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Edited Transcript of FER.MC earnings conference call or presentation 27-Feb-20 5:00pm GMT

Full Year 2019 Ferrovial SA Earnings Call

Madrid Mar 24, 2020 (Thomson StreetEvents) — Edited Transcript of Ferrovial SA earnings conference call or presentation Thursday, February 27, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ernesto López Mozo

Ferrovial, S.A. – CFO

* Ignacio Madridejos Fernández

Ferrovial, S.A. – CEO & Executive Director

* Rafael del Pino y Calvo-Sotelo

Ferrovial, S.A. – Chairman of the Board

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Presentation

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Operator [1]

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Good afternoon, everybody, and welcome to Ferrovial’s conference call to discuss our 2019 financial results. Just as a reminder, both the results report and the presentation are available to you in our website and should have been sent to you via e-mail. If you have any questions, you may ask them through the form included in the webcast or via e-mail to [email protected] throughout this conference call. Your questions and who they are from will be read during the Q&A session at the end.

With this, I will hand over to Mr. Rafael del Pino, Ferrovial Chairman, who will be leading this conference call. Rafael, the floor is yours.

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Rafael del Pino y Calvo-Sotelo, Ferrovial, S.A. – Chairman of the Board [2]

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Thank you. Good afternoon, and thank you for attending the 2019 results presentation conference call. I’m joined today — here today by Mr. Ignacio Madridejos, our CEO; Ernesto López Mozo, our CFO; and the CFOs of each of our business divisions.

We will take a closer look at the strategic update and 2020 expectations at the end of this presentation. But in terms of our results, 2019 has been another strong year operationally with especially solid performance of our infrastructure assets. Our Texas Managed Lanes have performed well above expectations, supported by the growth of the Dallas-Fort Worth region, the improved connectivity in the corridor following the completion of several improvement construction works during 2018 and the ramp-up process of NTE 35 West, which is still in its second year of operation. 407ETR has maintained its robust results, while at the same time remaining in customers’ good graces in terms of customer satisfaction and value for money.

Following the tariff increases, customer satisfaction levels have remained at close to 90%, while 80% of users agree that toll road costs are offset by time savings. For this reason, it is paramount that we continue focusing on having top-notch service levels on our toll road.

Heathrow continues to reach new record high-traffic levels with close to 81 million passengers traveling through the airport in what has been the ninth consecutive year of traffic growth. This has been achieved while service standards remain at top levels. And finally, we have received a new Managed Lane that was signed late August, the NTE 35 West Segment 3C, a northbound extension of NTE 35 West, which goes straight through the heart of the Dallas-Fort Worth logistics hub and office parks area and which make this our largest Managed Lane in the region.

There were also positive news on the financial front. We successfully completed the refinancing of the NTE Managed Lane’s debt, lowering the cost of financing and extending maturities. We saw an increase in the dividends received from our infrastructure projects, which reached EUR 725 million (sic) [729 million] in the year versus EUR 623 million the year before. 407ETR increased its dividends to shareholders by over 14% to CAD 1 billion. The NTE paid its first dividend to shareholders, which reached USD 292 million and Heathrow paid out GBP 500 million to its shareholders.

During 2019, we have maintained our strategy of rotating mature assets, and completed the sale of 65% of Ausol for EUR 451 million at evaluation, which was over 60% above that of market consensus, showing the strong appetite there is for this type of asset, which is the main focus of infrastructure money being pulled into the market. We also advanced on the sale of our services division through the agreement to sell Broadspectrum, which was reached last December, for an enterprise value of roughly EUR 327 million. We expect this transaction to close during 2020 when we should receive the cash impact of the same. We obviously remained committed to the full divestment of services and will explain later on how we expect to undertake it.

Finally, ESG remains at the core of Ferrovial strategy. And during last year, we received a globally leading position in the construction and engineering sector by Dow Jones Sustainability Index and awarded an A List by CDP for our leading effort against climate change.

In the following slide, we see some of the main figures of 2019. Revenues grew by 2.6% like-for-like to over EUR 6 billion. EBITDA impacted by the EUR 345 million provision in construction from first quarter 2019 and including the impact of IFRS 16 in application since 2019, reached EUR 121 million. Net income reached EUR 268 million, impacted, among other elements, by equity-accounted results, the capital gains from asset disposals and results from our discontinued operations, including the sale agreement of Broadspectrum.

Dividends from infrastructure projects, as I’ve just mentioned, totaled EUR 729 million, and our operating cash flow reached over EUR 800 million, leading to a net cash position at parent company that is excluding infrastructure projects of EUR 1.6 billion, which is a solid and comfortable level when facing the attractive infrastructure pipeline we have ahead of us.

With this, I hand over to our CEO, Ignacio Madridejos, who will discuss the operating performance of our business units.

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [3]

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Thank you, Rafael, and now I will give more detail for each of our businesses and main assets starting from Toll Roads. Our revenues from Toll Roads grew last year like-for-like 28.5%, supported by a higher contribution from Managed Lanes and traffic growth in most of our assets. EBITDA grew by over 33% with a 67% contribution from North America, our main geographical target to date.

