ACS, Actividades de Construcción y Servicios, S.A. (OTCPK:ACSAF) Q2 2024 Earnings Conference Call July 30, 2024 8:00 AM ET
Company Participants
Javier Crespo - Head of Investor Relations
Juan Santamaria - Chief Executive Officer
Conference Call Participants
Graham Hunt - Jefferies
Dario Maglione - BNP Paribas
Marco Limite - Barclays
Javier Crespo
Good morning, everyone, and thank you for joining us for the ACS Group 2024 First Half Results Call. This is Javier Crespo, Head of Investor Relations. The call will be led by our CEO, Juan Santamaria; who is accompanied by our Corporate General Manager, Angel Garcia Altozano; the group's Chief Financial Officer, Emilio Grande and the rest of the management team. As usual, after the presentation, we will open up for a Q&A session.
Now, let me pass to Juan.
Juan Santamaria
Thank you so much, Javier. Good afternoon and thank you for being with us today. ACS delivered excellent first half results in 2024 with solid growth of sales, backlog and net profit backed by strong cash flow generation. Over the last quarter, we have implemented important strategic initiatives that strengthened our competitive position.
Number one, in May, CriteriaCaixa, one of Europe's leading investment holding companies, announced it has become a core shareholder of ACS after acquiring a 9.4% stake by the exercise of the financial derivatives we held. Today, Mr. Isidro Fainé has been appointed as a member of the Board. We are extremely proud to have him on the Board. Also, the cash settlement of these derivatives is providing us with further firepower to deliver on our investment plans.
Number two, last week we agreed to acquire Dornan Engineering, a rapidly growing advanced tech engineering company based in Europe. This transaction will allow Turner to accelerate its strategy to expand in the European data center, biopharma, life science, and industrial markets.
Third, today we announced the creation of Flatiron-Dragados, a leading North American civil construction company, by combining Dragados and Hochtief in generating in construction subsidiaries in the US and Canada. This transaction approved by Hochtief, Dragados and ACS Boards will enable us to best deliver our engineering and construction strategy in a consistent and more efficient way in the rapidly growing North American market.
And fourth, in April, CIMIC increased its ownership to 60% in the natural resources company Thiess. This deepens the group's commitment to a global energy transition by increasing our position in our resources in critical minerals industry where Thiess is a global leader. I will later further explain these important initiatives that increased competitiveness, optimize operations and enhance our capacity to provide higher value for clients and stakeholders.
Let's start the presentation with an overview of the financial results. The group posted a net profit of €416 million, up 8.1% or 8.6% FX adjusted. Net ordinary profit, which excludes the non-cash gains generated at CIMIC, amounted to €335 million in the period, up 11.4% in line with the top range of our 2024 guidance.
In terms of cash generation, the group continues to perform very well. The strong second quarter has allowed us to deliver in this half year €358 million in net operating cash flow. This represents an outstanding improvement of €749 million year-on-year, mostly driven by strong working capital performance supported by Dragados and Turner.
On the back of this solid cash flow generation, our net debt position at the end of June was €1.6 billion. This is essentially the same figure as in March despite having incorporated €1.1 billion from the Thiess consolidation. This demonstrates the strong free cash flow generated in the second quarter supported by the net operating cash flow of €1.3 billion and the settlement of financial derivatives with a cash flow of €0.5 billion inflow.
From a backlog perspective, the first half has been very positive. The order book grew by 13% to more than €86 billion, a record in the company's history supported by an outstanding €27.5 billion of new awards. This backlog is the result of positioning the group as a leading company in growth infrastructure markets such as energy transition, new sustainable mobility and digital infrastructure. Currently, lower-risk contracts represent more than 85% of our backlog.
Let's look in greater detail at the consolidated results for the period. Revenues reached €18.7 billion, up 6.3% FX adjusted. EBITDA grew by 12%, delivering a 6.2% margin. Ordinary net profit reached €335 million, up 11.4% adjusted for extraordinary items in both periods. Earnings per share grew by 8.8%, reaching €1.62 per share.
On the next slide, ordinary net profit is broken down by segment and company on an attributable basis. Integrated Solutions and E&C show resilient profitability with Turner becoming the largest contributor to ACS net profit, representing 41% of the ordinary impact after growing 47.5% year-on-year. Infrastructure had a lower contribution than last year, due to non-operational items.
Abertis, despite its strong operational performance was impacted by new tax regulation in France and financial costs from the new asset acquisitions, while Iridium's contribution was consistent with its lower stake in SH-288.
