Vinci's (VCISF) Q3 2016 Results - Earnings Call Transcript

| About: Vinci SA (VCISF)

Vinci SA (OTCPK:VCISF) Q3 2016 Earnings Conference Call October 25, 2016 11:15 AM ET

Executives

Arnaud Palliez - Head of IR

Analysts

Jean-Christophe Lefèvre-Moulenq - CM-CIC

Nicolas Mora - Exane BNP Paribas

Eric Lemarie - Bryan Garnier

Mehdi Boudokhane - Raymond James

Josep Pujal - Kepler Cheuvreux

Nabil Ahmed - Barclays

Gregor Kuglitsch - UBS

Elodie Rall - JPMorgan

Operator

Ladies and gentlemen, welcome to the Vinci conference call. I now hand over to Arnaud Palliez, Head of Investor Relations. Sir, please go ahead.

Arnaud Palliez

Yes. Thank you. Good evening, everyone. I’m pleased to welcome you to this call. I hope that you have all received our press release on first nine month review. In my introduction, I will run you through the main highlights of our third quarter performance before turning over the floor to your questions.

Third quarter 2016 group revenue totaled EUR10 billion and was down 2.8% on an actual basis, which includes a negative 1.1% currency impact mainly as a result of depreciation of the British pound against the euro and a net positive 1.7% impact of the changes in consolidation scope. The main one being for VINCI Energies the integration of APX in Q4 ’15 and J&P Richardson at the beginning of 2016. And for VINCI Airports Aerodom in the Dominican Republic. Therefore, like for like revenue was down 3.4%, of which minus 1.4% in France and minus 6.3% outside France.

We had good traffic on our concessions businesses this summer with solid 2.9% increase on VINCI Autoroutes and a stronger 11.9% growth at VINCI Airports, excluding Aerodom. Q3 concessions reported revenue was up 8.4% to EUR1.9 billion, bringing total nine month revenue to EUR4.8 billion, a 7.4% increase year-on-year. During the last quarter, we stepped up our development in concessions with the acquisition currently being finalized of LAMSAC in Peru. VINCI was also named preferred bidder, as part of a consortium with CDC and Crédit Agricole Assurances, for the French government’s stake in Aéroports de Lyon, and is also the future concession-holder of a motorway in Colombia with its so-called partner Conconcreto.

The picture is most lukewarm for Contracting business. Q3 total contracting revenue was down 5.1% to EUR8 billion on an actual basis and down 5.4% on a like for like basis. At constant exchange rate and perimeter, both French and international contracting operations were down by 3.4% and 7.6% respectively. At the end of September, the reduction in total contracting revenue for the first nine months of the year was limited to 4.1% at EUR22.7 billion, minus 3% excluding SEA. During that period, 47% of our total contracting revenue was generated outside France.

Moving now to divisions. At VINCI Autoroutes, light vehicle traffic was up 3% in Q3. Heavy vehicle traffic did also well, with a 2.4% increase despite one less working day than in Q3 ’15. Including price mix effect, total revenue was up 4.8% to EUR3.9 billion. For the full year, we expect revenue growth at VINCI Autoroutes in excess of the 2015 figure that was plus 2.9%.

Turning to VINCI Airports, it continued to show solid traffic growth with 11.9% increase over the quarter, excluding Aerodom that was integrated in April this year. [indiscernible] traffic growth remained strong in Portugal with 13.2% increase for ANA. It was also solid in Cambodia plus 9%, France plus 4.9% and Dominican Republic plus 4.4%. Non-consolidated Airports concession in Japan and Chile did also well with Q3 traffic increases at plus 5.1% and plus 11.1% respectively. VINCI Airports third quarter reported revenue was up 29.4%, plus 15.4% on a like for like basis. For the full year, we expect like for like revenue growth at VINCI Airports to be close to that seen in 2015, that was plus 11.3%.

At constant scope and exchange rate, Q3 revenue at VINCI Energies was down 3.7% in France, showing a higher decline than in the two previous quarters. Revenue was almost unchanged in the tertiary sector, but fell slightly in infrastructure and manufacturing, while telecom infrastructure and GSMR saw a sharper decline.

Outside France, activity had lost momentum compared to H1 and was down by 7.2% in Q3. Business levels grew at a good pace in Southern Europe, and Benelux, but fell in Germany, Central Europe and outside Europe, especially in the oil and gas segment. For the full year, we forecast the small increase in revenue at VINCI Energies following the integration of its recent acquisition, but with the possibility of a like for like decline.

