FY 2013 ACS Actividades de Construccion y Servicios SA Earnings Presentation
Feb 28, 2014 AM CET
ACS.MC - ACS Actividades de Construccion y Servicios SA
FY 2013 ACS Actividades de Construccion y Servicios SA Earnings Presentation
Feb 28, 2014 / 11:00AM GMT
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Corporate Participants
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* Florentino Perez
ACS Actividades de Construccion y Servicios SA - Chairman and CEO
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Conference Call Participants
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* Daniel Gandoy
JB Capital Markets - Analyst
* Victor Acitores
Societe Generale - Analyst
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Presentation
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Florentino Perez, ACS Actividades de Construccion y Servicios SA - Chairman and CEO [1]
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Okay, good morning, everyone. Thank you for attending this presentation of ACS' results, our yearly result presentation. And now I'm going to review the main highlights for the year. And then, as usual, we'll have a Q&A session.
During the year we have been able to maintain a leading position in our core markets which are as you know mostly North America, Australia, South East Asia and also the European Union. These are our three markets where we have almost all of our turnover, which means that we have a highly competitive position in the global infrastructure sector.
And as a result of our activities we are posting excellent results this year with net profit of over EUR700m. In the year, as well as the investments made, we have reinforced our financial structure by significantly reducing our net debt and diversifying our funding sources further, as we will see later, increasing our presence in bond markets and reducing our dependence on banking loans.
I'd also like to mention what I think has been the successful restructuring of Hochtief in 2013. I think we've been able to substantially modify the company's profile. It is now, operationally, a lot more efficient, financially, a lot more solid and certainly much more profitable.
Our turnover in 2013 was EUR38.37b which is 0.1% less than our turnover in 2012. But, we should point out that in 2013 there has been a significant depreciation of the currencies in the countries in which we operate versus the euro, particularly the Australian dollar, although, also, the American dollar. If we subtracted the effect of the exchange -- the exchange rate effect, our turnover would have increased by 6.1% in like-for-like terms.
Our backlog, as well as, -- because of this depreciation of the currencies I've just mentioned was also impacted by the divestment of some of our businesses, particularly our service business in Germany, our telecommunications business which was very significant in Australia and also our divestment of the construction business in Greece.
Our backlog is currently at EUR63.4b, which, in like-for-like terms, is a 15% -- which is rather a 2% -- 15% reduction in nominal terms but would only a 2% reduction in like-for-like terms. And so with this figure, with our turnover and our backlog, we are once again a leading company in construction and concession business globally. And that gives us a very significant competitive edge in order to face the challenges in the coming years.
In 2013 our results were good. I've mentioned turnover. But, I should also add that our EBITDA was EUR3.002b, which is also 2.8% down from 2012, but that's because of the exchange rate effect. In like-for-like terms, as you can see, it would have increased by 3.1%.
Our EBIT is up 10.5% at EUR1.75b after divesting certain capital intensive assets and reducing the PPA amortization. In like-for-like terms, ex the exchange rate effect, it would have risen by 16.9%.
Our recurrent net profit in 2013 rose to EUR580m which is 0.3% down on 2012, but would have been 7% higher without the exchange rate effect.
And, finally, I'd also like to mention our cash flow in the year with EUR1.9b in cash flow which is 30.1% more than in 2012.
In 2013 the Group net profit, as I've said, was EUR702m. And I'd like to point out the difference between ordinary recurrent profit and one-offs. Our businesses have had a very good performance. Construction earned EUR261m which is more than it had earned the previous year because of improvements in Hochteif's profit after the restructuring process offsetting falling volumes in Spain.
Industrial services grew slightly up to EUR418m boosted clearly by our strong internationalization strategy which has offset falling volumes in Spain. And environment has obtained a net profit of EUR79m. That's up versus 2012 because of lower structural costs as well as lower financial costs.
I think that these results demonstrate once more our solid recurrent business, our ability to adapt, flexibility, our ability to generate recurrent profit which we hope to increase during the coming years.
The Group's net recurrent profit was EUR580m. That's 0.3% lower than in 2012, but without the exchange rate effect it would be 6.8% higher.
In 2013 we have had net extraordinary profit EUR122m. Mostly that's the Iberdrola dividend as well as the adjustment for the valuation of derivatives which had a positive impact. And we also provisioned -- that's a negative impact, and in combination, both effects brought net profit up to EUR702m.
In 2013 we have continued our efforts to reduce our net debt. By year end it was EUR4.2b. I'd like to point out that in these last two years we have continued to deleverage by EUR5.9b which is a 55% reduction as you can see, specifically 47% last year and 14.5% this last year 2013.
In this year 2013 we have sold the Hochtief airport business, the German service business and Leighton's telecommunications company. All the deleveraging involves the debt from the businesses which is currently on EUR3.5b. That means 1.4 times the EBITDA of our operating businesses.
