Empresas ICA (ICA) Q2 2014 Results - Earnings Call Transcript

| About: Empresas ICA (ICA)

Empresas ICA SAB de CV (NYSE:ICA)

Q2 2014 Earnings Conference Call

July, 29 2014 10:00 AM ET

Executives

Victor Bravo – Chief Financial Officer

Analysts

Carlos Peyrelongue – Merrill Lynch

Javier Gayol – GBM

Francisco Chávez – BBVA Bancomer

Pablo Barossa – GBM

Roberto Barba – ITAU

Anne Melanie – Bank of America Merrill Lynch

Operator

Good morning. My name is Lia and I will be your conference operator today. At this time, I would like to welcome everyone to the Empresas ICA Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) Your host this morning is Victor Bravo, Chief Financial Officer of Empresas ICA. You may begin.

Victor Bravo

Good morning and thank you for joining us for ICA’s second quarter 2014 conference call. With me today are Gabriel de la Concha, our Chief Investment Officer and Head of Investor Relations, and the IR team including Paulina Rubio and Elena Garcia.

I have to focus my comments this morning on five highlights in our results. First, I will cover on the construction segment and stronger source in constructions in airports and in line with our outlook for the year.

Significant reductions in SG&A also. Second, we have to get it another step in our initiative to increase the international share of our business with the acquisition of Facchina Construction Group or FCG) n the United States and contract wins in Colombia and Chile.

The Board has set medium-term goals to expand the international’s share of the construction business to 30% from a baseline of less than 10%. Third, we are completing our construction projects.

We expect to start operations of four projects in the second half including the Agua Prieta water projects, and a highway expansion in (inaudible) this push accounted for most of the revenue increase in the quarter. Fourth, capital markets transactions significantly improved our debt maturity profile and cut short-term debt in half.

Finally, we have a solid pipeline of new projects for this as the ATT announced last week ICA is in first place for the contract for the Mexico rail tunnel. This project win could be a positive signal for construction activity in the second half of 2014.

Let me address each of these five points and then we will open up the call for your questions.

Construction activity continues to recover in Mexico relatively slowly. International is making a significant contribution to construction. The operating constructions are maturing and generating large increases in traffic volume. The airport business continues to exceed expectations for growth in volumes and revenues.

Revenues from operating results for the second quarter and for the full six months of 2014 are in line with our full year average. Looking at the details, two factors in 2013 have such year-over-year comparisons. We have a 419 million peso gain on the sales on the RCO tollroads in the last year’s second quarter recorded as other fee income.

In addition, revenue related to the real estate as a major group in the first half of 2013 was concentrated in the second quarter at a constant basis. Construction revenue increased 22% in the second quarter. The acquisition of Facchina accounted for about 15% of this growth in the first half, construction increased 23%.

SPC contributed about 7% to growth and the other 16% was organic. Construction margins also recovered. The second quarter adjusted EBITDA margins rose to 9.6% and the six months adjusted EBITDA margin improved to 8.4%, up 350 basis points.

Revenues from the construction business decreased 17% in the second quarter. This was level of success in 2013 that I mentioned. For the six months, revenues grew 16% largely as a result of the growth in traffic volume.

Traffic on the four operating highways rose 36% in the second quarter and 46% in the first half, led by Rio de Los Remedios and Verde-Ciudad Valles highways. The Acapulco Tunnel had a solid revamp and Mayab Road traffic also grew.

Construction’s adjusted EBITDA decreased in the second quarter because of the RCO sales in the Rio de Los Remedios effect last year. For the first six months, adjusted EBITDA decreased 1%. The adjusted EBITDA margins in construction was 45.8% in the second quarter and 50.9% in the first six months.

Margins decreased because of the RCO sales last year. The sale of the two social infrastructure projects to CGL this is still on hold pending government approval.