Now, let’s look at Eurovia. In France, the situation seems to stabilize and we experienced a limited decline of our like for like revenue in Q3 at minus 1.1%. Outside France, Q3 revenue was down 1.8% on a like for like basis. Growth in the United States, Chile, Germany and the UK was not sufficient to offset declines in Central Europe, Spain and Canada.

Lastly, VINCI Construction. Q3 revenue for VINCI Construction was down 8.1% like for like, which is in line with the pace of decline observed in the two previous quarters. France remained a difficult market where trends varied between business lines and regions. However, the pace of decline is slowing down with minus 4.8% in Q3 compared to a revenue of minus 3.7% excluding the SEA impact. Outside France, Q3 like for like revenue was down 11.4%. International activities continued to suffer from lower oil and gas prices, which mainly affected Entrepose and Sogea-Satom. The 2015 comparison base was also higher for the non-French business of VINCI Construction Grands Projets and Soletanche Freyssinet.

For the full year, we expect both for Eurovia and VINCI Construction, a larger decrease in like for like revenue than for VINCI Energies. Order intake for the quarter amounted to EUR6.9 billion, down 18% compared to Q3 2015, but still slightly up by around 1% when comparing the first nine months of 2016 with the same period last year. The third quarter decline is mostly explained by the comparison between the high number of big projects recorded in Q3, ’15 and their limited amount in Q3 ’16, less than EUR200 million versus EUR1.7 billion in Q3 ’15.

Accounting these projects above EUR50 million in our order book is a random process. If you remember well, last year, we recorded in Q3 La Samaritaine, the Orly terminal’s junction building and Eurovia Railway renovation work in France and outside France, the Regina Bypass in Canada and the Thames Tideway Tunnel in the UK. When looking into details, Q3 order intake for contracts with value below EUR50 million was up by 1%. As a result, the group backlog stood at EUR28 billion at the end of September, down 1% year-on-year, excluding SEA. The order book equaled almost 11 months of average business activity in the contracting business.

A quick word on VINCI Immobilier that made a very good quarter with 28% increase in revenue, driven by France buoyant housing market. More than 1100 homes were reserved in Q3, up 40% compared to the same period last year.

In conclusion, Q3 revenue trends were not that different from H1 confirming solid traffic growth on our concessions, the absence of [indiscernible] in our French contracting revenue and some persisting difficulties in international operations. In this context, we confirm the big picture drawn for 2016. We expect for the full year a slight decline in revenue and an increase in operating income and net income.

I would like to thank you for your attention and also to remind that we will be happy to welcome you at our next event, the Investor Day dedicated to VINCI Energies on the 2nd of December in Brussels. I’m now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Jean-Christophe Lefèvre-Moulenq of CM-CIC.

Jean-Christophe Lefèvre-Moulenq

I have just three questions. First, could we quantify the traffic and tariff effect for the [indiscernible] we have let’s say a breach in trends for VINCI Energies over the third quarter, how can you explain this relative optimism for the remaining quarter in France and also abroad, what will let’s say offset this disappointment of the third quarter? And last question, could we have a split for the backlog in VINCI Construction between France and International, so EUR16.1 billion September of 2016 versus 16.4 in 2015, could we have the split between the France and International? Thank you.

Arnaud Palliez

Okay. Thank you, Jean-Christophe. On the traffic and tariff on the A86, well, I can only say that, we had some traffic growth in for the first nine months, but I don’t have more precise numbers, so again it’s not significant for VINCI Autoroutes as a whole, but what I can confirm is that traffic was positive in the first nine months and in Q3.

Regarding VINCI Energies, so you’ve noticed that until now for the full year, our guidance was for revenue some stable revenue on the like for like basis. And now, what we say is that we cannot exclude a small decline in like for like revenue for VINCI Energies. It’s true that Q4 was difficult, especially outside France, because France, we were more or less with the same trends as in H1, but outside France, we have to face a rather difficult German market.

And regarding the order book of VINCI Construction, France is slightly above 50% of total and it’s a bit higher in -- at the end of September 2016 compared with the end of September 2015.

Jean-Christophe Lefèvre-Moulenq

In France?

Arnaud Palliez

In France.

Jean-Christophe Lefèvre-Moulenq

Okay. It’s clear. So it’s implies that backlog stemming from international is slightly declining?

Arnaud Palliez

For VINCI Construction?

Jean-Christophe Lefèvre-Moulenq

Yes.