The ratio is 2.5 times as we'll see later when we add project finance, including the EUR685m which are in our net debt as well as the EUR2.97b which are connected to assets available for sale. But, as I said, later we will give you more detail on these aspects.
As you know, from the end of 2012 Hochtief began a restructuring process which has enabled the company to achieve its strategic objectives for 2013 as shown by our share price which has risen to almost EUR60. That's double the listed price.
I also wanted to point out, as far as Hochtief, that its profit has also improved and net profit was EUR171m which is 10.3% higher than 2012 with net recurrent profit EUR208m which is more than double what was posted last year.
In order to achieve these results we have undertaken profound restructuring efforts in the last month, simplifying the organization in Europe, reducing our structural costs in Germany and standardizing our risk system which we believe is one of our main assets at ACS.
In parallel to this restructuring effort the company has focused on its core construction business divesting of the non-strategic assets it owned in Australia with its telecommunication companies and also in Germany with services, airports. And the recent Aurelis divestment that was a real estate company, the three that we own, and this was the first step in the complete divestment of our real estate business.
In this period Hochtief has also increased its stake in Leighton by 6% bringing it up to almost 59%. As a result, there has been a significant reduction of its net debt down to the current EUR401m. That's a 66% reduction versus the figures of 2012 for Hochtief.
Turnover in this period was, as I have mentioned, EUR38.37b. That's 0.1% down versus 2012 although its 6.1% higher if we subtract the exchange rate effect.
In construction, this area construction represents 77% of the Group's turnover with EUR29.56b. In like-for-like terms, volumes grew 6.7%. The exchange rate effect on the construction business was basically due to the depreciation of the Australian dollar, although, also of the American dollar.
Industrial services turnover was EUR7.07b. That's 18% of the Group sales and this is a figure which is 2.9% higher than that of the previous year also in like-for-like terms.
And, finally, environment brought in EUR1.78m. That's 5.3% higher than in 2012 and is now 5% of the Group's total turnover.
The combined international activity of the Group can be seen in this slide showing strong diversification of our revenue streams. Europe brings in 26% of our total. That's Spain and the other European countries.
America brings in 34% of the Group's turnover. Mostly North America where ACS already has 29% of its turnover. That's more than the whole of Europe including Spain.
And South America brought in 5%.
Asia Pacific 31%. That's thanks to Leighton's business. Asia specifically 8% of the Group sales. Mostly Hong Kong, Macau, Taiwan, Indonesia and Middle East and Africa was 1% of our total turnover.
Overall in 2013 ACS had a turnover outside of Spain of EUR33.13b. That's 86% of the total.
Our backlog has shrunk in this last year by 15% and that's due to three reasons. First of all, changes in our perimeter, as I've said, because of our divestment of the service business in Germany, a telecommunications company in Australia and Dragados business in Greece. That has now reduced our perimeter by EUR2.8b. But, of course, the biggest effect was the exchange rate effect with EUR6.88b.
And, finally, the fall in activity in Spain and fewer mining contracts which are, in like-for-like terms, responsible for this fall. Without the exchange rate effect and the perimeter effect, our backlog would have shrunk by only 2%. Our current backlog is equivalent to 18 months of activity.
By areas, our construction backlog is at EUR47.56b. That's 75% of the total and 2.7% down versus 2012 in like-for-like terms.
Industrial services finished the year with its backlog at EUR7.4b. That's 12% of our total backlog. 5.6% higher than the previous year in like-for-like terms.
And environment has a backlog of EUR8.4b. That's 3.3% down versus 2012 in like-for-like terms and it's 13% of the total.
As in the case of our turnover, our backlog is mostly composed of international contracts. Figure is EUR53.24b or 84% of the total. Asia Pacific with 43% (sic - see presentation slide 12 "44%") of our total backlog is our main source of backlog, also because of the Leighton mining contracts which have a longer duration than most of the other infrastructure development contracts.
North America is already 22% (sic - see slide 12 "21%") of our backlog thanks to growth in Canada and Mexico.
And South America represents 4% of our total backlog.
Europe is 14% of our backlog mostly Germany, the UK, Poland and France.
Our backlog in Spain has fallen by 11.1% as a consequence of the current economic downturn and is down to only 16% of our total backlog.
In construction, sales in 2013, or turnover in 2013, was EUR29.56b. That's 6.7% higher than in 2012 in like-for-like terms. The exchange rate effect was very significant, as I said earlier, since, on average, in this year, the Australia dollar depreciated by 9.1% and the American dollar by 3%. Also, the divestment of our telecommunication businesses in Australia and our service business in Germany also impacted our turnover.