Airport recorded another quarter of solid growth in both aeronautical and non-aeronautical revenues. Domestic airlines are actually increasing routes inside their countries. We’ll obviously start with a high demand rate and aeronautical did the same in the second quarter. Fourteen new routes opened in the second quarter.

The airport segment had a 17% increase in adjusted EBITDA in both the second quarter and the first six months as a result of the growth in revenues. Construction backlog was 29.5 billion pesos and long-term service contracts were another 5.2 billion pesos as of June 30.

The decrease in construction backlog from December 31 reflects the slow rate of contract awards in Mexico and was offset in parts by the addition of 3.7 billion pesos in Facchina backlog from the US.

ICA’s non-consolidated backlog more than doubled from December 31 to $26 billion, the major increases came from the maintenance contract for the canal pipeline in Colombia – bypass construction contract in further new line for Santiago.

In terms of consolidated results, operating income was 1.1 billion pesos in the second quarter and adjusted EBITDA reached 1.5 billion pesos for a 17.1 margin. For the first six months, operating income was a solid 2.2 billion pesos, up 23%. Adjusted EBITDA grew 26% to 3.1 billion pesos with a margin of 18.3%.

The improvements in six months operating results were principally the result of the growth in revenue and the reduction in SG&A expense. ICA implemented an expense reduction program in 2013 to increase the flexibility of our corporate structure in the course of uncertainty of the timing of recovery of Mexico construction activity.

As construction activity recovers and depending on the competition revenues in this new segment, SG&A expense may go back up in future quarters.

Comprehensive financial costs decreased in the second quarter and was basically unchanged in the first six months. We recorded exchange gains in the second quarter and through six months compared to exchange losses in the 2013 period. These gains are increased interest expenses.

The interest expense line increased 584 million pesos in the second quarter, with the accelerated amortization of pricing expenses on the – signal, the prepayment premium offer to holders, commissions and the amortization of new expenses.

The income from non-consolidated affiliates and joint ventures reached 97 million pesos in the second quarter and 197 million in the first half and came from ICA Fluor as well as non-consolidated construction and construction affiliates. The appendix to the before includes supplemental information on this business operation.

Consolidated net income was 22 million pesos in the second quarter 2014 as compared to a loss in the previous period. The improvement reflect principally the reduction in comprehensive financial costs and a positive performance of affiliated companies and joint ventures.

In the first half of 2014, consolidated net income reached 259 million pesos. The share of the net income of the non-controlling interest through shares including minority shareholding in OMA and some performance of both OMA and San Martin. As a result of the foregoing, there was a significant reduction in the loss of the controlling interest in the second quarter and the first six months of 2014.

My second topic is the acquisition of our strategic initiatives with the acquisition of Facchina Construction Group in the US; we have taken a significant new step in our international expansion. FCG which is well respected, heavy construction company with most of its operations in the Washington DC area and South Florida.

The company’s strong management team will continue to develop its operations with the support of ICA’s administration. We are seeing that FCG has ample opportunities for growth and for margin expansion even allowing for the fact that margins in the US can be lower than in Mexico. With FCG as a vehicle, ICA is well positioned to grow our business in the US in a controlled low risk manner.

The acquisition was so in a manner, seniors with San Martin and Peru, we paid an initial $60 million for 100% of the ownership. FCG has meeting all debt and net cash position as on June 30 was 446 million pesos. Additional payment of up to $40 million will be based on the company meeting agreed EBITDA targets. In other words, this contingent payment will be funded by an increased cash flow of FCG’s sales.

ICA’s international area also had an important project wins in South America. This includes four countries 2.9 kilometers of Line 3 of the Santiago in Chile Metro including broadcast, galleries and tunnels for three stations and for three others.

In Colombia, we were awarded a five year contract for the maintenance of 900 kilometers of oil pipeline for Ecopetrol. The third topic is finalization of work to win new constructions and lines. We have three new constructions that is expansion of support to go into service in the second half of 2014.