We continue receiving good dividends from our Toll Roads with a total of EUR 494 million last year. As Rafael mentioned before, mature asset rotation is a key part of our strategy. As such, in 2019, we closed the sale of Ausol. We sold 65% of the equity for EUR 451 million and signed a call and put option for the remaining 50% stake to be exercised in the next 3 years. The sale has implied net capital gains of EUR 474 million. We also sold 11.75% of Ruta Del Cacao in Colombia for EUR 28.6 million with a net capital gain of EUR 9 million.

Our Texas Managed Lanes had the first debt refinancing and dividend after 5 years of operation. Last December, we completed the refinancing of the NTE debt, some $1.3 billion. The new debt structure would reduce the average cost of debt and extend debt maturity. If we compare deal to maturities, the cost of debt has fallen from 5.47% to 3.8% by 167 basis points. Also NTE paid its first dividend to shareholders above our initial expectations, thanks to the strong performance of the asset.

NTE paid $292 million to its shareholders, of which EUR 166 million were received by Ferrovial. We expect the refinancing of LBJ will follow this year as will the first dividends to be paid by these Managed Lane assets.

407 results were published last week. But I will still like to highlight its performance last year, with an 8.3% increase in revenues and 8.1% increase in EBITDA or 8.8%, if we exclude the positive one-off from 2018, and an 87% EBITDA margin, practically flat, compared to previous year. The traffic was flat, minus 0.2% in the year, affected by severe weather conditions in first half and the fourth quarter. Excluding the weather effect, traffic would have been up by 0.7%.

The 407 also announced a tariff increase that has become effective on February 1, introducing seasonal tariffs with the aim of maintaining excellent service standards in the toll roads and responding to the different usage levels we have observed. The 407 paid 1,050 million U.S./Canadian dollars (sic) [CAD 1,050 million] in dividends in 2019, a 40% growth in the year, and it is 6% above the optimistic case published in our December 2018 model.

In addition, the 407 Board approved CAD 312.5 million dividend for the first quarter of 2020, which is 25% above what was distributed in the first quarter of 2019. Dividends will grow above EBITDA as long as we have a strong performance and maintain the 1.7x target senior indenture debt service coverage ratio.

Performance will be supported by the strong macro drivers in the region with both population and personal income growth. We remain focused on maintaining the level of service at the 407 while maximizing revenues.

We continue to have an outstanding performance at our Managed Lanes in Texas. NTE and LBJ have finished the ramp-up period, but they are still showing very good traffic growth, while the 35 West is still in its ramp-up even when the traffic is close to the other 2 Managed Lanes. NTE EBITDA grew by 33%, with traffic up 14.7%, supported by the full opening of the 35 West in July 2018, which connects with NTE Segment 1 and the opening of the 183 TEXpress in October 2018, which connects directly to NTE Segment 2. The traffic conditions in the NTE Managed Lanes have led to toll rates above the soft cap in several locations to guarantee customer service.

LBJ had a good performance, especially in the second half of the year, leading to EBITDA growth in 2019 of 24%. Traffic was up by 9.1%, impacted by the opening of the 183 TEXpress in October 2018, which connects directly to LBJ Segment 1. And construction at 100 — the 75 US (sic) [US-75] intersection with PGB Turnpike. 35 West had a 25.3% increase of traffic in the fourth quarter compared to the same period last year as [LIBOR] returning to the highway, exceeding prereconstruction levels and an increasing share of that traffic choosing the Managed Lanes. Fourth quarter 2019 EBITDA grew by 85% from $12 million to $22 million.

One of the things that has led to the very strong traffic performance has been the surge in commercial traffic. The fact that there are logistic facilities and office centers, which surround our 3 Managed Lanes in the region as well as the presence of the Fort Worth Alliance and the Dallas-Fort Worth Airports has contributed to the growth in commercial traffic, which is less price-sensitive than light traffic. In addition, it is worth highlighting that e-commerce represents today already 13.3% of U.S. retail sales and is expected to continue increasing. E-commerce, together with increase in same-day and next-day delivery, should lead to growth in commercial traffic.

As mentioned previously, the improved connectivity of the NTE and LBJ through the 183 TEXpress contributed to the traffic growth in 2019. Going forward, there are further network improvements, works that will help to increase traffic beyond 2024 once construction works are over. To the east of LBJ, the construction of new lanes in the 635 East will start this summer.

In the NTE area, the 820 Loop will go through a reconfiguration and reconstruction until next year or 2022. The intersection between NTE and 35 West will also go through reconstruction, and there will be direct connector flyovers built to 35 West in what is called the Mark IV improvements. And to the north of the 35 West, the construction works for the extension Segment 3C will begin and continue until 2023. Therefore, we may see some short-term traffic effects in the segments of the Managed Lanes, which are closest to the improvement projects, but we shall expect a new surge of traffic from 2024 onwards, similar to what happened in 2019.

The NTE 3C is a 60% extension of our 35 West Managed Lanes that with this extension will become our largest Managed Lanes in Dallas-Fort Worth, and it is also the Managed Lanes with the largest percentage of commercial traffic. The total length of the project is 6.7 miles northbound with 2 Managed Lanes in each direction. Construction works are expected to be completed in 2023. The Managed Lanes will have a maturity in 2061. Total investments will be over $900 million. Cintra participation is 53.7% with an equity investment of $86 million. I think it will add a lot of value improving traffic speed north of Fort Worth.