Arnaud Palliez

Yes.

Jean-Christophe Lefèvre-Moulenq

Okay. Thanks.

Operator

The next question is from Nicolas Mora of Exane BNP Paribas.

Nicolas Mora

Yes. Good evening, guys. Just coming back on the energy slowdown, I mean, can you delve a little bit more into the slowdown especially international because it just feels like you are falling off a cliff. I know it's just a single quarter and may be the slowest quarter of the year. But the sudden break into the trend is quite impressive. So I want to know if you're doing anything in terms of reshaping a bit the business, catching on lower margin contracts especially in Germany, or if you can delve a little bit into the strength?

Second, just on the order intake, you used to provide trends especially for France between construction, road building and energy. Can you do the same for this quarter for Q3, and last points just on the M&A, can you provide us an update on the consolidation of the new airports and LAMSAC in Peru. If there is anything new as to when you believe that you will be able to close the deals and consolidate the assets? Thank you.

Arnaud Palliez

Okay. Good evening, Nicolas. So on VINCI Energies, again, the Q3 decline mostly comes from the international operations. I’ve mentioned Germany and also in my introduction, outside Europe, the oil and gas related businesses, then is it temporary, is it the result of higher selectivity in the order intake, it’s a bit difficult to be very specific, very precise at this stage. So I think that we will gather progressively more explanation, we will see also the recent developments for VINCI Energies, but at this stage, we can just notice that there was this decline for the international operations in Q3.

The second question, I didn’t get it. I just heard the third one. Can you please repeat the second question?

Nicolas Mora

Yeah. It was just to get an idea of the year-on-year trends in order intake for France in the third quarter by division. I think you gave this in Q1 and Q2. Just want to know if you could do this thing this time around?

Arnaud Palliez

Yeah. Okay. So in France, so this is the backlog I’m going to give you, not the order intake, sorry. I’m just checking one number before. So regarding the order intake by to give you some trends by division, in Q3, the order intake was slightly up for VINCI Energies by a bit more than 1% compared to the Q3 2015. For Eurovia, it was down by around 15%. We’ve no big difference between France and international. And for VINCI Construction, it was down by around 30% with again the same kind of decline between France and International, but as you know, the explanation is mostly based on the absence of big projects about EUR50 million in Q3.

And for your last question, unfortunately, no news on LAMSAC and de Lyon airport, we are still waiting for the financial closing of these two acquisitions.

Nicolas Mora

Okay. And just in terms of at times, you give us a feel for the pre-backlog, should we expect any large contracts or projects being and as over the next few months anything new on the Denmark to Germany or the Grand Paris express orders.

Arnaud Palliez

Yes. We added in Q3, we added two contracts were above EUR50 million and one was new contract for AOL, so that was in Q3. For the rest and regarding the Grand Paris, no figure for the moment is really fine and we cannot really mention a pre-backlog coming from the Grand Paris. In the pre-backlog, we have a few operations in France, maybe you heard about [indiscernible] university. So that’s one of the contract that is not yet in the backlog and outside France, we have also some contracts for the metro line 3 in Cairo and some contracts also in Hong Kong that are for the time being in the pre-backlog. The size of the pre-backlog at the end of September is not that different than usual.

What we can say also this is at especially for the Grand Paris there is a very high number of tendering process that are ongoing [indiscernible] and probably we will be able to announce some successes at this level. You mentioned some big project also; the [indiscernible] for the moment, it’s really too early to consider it as a project in the pre-backlog because as you know we are still waiting for some authorization on the German side. So it’s really too early to take this into account into the backlog, into the pre-backlog sorry, and we can also mention that it’s the same for the Bogota-Girardot enlargement in Colombia. It’s also too early to introduce into the backlog.

Operator

Thank you. The next question is from Eric Lemarie of Bryan Garnier.

Eric Lemarie

Hello, just two quick questions from my side. On Eurovia, I didn't catch totally the figures to give us regarding the like-for-like sales increase in Q3 in France and outside France; I wrote 1.1% declines in Q3 in France, so Eurovia had 1.8% outside France. Could you confirm that?

Arnaud Palliez

I confirm the two numbers, a good one.

Eric Lemarie

And a second quick question on the local activities in France, what's your view on the current situation, on the current financial situation of local activities in France, we can see in some French newspapers that it is maybe slightly better currently. What's your view on that? Do you think that we can maybe start to be able to invest again in road works in France?