Last week was the official inauguration of the Agua Prieta water project for the Guadalajara metropolitan region. It is currently the largest water treatment plant in Mexico which has the construction that won the 20-year service contract for this project in 2009 and commercial operations will begin by the end of the current quarter.

The El Realito Aqueduct will also into service after five years under construction. The extension of the Mayab tollroad to Playa del Carmen is 98% completed and we also expect this 54 kilometer road to be open for traffic in the next two months.

Finally, the main portions of the Nuevo Necaxa Tihuatlá highway to the Remedios open for traffic. Last year, a portion of the almost completed road after landslides after the working with the SEC.

We have been able to give details around the damaged section and complete this critical link in highway between Mexico City. Accelerated work on the lateral expansion was also significant from the quarter. We are making up some of the delays that this project experienced last year.

My fourth topic is the execution of capital market transaction. This transaction continues to improve our debt maturity profile. In December 31, which has reduced short-term debt by 51% or almost 5 billion pesos. The bond offering we carried out in May was 2.8 times oversubscribed.

ICA raised $700 million in senior notes and used the proceeds to prepay $200 million in notes in 2017 and the rest to pay short-term debt. OMA also carried out a new domestic bond issue and reported. The company issued 3 billion pesos in fixed rate, seven year notes and prepaid 1.3 billion pesos in notes due 2015.

The remaining 1.7 billion pesos will finance master development plans and strategic investments over the next several years. Just last week, ICA completed the refinancing for La Piedad Bypass and Rio Verde Cd. Valles Highway.

The 3.8 billion pesos the number of course there was rated AAA for the 12.6 year tranches and AA for the 22.1 year tranche. This refinancing of these mature assets improved the cash flow characteristics lower financial exchange and will facilitate monetizing them into the future.

The financing for the – in the concession fee services increased total debt. As of June 30, total debt reached 46.4 billion pesos. One of the new constructions are operating we expect to incur additional capital raising transactions. We decide to move assets with a central element of ICA’s business starting and we expect to continue to use the resources from this activity to pay debt and from the part of our investment requirement in new projects.

This is my fifth and final point. We have a wide range of attractive projects in both civil and industrial both in Mexico and abroad. Last week the SEC announce that ICA was in the first place for the contract to build a 4.6 kilometer tunnel as part of the Mexico City Toluca commuted rail line.

This contract was for 2.9 billion pesos is expected to be finalized and signed over the coming weeks and when it is we will add it to the backlog. The tenders of the project on the national plan are picking up momentum.

And ICA expects a number of interesting projects to come for bid in the second half of 2014 and 2015. This includes what a project highway and the final project on power plants alternative energy where projects on hospitals among others.

The international pipeline initiatives also rich and we see good opportunities for large-scale to these projects in all the countries. Summarizing our key lines of business are all contributing resources led by the revamp in construction activity.

ICA continues to execute our basic strategy including our international expansion. We are ready to put a number of new constructions into service. Capital market transactions have strengthened our financial position and we expect to target additional capital raising transactions to reduce debt and fund new projects.

And finally, we have an effective pipeline of projects coming up. These developments are in line with our outlook for the year. We expect to continue to grow with the EBITDA margin and to maintain a solid financial position.

This concludes our prepared remarks and we will now be pleased to address your questions. Operator, would you please open the call to questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Carlos Peyrelongue with Merrill Lynch.

Carlos Peyrelongue – Merrill Lynch

Thank you. Good morning, thank you for the call and congratulations on the results. First question is related to the peak of that you expect in civil construction. Can you provide some more visibility? Are there any large projects that you think can be awarded in the second half of this year?

Or do you think it’s more the large projects for 2015? And the second question is related to your net debt, you closed the quarter around 38 billion pesos. Should we expect that in the second half you reduce this level considering the recycling of capital as you mentioned through asset sales and the collection that is still pending on the presence? Thank you.