Finally, we have continued to experience falls in activity in Spain, down 23.1% in the year to EUR1.39b.
By geographies, construction turnover comes mostly from Australia. And Asia Pacific represents already 50% of our turnover and America, mostly North America, which represents 33% of our total turnover.
Europe, that's basically Germany, the UK and Poland is 12% of our turnover. And Spain is now down to only 5% of our construction turnover.
The contracted projects under construction is a backlog of EUR47.56b. That's 17 months of activity. Fall in the year is due, as I said earlier, to the perimeter effect, but, also, the strong impact of exchange rates which year-end also had more marked depreciations than the average in the year.
Backlog in Spain fell by 6.8% down to EUR3.35b. That's 7% of our total backlog and it's showing signs of stabilization.
By geographies, Asia Pacific is now 56% of our backlog, America 25% of our backlog and Europe 12% of our total backlog.
Among the projects for 2013 I'd like to point to the most significant. You have it on screen as well. First of all, the great tourist complex of over 450,000 square meters in Macau with a budget of EUR2.1b.
Also, Leighton is obtaining good contracts in Hong Kong, especially railway. And, for example, in 2013 it was awarded the connection between Shatin and Hong Kong Central Station for EUR500m. And, recently, we've announced the construction of a tunnel between the Central Station and [Mun Chai] for AUD453m.
I'd also like to point out, especially in Australia, due to the cooperation between Leighton and Dragados for the railway connection in the northwest of Sydney which is a project to build 15 kilometers of double tunnels, five metro stations and several annexed facilities for a budget amounting to EUR671m.
I'd also like to point to the awarded projects such as the construction of the Metronode, the metro enlargement in New York or the construction of a railway tunnel in Eglinton in Toronto. And the building of the Bank Metro Station in London, which is good because it confirms our presence in the UK and has made us specialists in subways, metros.
We are present in London, Ottawa, New York, Sydney, Hong Kong, almost everywhere in the world. And our experience here in Spain has enabled us to make very good bids in other places around the world.
In industrial services we've registered practically the same sales as 12 months ago amounting to EUR7b. But, this would have increased by 2.9% because of the international activity of industrial services with sales of EUR4.32b growing at 5.2% and it already amounts to over 61% of total sales.
America amounts to 42% of the sales and is clearly the greatest area for growth in the coming years, especially North America and Mexico.
On the other hand, the sales amount to EUR7.4m amounting to 13 months of activity, the backlog, and its 5.6% more than 2012 in like-for-like terms. This growth is from different -- primarily from several integrated projects in Saudi Arabia and South America which clearly offset the drop of the backlog in Spain, which now only amounts to 31% of the overall figure.
Among the main contracts awarded, we have the contract to build the thermal solar plant in Illanga in South Africa, 100 megawatts for EUR491m.
The contract to develop the coastline platform on the Gulf -- in the Gulf of Mexico. It's a project that Dragados offshore is developing from a shipyard in Tampico amounting to over EUR350m.
In South America we've obtained major contracts which I'd underscore the development of water treatment in cities of Lima and Peru and the two wind farms in Chile.
And then we have our activity in Saudi Arabia which is growing significantly, among which a fertilizer plant for EUR455m, the construction of a plastic production plant for approximately EUR300m and the installation of 10 reactors in energy generation plants for over EUR200m, or EUR199m.
In Spain, we've obtained contracts, have been awarded contracts for development and maintenance of control systems for the city of Madrid EUR101m.
And a national contract to support Endesa's commercial network EUR47m.
In environment, the turnover amounted to EUR1.7b, which amounts in like-for-like terms to a growth of 8.7% thanks to international expansion of [Urbisur] principally in the UK, France and the waste treatment business in Chile.
The environment is already acquiring great presence in Spain, but it supplements its presence with its active and presence in other countries, essentially in treatment plants. That's activity in the UK, France and the rest of Europe. We are closing 2013 by over 50%. But in Spain, it drops by 8.5% because of the restructuring of some contracts.
The backlog in environment at the end of 2013 was EUR8.4m. That's 3.3% less than 2012 in like-for-like terms. That's because of the reduction in Spain where the backlog drops by 15.2%.
By geographical areas, Spain amounts to 53%, Europe to 34%, America to 12% and Africa to 1%.
And to give you examples of projects in this area from last year, we had the incineration plant in Gloucester in the UK EUR300m, two important street cleaning contracts in London and in Paris for the approximate amount of EUR110m, street cleaning contracts in Spain amounting to EUR100m and the Malaga treatment plant for EUR46m.
The EBITDA, the consolidated EBITDA of the Group, as we saw earlier, was above EUR3b. Exactly EUR3.2b (sic - see presentation page 22 "EUR3.002b) amounting to -- which is a growth of 3.1% in like-to-like terms and the margin is at 7.8%.