Turning to cash flow performance. I would like to highlight the strong net operating cash flow generated supported by an outstanding working capital evolution, a movement of €405 million year-to-date, represent an improvement of €659 million year-on-year. Key drivers of these improvements are Dragados with positive working capital contribution in the period of approximately €500 million better than last year and Turner €100 million better.
Dragados' stronger cash generation results from improvements in working capital management in North America and a better contracting risk profile. And overall, there is an increase in the use of factory facilities driven by the sales growth including corporation of this. As a result, net operating cash flow in the first half impacted by the usual seasonality improved by €749 million compared to the same period in 2023. If we look at the last 12 months the group has generated a very solid €1.8 billion, up by more than €900 million year-on-year.
Our net debt position as of June stood at €1.6 billion including €1.1 billion consolidated from this as of June 2024. This represents an increase of €440 million versus the June 2023 figure. However, when excluding the consolidation effect of Thiess debt movement would have been positive by €642 million in the last 12 months on the back of the outstanding €1.8 billion net operating cash flow.
The strong operating cash flow generation supports our investment plans, which are aligned with the corporate strategy shared during the Capital Markets Day. Accordingly, our strategic capital allocation decisions during the period included several transactions, which are crucial for growth and risk reduction goals.
In February, all shareholders of Abertis contributed €1.3 billion in equity to support, the financing of the US and Puerto Rico acquisitions and the company's growth strategy. ACS described to its 50% share with a €650 million investment. And our major step in our strategy was taken at the end of April when CIMIC announced it had reached an agreement with Elliot to acquire an additional 10% equity interest in Thiess.
The acquisition for a purchase price of AUD 320 million included the group's ownership of Thiess to 60% increasing operational control of the company.
Consequently CIMIC has fully consolidated Thiess for two months during the second quarter. Following the transaction the put option for the remaining 40% is accessible between April 2025 and December 2026. Also during the year, we have continued executing bolt-on acquisitions to enhance and expand our engineering, digital and logistic capabilities in target market segments.
CIMIC has acquired several engineering firms in the critical mineral space including Prudentia, MinSol and Mintrex. This also announced acquisition of PYBAR an underground mining business that will complement Thiess' capabilities. We have also been active on the sustainable mobility front with Skyports' and Glydways transactions, the redevelopment of data centers such as the one in Madrid CRPPs [ph] and renewable generation assets in Australia. Overall, we have invested approximately €100 million across the group.
Other important angle of our strategy is to deliver attractive shareholder remuneration. During the last 12 months, the group has devoted €793 million to remunerating our shareholders via cash dividends, share dividends and active share buyback program. Our balance sheet position remains strong. Last week S&P confirmed the company's investment grade rating at BBB minus with a stable outlook. Maintaining an investment growth rating is a key principle for our financial policy.
Moving to slide 7. Order backlog stands at €86.7 billion up 11.5% FX adjusted. This growth is a consequence for strategic positioning in new generation infrastructure markets. Around 50% of new orders come from these segments.
The book-to-bill ratio, a leading indicator of our growth stands at 1.2 times. This provides us with confidence to deliver our targets for the coming years. This is also reflected in the current backlog visibility of 26 months. In addition, we continue to derisk our order book through lower risk contract models which currently account for more than 85% of the total.
On the next slide, you can see a selection of recent awards. I'm not going to name them all but let me highlight a few. In the energy transition sector we have been very active, especially, in Australia with the award of several contracts related to power generation, storage and transmission. It is worth mentioning the recent award of the South Dade Transit Operations Center in Miami, in new electric battery buses operations and maintenance facility.
In digital infrastructure, we have recently been awarded a project to build a semiconductor fab in Germany and large projects to build data centers in Asia, US and Europe including the $800 million data center campus in Jeffersonville, Indiana [indiscernible].
In new sustainable mobility and civil infrastructure, we continue to be the market as a reference contractor for large-scale projects in Australia, North America and Europe. Also in biopharma, health and indication and social infrastructure we have been highlight successful with different jobs to build a refurbished hospitals, sport venues and educational facilities.
Let's move now to a more in-depth look at each of our segments. As you can see in the slide Turner sales grew by 13% reaching €8.6 billion. EBITDA and PBT significantly improved year-on-year. We're starting to see the margin we expect at Turner as it moves towards our target of 3.5% in 2026. It is currently at 3% in the second quarter up 70 basis points year-on-year supported by successful strategy in advanced technology and SourceBlue supply chain solutions.