Arnaud Palliez

The important point for the French construction, the French construction recovery, what we see for the time being we see that there are huge differences in the market between the Paris region and the rest of the France with the exception of some big regional cities but basically the signs of recovery we are seeing the Paris region, we don’t see them in the rest of the French market. And one of the consequence also is that they are from significant differences also in term of the size of the project. Again, we can see some big projects such as the one linked to the Grand Paris that are to be started. But at the same time, clearly the mid-sized market in France is still very depressed and the demand coming from local authorities is a bit better for small projects that’s why maybe on Eurovia we are starting to see some signs of stabilization because municipalities again are putting money to refurbish their streets and their pavements. But for the rest of the market, for the [indiscernible] have been bigger that’s still a very difficult market environment. And there is still very, very high level of competition.

Operator

Thank you. The next question is from Mehdi Boudokhane of Raymond James.

Mehdi Boudokhane

Yes, good evening, everyone. Two questions from my side. So first one on traffic, you mentioned, actually in H1 that traffic should grow at a 2.5% tranche on a full-year basis. Taking the 3.1% in the first nine months actually implies a broadly flat Q4, isn't that too conservative especially looking at current trends? And secondly, could we get an update on the EUR1 billion Motorway Stimulus program, is it still in negotiations, what could we expect actually there? Thank you.

Arnaud Palliez

Regarding VINCI Autoroutes, you may be noticed in our press release that our full-year guidance is a bit better than before. We were before expecting for VINCI Autoroutes growth in revenue at slightly higher rate than last year. And now we mentioned in excess of the 2015 figure. So it means that we expect that sales last year were up by 2.9%. This year, total revenue from VINCI Autoroutes will be at higher rate. So then of course I agree that we’ve de-accumulated traffic growth we had at the end of the September. We only need 0.4% increase in Q4 to reach the 2.5% traffic guidance but you we consider now more total revenue than just the traffic in our guidance.

The second question, basically I think it’s still in discussion. I have no update about the 1 billion stimulus plan. So we are still with the latest comment that was made by the Minister of Transportation who had said that the total CapEx would be EUR1 billion. That it will be compensated with some annual tariff increases between 0.3% and 0.4% from 2018 to 2020. And that they would like some local authorities to contribute also to the financing of this program. So I suppose that there are some ongoing discussions with these local authorities but again, we don’t have news since the previous announcement.

Operator

The next question is from Josep Pujal of Kepler Cheuvreux.

Josep Pujal

Three questions from me. The first one is on Energies Germany, just to understand a little bit more, these declines is it because the market is bad or you see something internal? A change in management or a change in policy, you want to be more cautious, exactly what has happened there? I have two other questions, do you want them now?

Arnaud Palliez

Three, Josep?

Josep Pujal

I was asking if you want the other two questions now.

Arnaud Palliez

Yes please.

Josep Pujal

So a second question is again on the M&A, a follow-up on the question asked before about Peru, Colombia and so on. What according to you on the deals that have been announced recently, so Peru, Colombia, Lyon, the ones that you consider that they will be closed before year-end or let's precise from a net debt point of view, what should we consider that will be paid in ‘16 when we calculate our net at the end of the year and what could be finalized later in ‘17. And my last question is on the disposal of the 25% in Indigo that you mentioned in the press release, can you remind cash that you got from that and if I recall well, the 100% EP valuation of that subsidiary was around EUR2 billion so if the figure is not close to EUR500 million, can you remind us why please? Thank you.

Arnaud Palliez

So regarding VINCI Energies, I think that I have already answered this question. We see that the German market was in difficulties in Q3 and at this stage, it’s too early give you a precise analyze, if it's due to market environment or to some structural changes in our organization. Regarding the recent deal that were announced this summer, I think the two that could be possibly closed before year-end are the acquisition of LAMSAC in Peru and the acquisition of the Lyon Airport, are the two operation on which there is chance to get closing before year end. Then on Indigo, the cash proceeds from the disposal is around EUR230 million that's the order of magnitude, I don't understand the valuation you do basically it’s not a big disposal of VINCI Park, this is a disposal of our stake in [indiscernible] overall company for the acquisition of VINCI Park. So that’s why I have kind of explained difference but again, the cash proceed is EUR230 million.

Operator

Thank you. The next question is from Nabil Ahmed of Barclays.

Nabil Ahmed

Actually I got two. First one on the configuration on the remaining deals to be closed. I'm referring to LAMSAC and Lyon. Could you please remind us overall, what could be your net debt impact that you expect from those deals, so the investment plus the debt will be consolidated?