The annual evolution shows the impact I already mentioned of the exchange rate effect and the drop of construction in Spain.
In industrial services, on the contrary, international growth and activity of integrated projects and the improvement of margins for maintenance contributed EUR33m more to the consolidated figure of EBITDA. And environment grows by 14% with EUR34m more to the overall figures. The total EBITDA from construction is EUR1.8b, which adjusted, because of the exchange rate effect, means a drop by 0.5%. The margin being at 6.2%.
Industrial services offer an EBITDA of EUR937m, which in like-to-like terms, is 5.3% more than 2012. The margin goes up to 13.3% because of the greater weight of integrated projects that have greater added value.
But the contribution in 2013 of renewable energy assets to the EBITDA of industrial services has dropped by 8.6% down to EUR230m. This drop is due to the regulatory changes in Spain during the last two years which has made us provide for the value of these assets in an amount of EUR300m in the financial statements of 2012.
Additionally, this we did in 2012, as we said, and now, as a result of the new proposal for remuneration, we have made a preliminary estimate until the final decision comes through with an endowment of EUR200m more in 2013. Therefore, the value of the assets has been provided for with EUR500m between 2012 and 2013. And this figure adjusted by taxes is equal to EUR1.1 per share.
The environment EBITDA grows by 17.5% in comparable terms thanks to the treatment plants with an EBITDA, greater than urban services, with a margin at 15.4%.
In terms of investments, which we have also made this year, quite a few in fact, I would like to underline that even in this environment of deleveraging, we've made an important investment effort both in developing concessionary projects together with the divestment in non-strategic assets. But, overall, investment has amounted to EUR2.4m while divestments were EUR2m. So, net investment amounted to EUR476m.
I would like to differentiate between the investments in our operational areas for which we have disbursed EUR1b while divestment in machinery and equipment amounted to EUR148m, which leaves us with an investor net balance of EUR941m.
On the other hand, financial investments and the in projects amounted during the period to EUR1.3b while divestments amounted to EUR1.8b.
Net operational investment of EUR941m consists very essentially of construction amounting to EUR851m, of which EUR761m comes from the procurement of machinery and equipment of Leighton in Australia which are necessary for the mining activities which, as you know, is one of our most important businesses there. The rest of companies under the construction business have not invested that much in the purchasing of specialized machinery in maintenance.
Industrial services has invested EUR22m in their operational investment and the environment in the amount of EUR68m.
It's important to underline that these investments are very similar to the amounts depreciated in the different areas of activity with the exception of PPA amortization which amounted to EUR194m and which dropped substantially -- which will drop substantially in 2014.
Operational investments in the activity areas have been stable in the last years except for industrial services because of the growth of integral projects and to the reduction of investments in renewable. Hochtief, including Leighton, is investing in machinery and equipment, especially mining, between EUR800m and EUR900m a year while the remaining activities of ACS are in the vicinity of EUR150m per annum.
In financial and project investment I'd like to underscore the following. In construction, Iridium has invested EUR124m in building several highways of which I'd like to underline the contribution in EUR74m to the one -- to the I595 in Florida in the last stretch of its development.
In construction businesses in the United States, we have invested EUR48m in joint ventures. The other mainly around the development project with Leighton in Australia and in Hong Kong.
In industrial services, we've invested in finalizing renewable energy tanks in Spain and Peru with an approximate investment of EUR100m.
In addition, other energy assets such as the recent procurement of a [share] package of energy management in Mexico and energy concession agreements which have required an investment of over EUR220m.
In the environment we've invested EUR121m in treatment plants, especially in Essex in the UK.
In financial investments I'd like to underline Hochtief's purchase of 6% of Leighton for an amount of EUR198m of which approximately EUR20m have been invested in ACS too buying more Hochtief shares.
The main divestments this year have been in Hochtief and Leighton, as in Germany we have sold the airports for over EUR1b, an operation that has been very profitable to the company because it has enabled us to sell the entire asset without having to segregate its different shares.
Also, this year, in Germany, Hochtief has sold its services facility management for EUR236m.
And in Australia, Leighton sold, at the beginning of the year, most of its shares in next gen, as you will recall, and other telecom assets for the amount of EUR451m.
The maneuver fund has suffered a variation in it's -- of EUR1b as a result of three differentiated impacts. On the other -- first, the evolution of the operating circulating capital of Hochtief has reduced its -- the amount owed to it by EUR658m essentially because of some of the projects Leighton had in energy and gas companies in Australia which we hope to make -- to recover in the coming quarters after initiating a protocol for the efficient management of the working capital is advancing in this respect.