Moving now to North Carolina. We opened the northern portion of the I-77 on June 1 last year and the southern portion on November 16. We are operating the Managed Lanes with dynamic prices since December 2019. As you know, this road connects Charlotte uptown with Mooresville residential area, so much of the flow is commuter traffic. The performance has been according to expectations so far, although it is still very early days. However, we have already seen an improvement of the speed across the entire corridor, improving customer satisfaction and recovering volumes from preconstruction levels.

We do not talk often about them, but it is good to remind that our portfolio includes other toll roads. They are mainly availability projects in countries with low government bond yields in Spain, Portugal and Ireland. These are also long duration toll roads with an average maturity of 16 years overall. In general, these toll roads had a good performance during the year.

Moving now to Airports. Heathrow also published these results with a record high number of passengers, close to 81 million and 1% growth, the ninth consecutive year of traffic growth. It also had a good financial performance with a 3.4% increase in revenues supported by a 4.9% increase in aeronautical revenues, helped by a favorable long-haul passenger mix and recovery of previous year yield dilution, also impacted by the introduction of the commercial deal with the airlines. Adjusted EBITDA was up 4.6%, helped by IFRS 16. Excluding the effect, it will be 1.7% up.

As for AGS, traffic fell by 7.8%, with a reduction in all 3 airports, mainly on the back of Thomas Cook and Ryanair closures in October 2018 in Glasgow, the cancellation of easyJet’s route to Gatwick and London city from Aberdeen and fewer rotations to Manchester and Belfast by Flybe, and cancellation of the route to Amsterdam from Southampton. However, EBITDA reduced by 2.6%, thanks to better other revenues. Dividends received from our Airports division amounted to EUR 183 million in 2019. It is EUR 7 million less than previous years.

Heathrow’s strong results have been achieved while Heathrow maintains extremely high service quality with an overall score of 4.17 over 5 and 82% of passengers rating their experience as excellent or very good. Heathrow’s Terminal 5 has also been named Best Airport Terminal for the first time. Heathrow is also recognized best airport in Western Europe for the fifth time and best airport in the world for shopping. Departure punctuality and baggage connection also have improved year-on-year. And all this has happened while we were running the asset at 99.1% capacity in terms of aircraft movement. Today, though little room for additional aircraft, 1 in every 5 seat is still empty within those carriers, which implies an important opportunity to grow.

Heathrow remains committed to its net-net 0 carbon objectives through its plan Heathrow 2.0. This plan, which has been discussed before, includes as objectives to have carbon neutral airport operations by 2020, to have a 0 carbon airport by 2050 and to have a carbon neutral growth from the new runway. The plan also relates to the expansion, in that Heathrow has committed to it being sustainable in the long term. In its airport expansion consultation, it has presented this proposal for an environmentally managed growth framework, explaining how its growth will be managed in accordance with environmental limits on air quality, surface access, noise and carbon and supports growth in flights at the airport while ensuring Heathrow’s environmental performance stays with maximum limits.

Moving now to Construction. The division has performed operationally in line with the guidance we have given the market since first half of last year, has 0 EBIT margin excluding the impact of the $345 million provision registered in the first quarter of the year for estimated future costs in U.S. projects. We are comfortable with the current level of provisions.

As we explained in the Horizon 24 strategic presentation last month, we are taking certain measures like having a local presence in our target geographies, which includes U.S., U.K., Canada, Poland, Spain, Chile, Colombia and Peru; increasing the amount of sale performance in our projects; undertaking organizational changes with a clear accountability; implementing measures in place to increase risk controls to allow us to respond faster to any potential issue that may arise from our projects; redesigning key main processes like bidding; and finally, improving our technical capabilities. This will lead our EBIT margin to start improving already in 2020, when we expect it to reach above 1% and continue improving thereon until we reach our targeted 3.5% EBIT margin by 2024.

The order book in construction reached EUR 11.4 billion, it is 2.8% like-for-like increase, with 88% international and with civil works as the largest segment with 79% and also targeting a 25% — between 25% and 30% of revenues from internal concessional projects. Cintra’s share in the construction order book, excluding Webber and Budimex, reached 47%. The order book figure at December 2019 does not include preawarded contracts or contracts pending commercial or financial agreement, which amount to over EUR 600 million.

As for the cash flow generation, 2019 resulted in higher operating cash flow than we had initially anticipated. In fact, by midyear 2019, we expect that there will be to be a cash drainage of some EUR 300 million, but in the end the division has generated positive operating cash flow of EUR 132 million. This has been possible on the back of a positive impact in Budimex with more activity at the end of the year; advanced payment in U.S. projects, which have been higher than expected; a real estate sale in Spain, Valdebebas was sold for EUR 69 million; and finally, to the fact that only part of the EUR 345 million provision has been cashed out, the amount has been EUR 143 million. Going forward, for 2020, we expect to see the cash drainage, which has not taken place during last year, that is minus EUR 300 million, we are estimating the same amount we mentioned by mid-last year affected by the cash out of the provision and a reduction of advanced payments.