Outstanding cash flow generation has been a feature of Turner for many years and the first half of 2024 is no exception with operating cash flow increasing by around €150 million year-on-year. Turner's commercial strength is demonstrated by its new orders of €13 million during 2024 an increase of 36% year-on-year. This momentum has brought its backlog to €30 billion up by 24% year-on-year a sustained growth trend in recent years.
As announced last week, Turner has signed an agreement to acquire 100% of Dornan Engineering rapidly growing European advanced tech engineering company for an enterprise value of approximately €400 million, headquartered in Ireland. Dornan is a leading mechanical and electrical engineering company in Europe operating in data center biopharma, life science, industrial and other sectors.
Dornan has a strong presence in the UK, Ireland, Germany, the Netherlands, Denmark Switzerland and other European countries. The business is expected to achieve revenues of around €700 million and an EBITDA of around €55 million in 2024 implying an acquisition multiple of approximately 7.2 times.
Revenue growth has averaged over 20% in recent years backed by an expanding order book that currently stands at close to €1.1 billion. The current shareholders who are part of the key management team will remain in their position post transaction.
Dornan and Turner share a similar business model and risk approach as well as made the right relationships with blue chip companies and hyperscalers. This is what the acquisition will allow us to further leverage our strong engineering, project management, commissioning, procurement and mineralization capabilities.
Dornan's 1,000 skilled employees will provide additional resources to the group. The acquisition will be executed by Turner and will accelerate the company's strategy of expanding into the European market.
Let's now move to CIMIC, where we foresee significant growth opportunities in the energy transition and the natural resources markets supported by an active M&A strategy. Recent transactions, such as the 10% acquisition of Thiess, and the various bolt-on acquisitions explained earlier are good examples.
CIMIC delivered a solid attributable ordinary impact of €99 million up 8.6% FX adjusted, reflecting our increased stake in HOCHTIEF over the last 12 months. Net operating cash flow performance incorporates typical seasonality and structural changes in the working capital profile, aligned to lower risk collaborative constructing models and the orders of €6.1 billion were 4% higher year-on-year with a robust order backlog of 24.6 billion up 6% year-on-year.
Turning to Engineering & Construction segment. We reported €4.7 billion of sales up 6.7%. EBITDA growth of 6.2% maintaining a stable margin achievable impact grew by 7.5% and net operating cash to improved by almost €400 million year-on-year reflecting the positive performance of Dragados in working capital management.
The order backlog continued to grow at a 9% rate FX adjusted and currently stands at €29 billion with a strong contribution from a new sustainable mobility and transport projects. Order intake during the year reached €7.3 billion.
Today, we are also announcing the decision to integrate ACS Group Civil Engineering and Construction businesses in North America by incorporating Flatiron Dragados North America activities into a single entity. This will result in the creation of a leading fuel engineering and construction players in North America that will run number two in the US market.
The new entity Flatiron Dragados will benefit from product expertise, broad geographical footprint and solid technical capabilities. The advantages are immense. It will be a leading player combining credentials in the US and Canada, highly skilled technical resources and a successful track record in large infrastructure projects.
It will simplify the group's structure in North America ensuring strategic alignment across tendering procurement and commercial approach towards collaborative models. The transaction will generate meaningful synergies estimated at around $30 million to $40 million run rate focused on procurement shared services and centralization of a wide range of corporate functions. This is a significant further step in the group's simplification strategy that will allow for greater operational integration and tighter strategic alignment. The transaction is value accretive for shareholders based on significant available financial benefits.
Let's now look at the breakdown of the contribution from different companies that comprise Engineering & Construction segment. Dragados sales grew by 3% in the first half to €2.9 billion. EBITDA increased to €152 million. Profit before tax of €66 million was up 25% due to improved financial efficiency backlog is €17.9 billion up 10.5% with a strong focus on transport and in sustainable mobility.
North America currently represents 59% of the total. Our net operating cash flow went up by €413 million in the last 12 months driven by a significant improvement of circa €500 million in working capital.
Turning to HOCHTIEF engineering and construction activity. Sales growth in the year was 13% year-on-year rising to over €1.8 billion. At the EBITDA level growth was 12% with stable margins.
Net operating cash flow was driven by seasonal working capital variations and the order backlog of €11.3 billion was up 7% year-on-year with two major project wins in Europe worth over €1 billion.