Victor Bravo

Thank you, Carlos, just to answer the first question how do we expect for the second quarter. Well, there is a number of projects that we are already beating or preparing to beat, yesterday and the announced the beating process for the Mexico City train. We are also preparing to win for the other sections of the Mexico City Toluca train.

We are also preparing to meet for the – that goes through City of Monterrey from State of Tamaulipas and we are preparing meeting for a couple of cost reductions. There is also in process for the (inaudible) plant in the Tampico toll road. So at least those are processes that were no – we were beating on a – and there is a list of another two or three large-scale projects that we expect at the meeting in this second half of the year.

As for the second question, we understood this debt. We are absolutely expecting the level debt and also of investment will lead – to be substantially for the last two quarters of the year.

Given the fact that as I mentioned in the – most of the project that we are building are going to be reduced considerably. We are going to start operations in most of those by early third quarter and then we will need in the facility of additional debt or additional equity investment. So we expect that the recycling path – future – will happen in the second half and those will be devoted mostly to the new projects.

Carlos Peyrelongue – Merrill Lynch

Understood. Thank you, Victor.

Victor Bravo

Thank you, Carlos.

Operator

Your next question comes from the line of Javier Gayol with GBM.

Javier Gayol – GBM

Thank you for the call. I have a couple of questions. My first question would be, regarding the acquisition of the US construction firm, could you provide us with a guidance of how are you guys are going to completed the acquisition? I understand that it is related to the results. Could you give us more color there please?

Victor Bravo

Certainly, we have a series of between 2 to five years for Facchina to reach some EBITDA ratios according to the results of those – if those are met, then we will be making an additional payment of up to $40 million.

The reason we put it that way is we want to have the management has been waiting to a large extent, and the company to get more so in according to our calculations, it does result our mix and the cash flow will provide – will be provided basically from the distribution of the results of that company.

Javier Gayol – GBM

Okay, so it’s just to – is the company or will management reaches the targets, you will be paying an additional – up to additional $30 million?

Victor Bravo

$40 million.

Javier Gayol – GBM

$40 million, okay.

Victor Bravo

$40 million.

Javier Gayol – GBM

Okay, sorry, yes and my second question is related to the capital recycling process, do you guys – are you guys expecting to sell any or yet to sell any other shares of OMA in the near future?

Victor Bravo

No, Javier, we are not considering that as far the recycling of assets.

Javier Gayol – GBM

Okay, so and just to get a sense of how much – is there – in the projects that the company has or is some of the construction as you mentioned that you expect to deliver in the next two quarters. How much equity or still pending investments in these projects?

Victor Bravo

For the projects that we still have to complete, in our business I would have to do it in excess of $100 million.

Javier Gayol – GBM

Okay, okay, that’s very, very helpful. Thank you Victor. Thank you for the call.

Victor Bravo

Thank you. Thank you, Javier.

Operator

Your next question comes from the line of Francisco Chávez with BBVA.

Francisco Chávez – BBVA Bancomer

Hi, good morning, Victor and Gabriel. Thanks for the call. My question is regarding the financial expense line. In the second quarter we saw an important increase to 1.6 billion pesos which I understand includes non-recurrent charges. Can you give us an idea of what can we expect for financial expense in the coming quarters on a normalized basis? Thanks.

Victor Bravo

Certainly, Francisco, I will tell you that the average interest rate on the total debt is between 9.5% and 10%. So, you use our debt and multiply it by that interest rate you will get the financial expense.

Francisco Chávez – BBVA Bancomer

Okay, thank you.

Operator

Your next question comes from the line of (inaudible) with Morgan Stanley.

Unidentified Analyst

Hi, good morning and thank you for taking my call. My first question is regarding the 830 million pesos in revenue and 28 million pesos in EBITDA that corresponds to Facchina. Is that for the six months or only for the three months in the quarter? And my second question is, if you could give a sense of what the proportion of cash EBITDA and non-cash EBITDA that you had in concessions this quarter? Thank you.