If we move now to Services, and remember that the division has — is included as discontinued activity since the end of 2018. Services saw a positive performance, especially in Spain and international. Spain saw revenues up 3.8% and EBITDA up 5.3%, both like-for-like, with a 30 basis points expansion, margins will reach 10.7%.

International saw close to 20% revenue growth, like-for-like, supported by the growth in U.S. and Chilean oil and gas activity. EBITDA was up by 26.3% like-for-like. As for the U.K., EBITDA excluding utilities, collection and environment that are considered discontinued activities, reached GBP 56 million. Just as a reminder, we signed last year an agreement to terminate the Birmingham contract, which will not have an impact on Ferrovial profit and loss. In this agreement, Amey has paid GBP 160 million in 2019, and there are GBP 55 million to be paid in the next 6 years.

Aside from the divisional performance, we remain committed to the completion of the Services divestment. We signed an agreement to sell Broadspectrum, our Australia/New Zealand operations, last December to Ventia. We expect it to close in the first 9 months of 2020. The agreement was for an enterprise value of EUR 327 million and an equity value of EUR 303 million. As we have explained before, the process, which started off as a potential sale of the business as an international platform, will now be based on subsets of the original parameter, with transactions taking place on specific euro fees.

I will now hand over the call to Ernesto, who will go through the main financial results of the year.

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Ernesto López Mozo, Ferrovial, S.A. – CFO [4]

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Thank you, Ignacio. Good afternoon, good morning. Okay, so I’ll take care of the lines below the operating performance, starting with disposals and impairments. And here, we have the main item is the capital gain from the sale of Ausol that reached EUR 475 million. It’s important to see, as Ignacio mentioned before, the appetite from investors for this kind of infrastructure asset and if anything, the start of the year sees more yield compression in these assets. Other items included are an impairment of the net worth in Autema. You know that we carry this out every year, just pending the dispute in terms of the changes, unilateral changes to the concessions that were made in the past and we are claiming compensation. In terms of other items, including there, we also have the Ruta del Cacao disposal.

If we move to the financial results, starting with the infrastructure projects, financial expenses, we see a figure of — an expense of EUR 263 million and basically the increase vis-à-vis EUR 218 million is on the back of having a full year of NTE 35 West opened, also the start of operations on I-77 and the NTE refinancing with the expense of the initial fees of the original financing. Okay. This was done with very competitive rates.

If we look at the ex infrastructure project level, we see an income of EUR 69 million. So it’s a better result than last year and is basically on the back of hedges, equity swaps for performance-year plans for employees and management.

Okay. If we move to the equity-accounted results, here, we have the growth, the positive impact of the 407ETR and also Heathrow and AGS. In Heathrow, you see EUR 106 million, and this is helped by the improved on the operational — improvement on the operational performance and also by a reduction in inflation expectations that have helped positive P&L on the inflation hedges.

Okay. You probably have seen that today, there was the judicial review on the Airport National Policy Statement was out. And Heathrow’s view is that management will ask for a permission to appeal this ruling. Also that the, let’s say, the ANPS is on suspension because of the noncompliance with the Paris Agreement on climate change and Heathrow’s management has a strong view that this can be sorted out. And of course, the government has to take the final action on this Airport National Policy Statement.

In terms of impact, if this was not likely to go ahead, so expansion was not likely to go ahead, we would keep the current investment in terms of design and expenses of EUR 450 million, we should keep that in regulatory asset base and have a regulated return. This is part of the regulatory framework, right? So we shouldn’t have an economic impact if this does not go ahead. But accounting wise, yes, we would have an impact, we would have to likely write that amount down. And the impact on our P&L, the bottom line in the equity accounted line, would be EUR 100 million negative. You have more explanation on this on the full note, I won’t stay longer on this.

Okay. Then, you have the corporate income tax of EUR 47 million expense. And here also I will refer you to the note in the financial statements, but the main cause for this is that the capital gain on the sale of Ausol is tax-exempt, right, so that means that you have a lower accounting tax rate.

Then you have the net profit from discontinued operations. And here, remember that at the end of the first 9 months, we had a result of EUR 28 million, but then the sale of Broadspectrum, we mentioned that in the quarter, in the last quarter, would impact with a negative of EUR 270 million. So the EUR 198 million reflects the combination of the first 2 and then the results of the rest of discontinued operations in the last quarter.

Okay. So I will move then to the next slide to review the cash flow generation, and you can see that we had a very strong end to the year and year overall. I think that the last quarter, if we go to the first column where we see dividends from projects, had a very strong performance. I mean we had dividends ahead of our expectations in the 407, NTE and Heathrow Airport holdings, right? Then if we move on to the right, we see the evolution of Construction. I mean of course, we have the EBITDA and then the impact of the noncash construction provision in the first quarter. We have, following to the right, the cash out relating to that provision.

And then further right, we have a EUR 129 million additional provision. Here, we end with construction along the lines, as Ignacio described before, that we guided the market to. And the important thing is that the main caption here comes from risks provided for in Budimex related to industrial construction, and the rest is really scattered among the very different projects just covering for additional costs. So we are happy with this end of the year, and we see that the working capital evolution, that is positive EUR 165 million, was also helped by the Construction performance. And here we had works built in advance in the U.S. and positive working capital evolution in Budimex. Also in these figures, we have cash from the Services division. And as Ignacio mentioned, Spain had a very strong gearing in cash generation in Services.