Lastly, let's move to infrastructure. The attributable net profit contribution in the segment was slightly lower than the previous period impacted by non-operational items. A smaller participation in the 288 Iridium and the impact of the new tax regulation in France and financial costs from new asset acquisitions at Abertis. Operationally, Abertis has had robust performance as shown in its results released last week.
To summarize, Abertis average steady traffic was up by 0.8% in the first half with revenues and EBITDA of 11% and 13% year-on-year on a comparable basis. Net profit pre-PPA amounted to €402 million. The Abertis profit contribution to ACS after PPA was €89 million. For 2024, we expect Abertis will make a similar profit contribution to last year.
On slide 19, you have further information on a geographical basis to help explain the evolution of the portfolio of Abertis highlighting the significant traffic growth in important markets such as Spain, Brazil, Mexico and Puerto Rico.
To conclude, I would like to underline a highlight of our solid operating performance: 11.4% growth in ordinary net income at the top end of our 8% to 12% of our annual guidance, a strong cash flow generation supported by working capital management, record level of order intake during the period providing visibility to our long-term outlook and further derisking our backlog profile.
We also continue to make significant capital deployment in alignment with our strategic plan with €1.2 billion invested in the first half.
In summary, we are on the right track, to achieving our long-term targets by delivering a consistent corporate strategy centered on three key pillars. First, reducing the group's risk profile, which we are achieving by the greater use of our collaborative style contracts. Second, expanding our already strong presence in strategic high growth areas with [indiscernible] a more sophisticated value proposition, and which are driving higher margins. And third, a very disciplined capital allocation approach as we have done during this year, and we believe will start to yield attractive returns in the future.
Thank you very much for your attention. Now, we are ready to answer your questions.
Question-and-Answer Session
Operator
Ladies and gentlemen, the Q&A session start now. [Operator Instructions] The first question comes from Graham Hunt from Jefferies. Please go ahead.
Q – Graham Hunt
Hi. Thanks for the questions. I've just got three short ones. First of all, just referring to the new construction entity that you've created today or announced today. Can you speak to any cost efficiencies or improvements that we could expect under the new structure? That's question one. Number two, you seem to have a pretty strong working capital inflow for the business excluding Hochtief in the quarter. Just trying to understand, which drove some of the strong operational cash flow in the quarter. So just trying to understand that. And then third question, just on the ACS holding costs. It seems to be down €40 million versus Q1. Just trying to understand that quarter-on-quarter move. Thanks so much.
Juan Santamaria
Thank you so much, Graham. So let me start with the first one. Cost efficiency, so you look at both corporations in North America, Dragados and Flatiron. Dragados currently has a series of subsidiaries Thiess [indiscernible] et cetera. In the case of Flatiron, you have E. Cruz. And each one of them they do have a holding. So first of all by combining all these companies, we are going to be able to reduce significantly all the stuff associated to each of the holdings. So there were -- I mean there will be significant cost synergies in that sense.
There's also a lot of operational. I mean, operational efficiencies in terms of systems, in terms of procurement, in terms of certain contracts that you require certain caliber of size. So overall, that's the way we come to the €30 million to €40 million potential efficiencies, in our space.
In terms of the working capital, basically, that has been Dragados. So in two years ago, we started with the transition of our Engineering & Construction business towards more balanced risk and equation there is more collaborative contracts et cetera, on one hand. On the other hand, we made significant changes in part of our old projects that were on track. We achieved in some cases agreements, with the clients. In our case, we've created efficiency plans for the projects. So you start seeing all of that reflected in the cash flow. So, we think that it's a positive story from Dragados, that has seen a significant inflow on their operational business.
And then, when it comes to the ACS holding costs, I think that is more at this stage a timing effect. We have around €10 million difference specifically in the ACS headquarters from 2023 to 2024. And that has been -- I think that last year was like €32 million and this year was €23 million. There has been an improvement.
Graham Hunt
Very clear. Thank you.
Operator
The next question comes from Dario Maglione. Please sir, state your company name and go ahead.
Dario Maglione
Hi, good afternoon. Dario Maglione from BNP Paribas. Thanks for the presentation. I have three questions. So, one about the monetization of the options on ACS shares, the €0.5 billion inflow. Is that including working capital or excluded?
Second question on Dragados U.S. and Flatiron, I think it makes tougher sense. Why this has not done before in your view?
And last question on Hochtief shares stake, any thoughts there and update in the larger view of capital allocation? Thanks.