Secondly, the remaining companies of ACS have seen a deterioration in what they owe by EUR290m as a result of the reduction of their activity in Spain, especially because also its activity, lower activity in construction, reduction of advances and provisions in the -- in industrial services. In addition, the Group evolved positively in 2012 by EUR217m. And, because of adjustments, because of provisions and perimeter changes for consolidation, it's EUR123m deterioration in the working capital.
During 2013 the Group has continued emphasizing the sustainable generation of cash flow by its activities. ACS has generated EUR1.9b, as I said earlier, 30.1% more than the previous year of the funds generated by our activities.
Thanks to the gross profits of operations, EBITDA was over EUR3b.
The net financial cost detracted barely EUR500m after discount deducting the financial expenses arising from our debt, the dividend received from Iberdrola in EUR100m, and also the subsidiaries and which we consolidated through the equity method and EUR270 -- in an amount of EUR275m.
The amounts paid and other adjustments that reduced the cash flow in an amount of EUR539m.
Once deducting the net operational investment, the free cash flow, recurring cash flow, reached EUR1b.
In 2013 there have been a series of extraordinary impacts on this cash flow, free cash flow. In addition to the deterioration of the working capital to which I referred earlier, we've received EUR1.8m for divestment, especially from the sale of airport services and telecoms such as Hochtief and Leighton. I've also mentioned the investment of growth which leaves us with a generated net cash flow of EUR535m at the end of 2013.
I'd like to give you the details on the development of our debt this year. As you see, we've used EUR496m to pay our shareholders with a payment of dividend both in ACS and its subsidiaries to minorities. And, essentially, Hochtief and Leighton, because of the sales of Iberdrola derivatives, we said that the swappable bond, issuing of the total lines we would cancel, we would partially cancel the equity swap.
And we've spent EUR398m and afterwards we've monetized the cost spread which has enabled us to receive EUR856m.
Finally, other impact on the debt, especially the creating of the freight company in Australia leaves the debt at the end of the year EUR4.2b.
And as I said earlier, in these two years we have made major efforts to deleverage by 55% in -- well 55% overall, 47% in 2012 and 14.5% in 2013, so a total in the two years of 55%. And, currently, our net debt to EBITDA ratio is at 1.4 times for the businesses and, nevertheless, we are going to continue to deleverage by divesting of non-strategic assets and we will also focus on reorganizing, making our financial structure more efficient. And there we think there is ample room for improvement.
In 2013 we have also continued to reduce the rest of our financial liabilities, both the debt allocated to assets for sale, which is EUR2.97b also factoring and securitizations for EUR458m. In the last two years the total from these has gone down by 25%.
Debt on assets available for sale, that's almost entirely project finance, is mostly composed of debt for renewable assets. That's EUR2.07b. Also, there is the debt for other assets from industrial services, including our desalination plants, or our transmission lines. That's EUR232m in debt, as well as the debt for the infrastructure concessions which is EUR593m.
Factoring has gone down significantly thanks to the supply of payment plans passed by the Spanish government and also by falling volumes in Spain. So, basically, in these last two years we have significantly reduced our leverage down to a net debt, total net debt including that in assets available for sale, to 2.4 times the Group's total EBITDA.
Additionally, in the same period, we have increased our non-equity funding. This is a trend which we hope to continue to reinforce by going to the bond markets more frequently. Our intention medium-term is to get investment grade rating which will enable us to replace our bank loans with corporate bond issues at competitive prices.
In the last year the Group has been particularly active in the bond market. Hochtief issued last March a corporate bond issue of EUR750m with a seven year maturity.
Also in March, ACS established a short-term commercial paper program for a maximum amount of EUR500m. And in October, as we announced, we issued the swappable bond exchangeable for Iberdrola shares for a total of EUR721m with a five year maturity. So, overall, the Group has a balance of EUR3.2b in bonds and commercial paper issued in markets which is 28% of our current debt structure.
As we have seen, our operating profit was good in the year which demonstrates the sustainable recurrent profitability of ACS's businesses. Our EBIT rose in 2013 by over 10% to approximately EUR1.75b, and our cash flow generation was over -- recurrent cash flow generation was over EUR1b in the year, as we have mentioned.
We've also reinforced our financial structure by deleveraging by 14.5%, 55% in the last two years, continuing with our policy to divest of non-strategic assets which has brought in EUR1.86b in 2013 and over EUR6.5b in two years.
We have also carried out major investments for the future of the company both in our infrastructure development businesses and transport concessions and in energy projects as well as by acquiring a bigger Hochtief stake and a bigger Leighton stake by Hochtief.
Both companies are a major part of our Group and are an extremely important platform for our future growth and internationalization. At the year-end we owned, considering our treasury stock, including our treasury stock, 10% of -- 56% of Hochtief and, indirectly, 58% of Leighton. In the next months we will increase our stake in both companies.