Okay. Then if we move on to the right, we have investments close to EUR 300 million and divestments that we already mentioned and shareholder remuneration, ending the year with a net cash position ex infrastructure projects of EUR 1.631 billion. And this figure takes into account a net cash position for the Services discontinued operations, ex infrastructure projects, of course, of EUR 158 million. So as I said, a very strong performance in cash at the end of the year and for the overall year. And now I would hand it back to Rafael.

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Rafael del Pino y Calvo-Sotelo, Ferrovial, S.A. – Chairman of the Board [5]

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So now going back to what we mentioned at the beginning, let me go through some of the main figures mentioned and which show the performance during this past year. We had a 14% growth in 407 dividends on the back of the asset’s strong performance. The strong performance of NTE led to Ferrovial receiving EUR 166 million from the Managed Lane. The strong appetite for high-quality mature assets in the market has led to evaluation of Ausol in the sale undertaken in 2019, 60% above that of the market’s consensus. NTE 35 West continues to perform above expectations, with traffic growth of 25.3% in the fourth quarter of 2019. Heathrow reached its ninth year of consecutive growth whilst maintaining excellent service standards. And finally, an improved net cash position ex infrastructure assets of EUR 1.6 billion, not including the proceeds from the agreed sale of Broadspectrum.

Now a quick word looking into the future. Ignacio already explained last month what the group’s strategy would look like in the next 5 years during the presentation of our Horizon 24 strategy. The application of this strategy will already start seeing results in 2020. We expect the strong performance of our infrastructure assets as well as the first dividend from LBJ Managed Lane to lead to strong growth in dividends received from infrastructure projects. The company’s focus will remain on infrastructure projects with high concessional value. We have already identified a pipeline of EUR 12 billion, of which EUR 10 billion are in toll roads, mostly in U.S. Managed Lanes, which will remain our core target. As such, we have received this month, the first RFQ for Maryland’s first project to come into the market. We’ll be working on this process during 2020 and expect that project to be awarded at the beginning of 2021.

Construction remains key to our strategy as a way to win these high complexity greenfield projects in Toll Roads, which are the ones we find the highest returns in where we have a larger competitive advantage and where we are better suited to manage the existing risks. This being said, we realize that changes need to be made to the division to improve its performance and profitability and have a target of 3.5% for 2024. During 2020, we expected — we expect already to have an improvement versus 2019, and our target is an EBIT margin over 1% for the Construction business as a whole. We remain committed to the completion of the Services divestment. And all of this will be done with a new operating model, which aims at having a more agile, innovative and efficient organization. The total savings of this plan should reach an annual amount of EUR 50 million, with EUR 20 million of savings reached during 2020.

All of what I have mentioned for 2020 is derived from one objective, to continue creating shareholder value. Shareholder remuneration is a crucial element of this, and our proposal for 2020 is for our shareholder remuneration to increase by 5.8% to a total of EUR 550 million, with the first scrip dividend of EUR 0.32 per share and a second scrip dividend of EUR 0.43 per share. A maximum share buyback of EUR 360 million or 25 million shares has also been approved.

Thank you very much for your attention, and we are now ready to answer any questions you may have.

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Questions and Answers

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Operator [1]

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So the first question comes from Elodie Rall from JPMorgan. A question on Heathrow. What is your view on the likelihood of the new runway to be approved? And if not, what would be the consequence for Ferrovial?

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Ernesto López Mozo, Ferrovial, S.A. – CFO [2]

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Thanks, Begonia. Well, we already covered that in my speech, right? So I just reflected on Heathrow’s management comments. Heathrow is going to ask for permission to appeal. And in terms of the ANPS ruling, I mean the lack of compliance with the Paris Agreement on climate change, Heathrow’s management has a strong view that it can be sorted out. Of course, as I said, finally, the government will have to decide on the ANPS. and In terms of impacts, I already covered that from an economic point of view, all the amounts should be part of the RAB. We will have an impact of writing them down from an accounting point of view of EUR 100 million at the end of 2019.

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Operator [3]

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Also from Elodie. Do you have a view on the potential impact from the coronavirus?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [4]

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Thank you. Thank you for the question. Of course, I mean the coronavirus main concern is about the health of our employees and about all the people related to us. Well, so far, we have not been affecting the supply chain, not any effect also in the toll roads for the time being related to the traffic, of course. And the only issue will be something related to the airports. However, as was commented yesterday during Heathrow’s results presentation, the reference that they are using is the one from the SARS outbreak in 2003. At that time, the traffic was down 2.8%. Of course, we are following all the protocols defined by the Health Department in the U.K. And we follow the situation very closely. So it’s something that — see how the situation is evolving, but the only reference that we have so far is that related to the outbreak in 2003 with SARS, and as I mentioned, the effect in traffic, but nothing more for the time being, and we’ll comment next time with the first quarter results.

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Operator [5]

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And lastly, also from Elodie, a follow-up on Heathrow. Do you see a risk of lower dividends?