Juan Santamaria
Okay. On the first one that €500 million is excluded from the working capital. On the second one, why it hasn't been done before? I cannot comment except that I mean the management around the table today has been working on this since starting with our mandate. It, obviously, has to be done in the right way as it needs to go through all the right approvals at Hochtief, et cetera. So, it takes time to make sure that we get to the right evaluation and et cetera. So, it's a process that takes time but we've been working on this almost during the beginning of our mandate.
And the third one Hochtief, as I always say, we will be opportunistic. It's we will analyze tipping on the value of the share, et cetera. So, I mean certainly you've seen us increasing the share and we'll continue analyzing on a case-by-case basis.
Dario Maglione
Okay. Thank you. And could you confirm the latest shareholding Hochtief? Thanks.
Juan Santamaria
79.1% include interest restocks.
Dario Maglione
Okay. Thank you.
Operator
The next question comes from Marco Limite from Barclays. Please sir, go ahead.
Marco Limite
Hi, good afternoon. Thanks for taking my question. A couple of questions on Abertis. First of all, if there is any update on the SH-288 first question?
And the second question, I think, post-CMD Standard & Poor's said that they were working on an update on your credit rating review whether -- my question is whether you've got any expectation in terms of timing for that? So, those are my couple of questions on Abertis?
And a third question on capital allocation, how much have you spent on buyback so ACS shares year-to-date? Thank you.
Juan Santamaria
Thank you, Marco. So, starting with an update on 288. Well, -- so there's two parallel lines. The first one is a termination that was announced. The second one is the negotiation. So, we continue managing both in parallel.
We're still having conversations with [indiscernible] is being very good at listening to what we have to say and different options. We're in that process. Next weeks will be important as there are some meetings confirmed to follow-up on the conversations, but it's early days to announce anything one way or the other, right?
So, -- but of course, it's so relevant that as soon as we can announce anything one way or the other we will. S&P second half of the year for the timing of the rating. And in terms of a buyback, so far I think that it was 293 million -- 293.
Marco Limite
Thank you. And if I can add one follow-up question. Can you just further explain how you calculated the percentage of ownership of the new entity and the split between ACS and Hochtief? Is that based on revenues of the two merged entity or net profit? Just a bit of clarity on that. thank you.
Juan Santamaria
Okay. So obviously we went through a furnace opinion and a long process to make sure that all of that was carried out independently. But the final percentages are 62% of the new entity owned by Dragados USA, 38% by HOCHTIEF. So Dragados USA will consolidate the result.
Marco Limite
Great. Thank you.
Operator
Ladies and gentlemen, it seems that there are no further questions, so I will give the floor back to ACS management to close the meeting. Well, it seems that we have a further question. Sorry apologies. Graham Hunt from Jefferies. Yes. Sir, you have the floor.
Graham Hunt
Thanks for allowing the follow-up. Maybe just, a question on, whether you see any opportunities for further corporate simplification, similar to what you've done in the U.S. and the rest of your portfolio? That's one.
Number two, any update on Clece and the process there? And then last question, are you seem to -- actually no, just those two questions, sorry. Thank you.
Juan Santamaria
Yeah. Thank you, Graham. So well, simplification, I believe that there are opportunities on simplification. I mean there's -- I mean, we are a group of companies. And obviously as we move into a one single company, one team and one approach, I mean certainly there's, a lot of efficiencies in the process. So we will be continuing pursuing them as we go.
In Clece, so Clece, we continue -- I mean, Clece will -- we will sell Clece, if the price is right. Okay? Because obviously, it has a lot of opportunities as well, so we are listening to potential offers. We are in the market with Clece. But at this stage there's no further update.
Graham Hunt
Thank you.
Operator
It seems that we have another question from Dario Maglione from BNP Paribas. Please sir, go ahead.
Dario Maglione
Thanks for additional question. Just on guidance for full year 2024. Is that confirmed? Or are you thinking to update it after the acquisition of Thiess and other companies? Thanks.
Juan Santamaria
At this stage, we prefer not to update the legal guidance.
Dario Maglione
Okay. Sure.
Juan Santamaria
I mean, I know we are in the top of it. And we are happy with the results, and how things are going, but we want to be conscious, I mean.
Dario Maglione
Okay. Thank you, Juan.
Operator
Now, ladies and gentlemen, it seems that really there are no further questions. So I'll give the floor back to ACS management to close the meeting.
Juan Santamaria
Excellent. So thank you so much, everyone, for your time today. And we look forward to continuing talking to you as we move ACS through this strategy that was outlined in the Capital Markets Day. And we'll continue delivering on it. Thank you so much.