12 months ago we published our strategic targets for 2013/2015. We believe that we are on schedule with our strategy. Our plan was to consolidate our leadership in developed markets, and we are currently already the largest construction company in the US and Asia Pacific and the second largest in Latin America.
In order to increase our profitability we have carried out a significant restructuring of Hochtief's business which we expect will bring in the results starting 2014 already. We are also standardizing our risk management systems globally, already deployed fully in Germany and underway in the US and Australia, and we have also undertaken structural cost reductions in all of our geographies.
Finally, we have continued to deleverage, as I mentioned, through divestments in the period but also through cash flow generated in our businesses whilst maintaining our investments. We would like to continue to pursue these goals since we believe they will enable us to continue to grow sustainably and profitably.
In the coming years we will continue to grow in our core developed markets North America and Asia Pacific, taking advantage of opportunities from our competitive position in Latin America whilst maintaining our position in Europe in those countries in which we are leaders.
We will continue to invest in infrastructure development projects, rotating our backlog in order to bring in new projects which is an essential part of our activity as global contractors.
We will also be implementing more measures to improve the profitability of our businesses, standardizing our risk management system and promoting the growth of some of our high-value activities in new markets such as industrial services in Asia and Australia, in North America, mining in South America and treatment plants in the US and Canada.
As I've mentioned, we believe that we can improve our financial efficiency as well not just by appropriately managing our working capital, avoiding unnecessary cash requirements as well as by increasing ACS' recourse to the markets in order to replace our current bank loans by bonds and commercial paper which will enable us to reduce our financial costs.
I'd like to conclude by repeating the strategic objectives that we are working on for the near future. First of all, we believe in the Group's ability to grow profitably. Our recurrent net profit should grow every year by at least 10%.
As I pointed out before, we would like to remain with a moderate debt level. We would like our net debt to fall from the current 1.4 times EBITDA and we will maintain a stable payout policy which will match our business performance and be attractive for our shareholders. We have always seen our mission as creating sustainable value and with these targets we think we will fulfill this mission.
Thank you very much for your attention and now we will be glad to answer any questions that you may have.
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Questions and Answers
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Daniel Gandoy, JB Capital Markets - Analyst [1]
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Yes, good morning. My name is Daniel Gandoy from JB Capital Markets. My first question is could you give us a bit more visibility on cash flow forecasts for 2014, particularly your operating CapEx and your operating working capital?
Secondly, I'd also like you to bring us up to date on your divestment processes, particularly your ACS assets, particularly your renewable assets given the new Ministerial Order that has just been passed.
And, thirdly, I'd like to know what your plans are with regards to your treasury stock in 2014, and should we expect that you will continue to repay debt to offset the scrip dividend, or sorry, to reduce the number of shares to offset the effect of the script dividend.
And, finally, are you planning to buy additional Hochtief shares?
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Florentino Perez, ACS Actividades de Construccion y Servicios SA - Chairman and CEO [2]
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Okay, starting with your last question, I did say that we intend to continue to buy Hochtief shares. As for our treasury stock strategy, it's true that so far we have amortized shares to offset our script dividend. We'' continue to do that. Between now and June we'll continue to do that to reduce the number of shares to offset the impact of the script dividend we pay in shares to our shareholders.
You know that our shareholders are interested in getting shares because they derive great benefits from them. But we don't want to see a dilution which would impact those who want their dividend paid in cash.
As for renewable assets for sale, as you know, there is still some time to go until the draft Ministerial Order becomes law. But, as required, we've provisioned an additional EUR200m. So, we think that with the current EUR500m we have provisioned, we feel rather comfortable in that position.
And so, in the coming month, we will decide whether to sell those assets or transfer the debt to our balance sheet. But that's a decision that we will make once the final draft is in force. But we have already made a significant provision of EUR500m which I believe, with our current data, should be sufficient.
As for cash flow forecast for 2014, well one more thing, Daniel, we did make an announcement yesterday about our relevant event. We said that we would cancel our treasury stock. In fact, right now we are down to a negligible amount, really very small. The Board approved yesterday that we -- sorry, that we reduce capital, yes. That we reduce shares, same number that we had given a scrip dividend.
As for our operating working capital, this year there has been an impairment of some EUR300m. But, the biggest part of that, which is a one-off, was due mostly to the large energy projects in Australia. Because traditionally, you would get paid by project milestones and if it's a very big project, or if there are significant contract changes, there's a settlement at the end of the project which is acceptable in smaller projects, which are fairly short-term. But we currently have some very large contracts there where the scope has been changed and the amount is now double the original amount.
So we cannot be financing these customers who have plenty of cash, like the Gorgon project where Chevron is the main shareholder. It doesn't really make any sense for us to wait to be paid until the project is completed. We're negotiating with them to get this to change.