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Ernesto López Mozo, Ferrovial, S.A. – CFO [6]

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Okay. Heathrow, also answered that question in the management presentation. I mean with the base case, they don’t see any risk. In fact, the first quarter dividend was announced in line with the expectation at the end of 2019 from their investor report, and Heathrow remains with very ample headroom in all their financial parameters. So I mean we don’t see that at this point in time.

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Operator [7]

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The next question comes from Daniel Gandoy from JB Capital. Would it be reasonable to annualize the first quarter 2020 dividend for the 407ETR to calculate the full year dividend? Or should we include there was some extraordinary item in the first quarter of 2020?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [8]

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Of course, the decision about the dividend in the 407 is a decision by the Board, not that it is taken every quarter. And that’s based on the performance of the 407, mainly related to the EBITDA and operating cash flow. Of course, we extrapolate the EBITDA — the dividend of the first quarter to the full year, it will be a 19% increase. And as you know, in the last years, we have had an increase of EBITDA, but the decision will be taken every quarter, and we have to wait till the performance in the following quarters to confirm that it will be the same dividend for the year.

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Operator [9]

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The next set of questions come from Stephanie D’Ath from RBC. Could you please update us on the 407ETR potential stake increase?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [10]

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Well, there are no news. And the hearing, I think, will be in April, I think, it’s 19th of April — 16th of April, yes. So after that, it will take probably a few months to get a decision. So it will be by midyear, probably.

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Operator [11]

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Could you please update us on the timing of the Services or disposal?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [12]

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Well, as commented several times, fully committed to the sale of the Services division. And as commented also we are moving from a global platform to sell it by country basically. So we are proceeding to that — to sell geographically, the Services division is ongoing. We cannot commit on any specific date, and we’ll announce as soon as we have news of any specific agreement to sell any of the parts.

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Operator [13]

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Can you please comment on the dividend expectations from the U.S. Managed Lanes for 2020?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [14]

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We don’t give a forecast of the dividends. The only thing that we gave during the Horizon 24 plan was a EUR 3.3 billion dividend coming from the Toll Roads. That is, I think, the only guidance that we have done.

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Ernesto López Mozo, Ferrovial, S.A. – CFO [15]

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Yes. And also from some — a couple of years ago or 3 years ago, there was the business plan published, it’s a little bit old. That is the only guidance out there, and the operational performance is better. So we hope to beat that.

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Operator [16]

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Can you please give us the time line on the Maryland project tender?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [17]

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Yes, I think the tender, the RFQ, it will start in April. I think after that, we will go — I mean the basis of how the project is going to be launched, I think, it’s going to be July, if I remember well. I think that the bidding process will be in February, and the closing will be mid next year. And also I think what — we will see more information on how the process is going to be exactly defined in summer and probably the bidding selected in around February or March next year, and the closing in mid next year. So still more than a year ahead for this project.

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Operator [18]

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The next question comes from Guillermo Fernández-Gao from Kepler Cheuvreux. Any color on how the traffic has begun in January, February in the 407ETR?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [19]

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Well, I think, it’s to too early to give any guidance about how is going to be the traffic in the year in the 407. Of course, there are many factors. The economy is performing well in the area. Of course, there may be some price elasticity. It’s too early to define if there will be any because the increase was in February and there will be another increase during the summer. Of course, there are some weather effects, no, that last year were negative. We’ll see how it looks this year. We have also 1 more day in the — during the year in the calendar. So I think there are several effects. It still is too early to give any guidance, and we have to wait at least until the first quarter to get more information about that.

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Operator [20]

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Also from Guillermo, any particular asset that you consider mature and a candidate to rotation in 2020?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [21]

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About that, as commented previously, of course, we are analyzing any opportunity that we may have to rotate mature assets. Still, we have not taken any decision about that.

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Operator [22]

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And lastly from Guillermo, is Heathrow going to ask permission to the government for the expansion?

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Rafael del Pino y Calvo-Sotelo, Ferrovial, S.A. – Chairman of the Board [23]

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Well, what I mentioned before is that Heathrow has said that they will ask for permission to appeal and then also that the condition from the initial review could be sorted out, and they are willing to have the government to sort this out.

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Operator [24]

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The next question comes from Nicolas Mora from Morgan Stanley. Can we discuss the soft traffic in 407ETR in 2019, especially the weaker mix with lower weekday traffic versus stronger weekend? Why has this taken place? And moreover, can you explain your view on schedule 22 payments?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [25]

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Yes. I think about the traffic last year, I commented during my presentation that it was a negative effect because of weather. And as commented, it was a negative effect. Without that effect, it would have been 0.7% positive. We have always — as usual, we have some positives and negatives during the year. Of course, the economic growth is a positive, the elasticity was a negative. I think the area is growing well. Also construction in the 401 is, you may have some positive effects at some point of time. When it is sold, then we have the other way around, the negative effect because of the finalization of that type of job. I think that, in general, we don’t disclose information about the type of traffic or segment.

I think we consider this commercial relevant information. But as commented, usually, we use as much as we can all this information in order to, first, give the best service to our customers, so they can have out — have the traffic flow, that is adequate speed in the 407 corridor and also to maximize the revenues. So based on that, we take the decisions. And based on that, we define the price increase for the following years.