Victor Bravo

Certainly, the Facchina is only for three months, only the second quarter was registered. As for the second question, it’s roughly 50-50 in the concessions.

Unidentified Analyst

Perfect, thank you very much.

Victor Bravo

Thank you.

Operator

Your next question comes from the line of Pablo Barossa with GBM.

Pablo Barossa – GBM

Hi, guys, Thank you for the call. I was wondering if you could give us a bit more color of the Mayab highway. What do you expect for – beat the cash flow of 2013?

Victor Bravo

Certainly, Pablo. We expect that the traffic will increase roughly one-third with these additional route from the actual figures. So, I plan the same levels of EBITDA that should give you the additional caps that we expect from it.

Obviously, it will depend very much on how the learning curve goes when we open that section of the road. We expect that it will have two operations from September to December. So, we expect most of the learning curve will happen by the end of this year and beginning of next one and we expect it to be at the most one-third percent of the actual traffic in addition to.

Pablo Barossa – GBM

Okay, thank you.

Operator

(Operator Instructions) Your next question comes from the line of Roberto Barba with ITAU.

Roberto Barba – ITAU

Hi, good morning. Thanks for the call. I was just wondering if you can give us some color or guidance in terms of the bid going forward. I mean, we saw a sliding net debt to EBITDA ratio during this quarter. Do you have any guidance in that sense?

Victor Bravo

Certainly, Roberto. As I mentioned before, this was here to the completion of some projects. We expect that the net debt will be reduced in the second half when we compete some of the transactions that are pending when we are setting up assets.

Roberto Barba – ITAU

Okay, thank you and my second question will be regarding to the accounts receivable, I mean, we saw an increase during this quarter. So, could you give us some color on that sense? If you expect them to actually decrease as you provide from the construction projects or if we could expect a rather increase from that – in that part?

Victor Bravo

Well, if you look at the numbers of the debt receivables, it increased because we increased the revenues. So it was a natural increase due to the additional work that we are expecting to recover from the client.

That’s where the actual the current receivables as for the non-current receivables that way for example because still that we need to collect from the landscape of the recoveries are still pending and we have no date for a foreseeable collection at this point of time.

Roberto Barba – ITAU

Okay, thank you.

Victor Bravo

Thank you.

Operator


Your next question comes from the line of Anne Mel with Bank of America Merrill Lynch.

Anne Melanie – Bank of America Merrill Lynch

Good morning. Thank you very much for the call. I have an additional call on the debt structure following up on some of the other questions. This didn’t really has to do more with the location of the debt. This quarter now I know you’ve issued 700 million bond at the corporate level at the holdco level bringing debt at the holdco up to 41% of total debt.

I am just wondering if this is a change in your strategy, if you are going to have more debt at the holdco or if essentially you will reduce debt at the holdco? And just your thoughts about the structure of where the debt will be located going forward? Thank you.

Victor Bravo

Well, thank you, Anne. This was much more related to the opportunity that was found when we went to the financial markets to raise this debt. The aperture and the capability of it indeed just in the markets to allow us to raise more funds and be able to move not only corporate debt in short-term but also we took some of the operating debt from the construction site basically.

That led us to the increase in corporate debt because we took the opportunity. Our strategy to reduce the corporate debt which has been in place and we are really thinking that we are still having some certain asset payments.

So that was certainly the fact that we will continue to reduce the short-term debt and the corporate debt – part of the corporate debt that we have. We are not changing the strategy; we use that opportunity in that model.

Anne Melanie – Bank of America Merrill Lynch

Thank you.

Operator

At this time, there are no further questions.

Victor Bravo

All right, thank you for your interest in ICA and for participating in this call. Please contact us if you have additional questions that we did not addressed in this call and Gabriel, Paulina, Elena and I look forward to seeing you in the near future. Have a good day.

Operator

This concludes today’s conference call. You may now disconnect.

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