It's happened quite often in Australia, when you change the scope of a project. That means that contracts cannot continue with final settlement. You have to be paid receivables, because you can't act as a bank for the project. But once we finish negotiating that, which should happen in the next few months, both Leighton and the consortium involved in this project is actively involved in that. The rest of our operating working capital has suffered minor impairment, but similar to what we had last year.
Just to summarize, I'd say that this year, 2014, we don't expect any additional impairment. In Spain, for instance, we don't expect volumes to fall any further. So, that shouldn't mean any further impairment and, overall, we don't expect any further impairment of our working capital.
As for our CapEx, I should separate between capital investment in engineering and equipment in Australia, which is about EUR900m a year. That we manage as follows. First, last year there was a major investment because we had some new very large contracts, which required strong investments in that area.
As you will have seen, Leighton has established a company, FleetCo, where the standard mining equipment for Australia will be purchased through that company, which is currently 100% owned by Leighton. But they want to bring in financial partners, so that they will not have to consolidate the results of that company. So that this strong capital investment effort will be done by that company under market conditions and not by Leighton.
So, our capital investments for equipment should fall significantly in for maintenance while it's at a fairly similar level to our amortizations and it's quite reasonable.
Apart from that, they then have investments in our core business. That's to develop new concessions, to work on new tenders, new projects and that investment has its own lifecycle and in growth areas we will continue to invest. But I think you were referring to operating capital investments. That's basically Leighton.
From HSBC, through the Internet, we're receiving three questions. One has already been made, so it's actually two.
With regard to the recent announcement of the reform of the Mexican energy market, where their intention is to change the regulation and increase liberalization and I wonder whether we are considering an increase there?
We've been in Mexico for a long time now in the two shipyards, as we mentioned earlier, Tampico. And we are one of the companies that is best prepared to tackle the new projects that are going to arise as a result of the energy reform in Mexico.
What is more, we've bought from partners for EUR190m, I think I mentioned it earlier, a company that we had with them. And we've done so precisely to benefit from this reform -- from this energy reform in Mexico. We have very good possibilities to improve in Mexico, yes.
The next question is about the environment business. There has been a substantial fall of the backlog in the last year and so they're asking whether we expect our waste treatment activity, which has grown, to continue to offset the fall in the traditional business in Spain, which was our garbage collection and street cleaning. So, what's our forecast for this business, for the environment, business?
Well, we expect to grow more outside Spain than in Spain and we plan to restructure our customer portfolio in Spain, based on the experiences that we've had in the last years with the difficulties we've had to be paid, as you all know. So, we want to have less risk in Spain in certain places and we will be offsetting that by making new acquisitions and getting new contracts like we have done in Paris and London and treatment plants in France. The ones we have, should offset the restructuring in Spain, with these new contracts abroad.
And finally, a very specific question with regard to the dividend. What dividend are we going to be proposing for this year is the question?
Well, we will agree this on March 26 at the Board meeting. We will be making the account and approving the supplementary dividend.
As mentioned up to now, well, I thought everybody knew we did this yesterday, that we amortized the part corresponding to those shareholders who wanted their dividend paid out in shares. So, as we said earlier, very many want it to be this way but -- and others don't. So we will continue working both ways until the next dividend payout.
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Victor Acitores, Societe Generale - Analyst [3]
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I'm Victor from Societe Generale. I have two very simple questions. On page 39, where you have your target 2014-2016, the first about the dividend. It's not so much about this year, 2014, but the Group has been paying just over EUR2 per share until recently. But growing the way you expect our net profit to grow, could we expect you to pay a dividend of around that amount, two or three years from now? That's my first question.
And my second question is more about what you were saying during your presentation when you spoke about the Group wanting to get an investment grade rating so you can go to the market and reduce your financial expenses. This 10% growth -- well, over 10% growth, do you think it could be a conservative estimate, if you were able to truly reduce your financial costs that much?
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Unidentified Company Representative [4]
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Well, as we all know, the last few years have been difficult, especially for our sector, for the construction sector in Spain. As you will know, and as you all realize, the priority these last few years was to follow the European guidelines.
In 2012 there were all those rumors about whether we were going to have to leave the euro and so on and, as a result, there were huge cuts in every area in Spain. And we, of course, had to also make every effort to reduce our costs. We continued to do so and that's why we also reduced our payout.
At the time, of course, our profit was over EUR1b because of some capital gains and some other one-offs which are no longer available to us. And so, in order to be prudent, we decided to cut the dividend down to about 50% of our usual payout level. But because we are prudent, we believe that the strategy we need to follow is the one that I have described here.