In terms of the schedule 22 payments, also it’s something that is part of the same equation. First is, it’s not a long-term effect because it has an initial theoretical evolution of the traffic at some point of time, reach the cap that was expected for the 407. So I think that after a few years, we will not see any effect from schedule 22 payments because we’ll be above that threshold, and then it will not be an effect. In the short term, in the next few years, it may be the case that we are below this theoretical evolution of the traffic. But of course, we consider that as part of the equation of the, first, looking at the customers and making sure that we have an adequate traffic flow in the 407, but also looking at the revenues and also looking at additional increasing costs that could come from these schedule 22 payments.

So I think it’s part of the equation. The month has been very small. During the last year, it’s also at the same time, very difficult to calculate because it’s based on specific days. And I think that it’s not very easy, it’s calculated at the end of the year. There may be some effect in following years. But I think it will not affect or have an impact on increase in revenues because, as we commented previously, price elasticity and the price increase and customer will be considered whenever we try to maximize the revenues.

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Operator [26]

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On the Texas Managed Lanes, can we talk about truck traffic? And can you help us understand the penetration levels between NTE 35 West and LBJ? And what was the step-up in number of days when traffic was above the maximum threshold to switch to free pricing at NTE over 2019?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [27]

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As you know, we don’t give information about trucks in our Managed Lanes. I think that this is an important part because of the commercial traffic, as explained previously. But I think it’s price-sensitive information that is important for future Managed Lanes, and we want to keep that confidential. And we are not disclosing any information about that. About reaching the cap, we did in the NTE during the last year in several locations, and also in the 35 West, in one of the segments, we’ve reached the cap in the month of December, and we could expect that that may be the case during this year, especially when we approach to the summer months in which the traffic is more intense.

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Operator [28]

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The next question comes from Stanislas Coquebert from Lazard. What kind of leeway do you feel you have for a further price increase at U.S. Managed Lanes and at the 407 ETR?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [29]

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Well, I think that, of course, I mean you have to take your own assumptions, but you know what are the variables that we are taking in order to increase prices. We look to make sure that, first, there is a traffic flow at a certain speed in our Managed Lanes and the 407. We can have a more dynamic pricing in the Managed Lanes in order to make sure that there is not congestion at a time. And as you know, also the 35 West is lagging behind because of its ramping up still compared to the LBJ and NTE. Also as you know, 77 is starting dynamic prices just in December. So I think it’s ramping up. Of course, it will be based on the traffic, its pricing dynamics in the information that we have.

And based on that, we will take the decisions. So it’s very difficult to anticipate how this will evolve because it will depend on the traffic. But as commented, we see a very strong economy. We see Dallas-Fort Worth that is growing very strongly. So I think that we feel comfortable with our pricing dynamics and how we’ll apply that in the future. You will see in next quarters how this price is evolving.

In the case of the 407, as you know, there are, I think, 2 increases announced and one decrease during the year, again, to take advantage of the seasonal and the traffic that you have more traffic during the summer months. And again, we try to maximize customer service and at the same time more revenues. So that’s why we have our first increase in February that has taken place already, a second one that will happen during the summer months and then a reduction later on during the winter. It has already been announced and you have that information.

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Operator [30]

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The next question comes from Marcin Wojtal from Bank of America. Would you consider divesting your stake in Heathrow if capacity expansion was definitely not to go ahead?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [31]

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I think that Heathrow is, under any scenario, attractive — a very attractive asset. It’s a very good infra asset, as commented, excellent customer service, rated as one of the best in the world. And as commented several times, we expect anyhow to have some CapEx in the following year so that will be attractive. Still the third runway, I think that — we are still thinking they will appeal, and we have good options that it will happen. It’s – in my opinion, it is very well needed for a global U.K. I think it will also fulfill with all these environmental concerns and being carbon-neutral. So I think that there is no reason not to happen because it fulfills all the requirements needed for growth, economic growth in the U.K. and also to be a global hub, taking the present that has been — taken today, that has today. So for us, we consider still that is a strategic relevant asset that could generate value under any scenario.

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Operator [32]

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Also from Marcin, would you consider divesting other mature assets such as the AGS airports?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [33]

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Well, we are not considering that. I think this is — we don’t see that as a mature asset yet. I think it still — in spite of the lack of traffic growth last year, I think it still has a potential in the future, and we are not considering to sell the AGS airports.

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Operator [34]

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And lastly, from Marcin, do you expect to have any material restructuring expenses in 2020 related to the implementation of the cost savings plan?

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Ernesto López Mozo, Ferrovial, S.A. – CFO [35]

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Yes, there could be some costs. I mean we are finalizing the assessment. I mean we’re talking about close to maybe EUR 30 million, something like that. But this is a preliminary figure. We’ll update the market when we have the final assessment.

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Operator [36]

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The next question comes from Robert Crimes from Insight. Can you comment on the slowdown year-on-year average tolls per transaction in the Managed Lanes in the fourth quarter, especially the 3% in LBJ?

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Ernesto López Mozo, Ferrovial, S.A. – CFO [37]

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Well, the LBJ on the last quarter at the peak has been very close to the makeup and the traffic conditions didn’t make for the soft cap being raised, right? So it was close to that. And therefore, we didn’t have such an uplift. But of course, with traffic conditions changing and the cap evolving, this could change in the future.

