are still very early, but it seems that it's according to our expectation.

But Paco, just with that one month, you've managed to do €9 million of EBITDA? So would it be reasonable to kind of assume at least for the rest of the year [indiscernible]? Francisco Clemente Sánchez: Well, we are getting paid partially from liquidity damages from the contractor. So it's still very, very early to come up with -- which will be the revenues that we are expecting for the rest of the year. So we need more time to see how the infrastructure is behaving. There's still a lot of work underway. This -- we believe that it is this current user, they're preventing them to get use from the facilities. So still very, very early. So it's all we can say in that regard, Robert.

Okay. But it's clean EBIT number. There's nothing funny in that. Ernesto López Mozo: It's clean, Robert. But as I said, they are receiving damages from the construction JV, right? So that is not, let's say, traffic-related profit. It's penalties on the construction delay that they are cashing in.

And can you say how much they were of the €9 million EBIT? Ernesto López Mozo: We'll update you on that. I don't have the exact number now. We'll update you. Thank you. Okay. So next question, please?

Our next question is from Guillermo Fernández of Kepler. Guillermo Fernández: [indiscernible] mine would be on the alternative usage for the cash [indiscernible] thinking about mainly about [indiscernible]. The second one would be your comment on Europe [indiscernible] the appetite for these kind of assets indiscernible]. Is there any another one in your portfolio that you may consider [indiscernible] in the coming 12 months? Ernesto López Mozo: Thank you, Guillermo. The line was breaking down a little bit, but I think I got them. The first question was that if we, though, are not successful in buying these -- taking the 407 that we are pursuing, if we could use the money to increase our participation in some of the Managed Lanes or other of our good infrastructure assets. Well, I don't know if we have the opportunity available, although it would be great if we could, because the dynamics are really positive. But I don't think that we have the opportunity, to be honest. Then the other question is if we have other participations or assets like Ausol that could be subject of sale or reverse inquiries, we are not entertaining anything like that at the moment, okay? So no. Also we'll see then, looking to redeploy the proceeds when we get them. I don't know if I missed anything, Guillermo. Okay. Thanks a lot, Guillermo. So I don't if we have any more call, definitely not in the IR inbox. And I don't know if, operator, we have any other question, then we would be closing the call. Is there any other question?

We have no further questions. I hand back to you. Ernesto López Mozo: Okay, thanks a lot. Thanks for attending the call, and we're looking forward to meeting you in the near future. Thanks. Bye.