In Spain we still have to make some minor adjustments. A business that has gone from a very large volume, down to practically nothing. And so we decided to manage the Company outside Spain, Hochtief to improve its profitability. 2013 was, I thought, a spectacular year in the transformation of Hochtief. You only have to look at the share price at the market cap. And we have to now complete that adjustment in America with Hochtief and in Australia. And I think that once we have made all of these adjustments, when we complete Spain and exporting our biggest asset, which I think is our risk management system, which was always the biggest asset for us, for instance in Dragados.
Of course, you always have the country risk. You should never to go a country where conditions are not favorable for our activity. But our second biggest risk is the size of the project. We should never get involved in a project whose size is disproportionate given our turnover. Say, 10% or 15% of our total turnover, because if there is an accident in one of these projects, it can bring down the company.
So, country risk, project size risk and the next one, of course, is the payment risk. You should never go anywhere where you're not 100% certain of getting paid. It all seems pretty common sense but we specialize particularly in project execution risk management. We have our system, daily financial information system, which enables us to know exactly where we are on any given day. And so we are never caught unawares, or never caught by surprise.
We know that the solution is a lot more difficult as time goes by than if you act promptly. And so this is a system that we have been deploying at Hochtief and, Senor Fernandez, who is really the biggest expert in this field, is now going to deploy it at Leighton and in America.
So, we are optimistic in terms of the payout for the future, but we also have to be realistic about the efforts that we've had to make to turn things around in Spain and for the first time, manage things at Hochtief directly. But, we're working so that next year things will improve.
And the other question, Victor, you were asking is, whether we are too conservative with our 10% profit growth. Well, we hope to be over 10%. The investment grade rating is one of our objectives, but we don't want to make it an obsession. It's something you have to request when the right conditions are in place, so you can get a good rating and produce your financial costs that way.
So our Chairman has explained, we've already had bond issues which have helped us restructure our debt, switching from bank loans to non-equity debt which will have an impact on our income statement, certainly, and the better the rating the bigger the impact, of course. But, it is not an obsession. It is not something that we need to achieve as soon as possible, because we are already managing to swap our bank loans by non-equity issues.
So, we believe that our recurrent profit, where it says over 10%, we believe that it will be well over 10%. We think it's quite achievable and we hope it will be a conservative estimate.
I'm sorry, I can't hear this comment.
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Unidentified Participant [5]
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Yes, I'm sorry, if I may our side. 36 -- you say that you have 36%. Is that before cancelling the treasury stock?
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Unidentified Company Representative [6]
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It will increase more and more. It will be done gradually.
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Unidentified Participant [7]
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Good morning. (Inaudible). My question may be similar, may be not that easy. Regarding the financing and the banking debt to the fixed rate with treasury stocks, would you exclude derivatives and so forth in 2013? And how much do you think you could save on interest rates? How do you see the markets?
And you've also talked about the interest, or possibility of buying more Hochtief shares and I think they financed stock at 3 -- treasury stock, 3.8. Are we talking about financing in fixed trend only on the national market or through some subsidiaries as well, reducing interest rates for the Group?
And this leads me to my last question. You've talked about the possibility of increasing Hochtief and Leighton stock in the coming months, but my question is more strategic. What is the idea for the coming years of -- is it more of an operational nature? Where do you see your company among other listed companies?
I didn't say Leighton, because Leighton is up to Hochtief. Hochtief was asked yesterday and they said that they would increase their shares.
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Unidentified Company Representative [8]
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I'm going to answer this and (inaudible) will answer the other part. We're, I think, contributing to improve -- improving the profitability of our companies and that's where I think our future lies.
At what pace? As we go we will determine that because we need to make operation industrial investments because that's our business. And we need the time to improve and we may not be in such a great hurry as you may think. And debt ways as well. If anything -- if there's any accident, well it would be a good moment, wouldn't it?
As for the rating -- oh, sorry, the interest rates the fixed -- I'm not going to teach you a lesson, am I? Markets are looking very attractive. The bonds we've issued, both commercial paper and swaps, especially long term bonds, have been issued outside Spain. Even commercial paper we have 25% foreign investors.
The fixed rate market is becoming quite global. There's a big demand for paper and even if your rating isn't explicit, your implicit rating at which you are assessed gives you attractive rates. Five year placements below 3 and low 2. But we don't' know when the opportunity rises, but we use it when it crops up, because we wouldn't let an opportunity like that go by.
It's not easy for rates to go below where they are now. There isn't much room. But we will do it steadily, but we're in absolutely no hurry. But we do place the swap at 2 point something, don't we and there's a possibility of options. But the rates, without enhancement, are below 3 right now, for, as an acceptable rating and that's an opportunity.
Well, if there are no further questions, of course I'll be glad to chat with any one of you whilst we have a drink. We could even talk about the match, the day before yesterday. I don't mind.
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Editor [9]
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Statements in English on this transcript were spoke by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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