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Operator [38]

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The next question comes also from Nicolas Mora from Morgan Stanley. When do you expect to pay out the provisions on U.S. contracts and the other contracts over 2020, 2021?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [39]

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Yes. Most of these provisions, the cash-out will happen. As you know, this is coming mainly from 3 construction projects, the I-77, the Atlanta project, the I-66. The I-77, as you know, is almost is finished, already the construction. But the I-66 will happen during the next 2 years, same as Atlanta. So we’ll see that provision that is — especially during this year 2020, but also we’ll see part of it in 2021.

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Operator [40]

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Also from Nicolas, when will you start contributing equity into I-66, and by how much?

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Ernesto López Mozo, Ferrovial, S.A. – CFO [41]

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Okay. The contributions will happen. Basically, ’22 and ’23 are the main years and also ’24. I mean the final amount is close to $700 million.

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Operator [42]

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The next question comes from José Manuel Arroyas from Santander. What is the recurrence of the schedule 22 payments in the 407ETR? We learned that 407ETR was under the second congestion payment in the fourth quarter in 2019 by, we assume, about CAD 2 million. Do we have guidance for 2020?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [43]

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You know, José, as mentioned, this schedule 22 payments, that is the way we call it, they are calculated after the end of the year and paid in April. It is very difficult to calculate because it is based on certain specific days and how the traffic is in these days compared to a certain target that was defined a long time ago. So it’s really very difficult to calculate how it’s going to perform during the year. Our expectation is that, yes, in the next few years, there will be some payments. We cannot say because we don’t know because it will depend on the traffic in certain specific days how much it will be. So I think that still, we need — we’ll need some time to know exactly how much will be those payments.

But as commented previously, after these few years, later on, we don’t see that there will be any further payments because we’ll reach the threshold that has been defined. The number still is not fully defined. And as you know, it’s a payment to the state that will be done, I think, in April.

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Ernesto López Mozo, Ferrovial, S.A. – CFO [44]

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Regarding a previous question, sorry, I did the slide the 1 year all the shareholders. So instead of ’21 through ’23, the injection on the I-66 is from 2020 through 2022. And if we translate the dollars into euros, it is just around EUR 625 million.

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Operator [45]

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And also from José Manuel. Could we have your thoughts on the dividend remuneration following today’s announcement in terms of share buyback and a rise in the annual dividend?

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Ernesto López Mozo, Ferrovial, S.A. – CFO [46]

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Well, you have seen that we had a strong close to the year in cash. Infrastructure is performing. And we thought, as you know, we decide each year, and we thought it had the merit to propose an increase for this year’s remuneration.

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Operator [47]

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The next question comes from Nabil Ahmed from Barclays. Can you please quantify the traffic impact expected from the network improvement in construction works in the Managed Lanes over 2020, 2024?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [48]

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No, I think that we cannot give them. But we have not disclosed that kind of information. It’s difficult — it’s very difficult to estimate also at the same time because some of these improvements, I mean will affect only specific segments. The work sometimes is only at night and it’s not during the day. So it might in some places start later and will finish sooner. So I think it’s very difficult to anticipate how it will affect the traffic. And also of course, it depends also on other factors. But it’s clear that after 2024, we’ll see an improvement in the same way we have seen during 2019 in the traffic because we are increasingly improving the connection between the different Managed Lanes, and I think that traffic will flow much better after all these improvements.

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Operator [49]

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Do you have any interest in ADP in France, should the privatization process restart?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [50]

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It’s — we don’t know yet if it will happen and when it will happen. And still, we — of course, we’ll need to have some information of whenever it is announced that they are selling any stake if they decide to do so in order to analyze if it’s interesting for us or not.

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Operator [51]

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The next question comes from Bruno Silva from BPI. In the fourth quarter working capital evolution, how much was due to prepayment? And out of these, if any, how much were related to own group concessions?

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Ernesto López Mozo, Ferrovial, S.A. – CFO [52]

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Okay. In — the total of the year was really EUR 130 million. And most of that was in the fourth quarter. I won’t differentiate between the group companies and external because all this is done on an arm’s length basis. So there’s no point on differentiating. So EUR 130 million is the number for the year.

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Operator [53]

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And also from Bruno. Is the NTE EBITDA estimate of USD 146 million published in the concession zone budget for 2020 aligned with Ferrovial’s own budget?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [54]

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We don’t disclose that information.

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Operator [55]

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There is one further question, which should be arriving, please hold. So the last question comes from Charles Maynadier from Kempen. Could you please give more granularity on the 2020 construction EBIT margin expectations per division, that is Budimex, Webber and Agroman?

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Ignacio Madridejos Fernández, Ferrovial, S.A. – CEO & Executive Director [56]

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No, we don’t disclose that information. We only see the 1% EBIT margin for the whole Construction division, and this is the only information that we are giving.

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Operator [57]

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Thank you. There are no further questions.

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Rafael del Pino y Calvo-Sotelo, Ferrovial, S.A. – Chairman of the Board [58]

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Well, thank you very much for attending the conference. And this is all for today.

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