Arnaud Palliez

We prefer to answer this question after the closing because it’s difficult at this stage to assess the financing for this acquisition will be structured.

Nabil Ahmed

Did I get it correctly; the Indigo final disposal is already in the EUR13 billion net debt at the end of September.

Arnaud Palliez

Yes.

Nabil Ahmed

It’s already included. And the second question I guess sorry to come back on the energy business. Two questions actually, first one on France, I mean, you seem to be mentioning as the reason for the weakness in Q3, telco factory in particular. Is that something you would expect to continue for the coming quarters? In other words, is there any specific investment cycle that is currently at play here and that might explain the weakness in the Q3 and some possible more cautiousness going forward. And the second question on Germany, I mean, my impression listening to you is it comes a bit of a surprise as well for you, the declines in revenue. So, should we expect some margin impact from the decline in Germany over the full year?

Arnaud Palliez

So on the first question, it’s not new that telecom business for VINCI Energies in France is facing difficulties; we had some trouble last year with one of our big customers. What is happening also we see that we have now completed the work for the installation of GSM-R on the railways? So that’s the explanation these lower renew coming from the telecom sector. Regarding Germany, as far as we know no impact on the margin, just an issue about revenue but no impact on the margin, on the operating margin.

Nabil Ahmed

And on French telco, you would say that probably something that will last for a number of quarters now?

Arnaud Palliez

No, because you know the comparison basis month after month is becoming more favorable. So, GSM-R is a kind of one-off, this is the completion of the project and for the right, it has already been translated in our revenue.

Operator

Thank you. The next question is from Gregor Kuglitsch of UBS.

Gregor Kuglitsch

I've got few questions. So let's come back on VINCI Energies, sorry it's getting a bit boring but just on the profitability are you - just to confirm, you're saying that margins will be at least flat, is that what you're saying for the division i.e. could it be slightly upwards are too optimistic? First question. Second question is on guidance regarding airports. I think if we look at the first nine months, you were up 13%. I think you're saying that it could approach 11% i.e. that presumably means approach from below 11%, so I want to understand whether there's anything deliberate with regards to the fourth quarter in airports. And if there is, if you can explain, I'm thinking specifically about perhaps we are now running against very challenging comparisons in Portugal, it's not obvious from the third quarter but maybe we can get a little bit color there please? Thank you.

Arnaud Palliez

On the first point, I think, I’ve already answered and again the purpose of this call tonight is to focus on revenue and not on operating results, our margins. The second point regarding the guidance. If you look also at our press release you can notice that we have mentioned that the productivity effect made by the group entities can – with this productivity effect we can expect some slight improvement in margin, that’s the comment we’ve made on contracting in trends, and so that’s what we can say at this stage. Then regarding the guidance of VINCI Airports, take it as the fact that we are always cautious, you never know what could happen on the airline traffic. And again you're right, the comparison basis is becoming a bit less favorable, it's higher comparison basis and so that’s why we are rather cautious.

Gregor Kuglitsch

I have a follow-up to that. Are you running against capacity in Portugal or not really?

Arnaud Palliez

As you’ve noticed the traffic growth in Q3 was still at double digit rate, still very high, I don’t think that for the time being we are really phasing some capacity constraints in Portugal.

Operator

Thank you. The next question is from Elodie Rall of JPMorgan.

Elodie Rall

I’d like to follow-up on margins again on that question. So you’re saying you’re expecting slight improvement in contracting margin in France. Can you also confirm that this is just true for the contracting margin at group level not just in France? And second, are there impacts as we know where which in Q3 you had flagged that comps were particularly hard and how do you think the comps are looking for Q4, you expect the normalization there? and lastly, do you have some indication of what the traffic trend was in October if you have any data? Thank you.

Arnaud Palliez

On your last question, now it’s too early, we don’t have any data for the month of October. Then the first question, on margin I think I have already answered and I don’t want to give more details at this stage that what is in the press release. And regarding the Q4 comparison basis for the order intake there was also some big projects in Q4 last year but I think it’s comparison basis that is a big more favorable than the one we had in Q3. But again, it’s very difficult to analysis quarter after quarter the order intake because of these random process on the recording of the big projects.

Operator

Thank you. We currently have no further questions.

Arnaud Palliez

Okay, if there are no further questions thank you very much for this question and your attention. And again, our next event will be the Investor Day on the 2nd of December, so I'm looking forward to see you there. Thank you.

Operator

Ladies and gentlemen, thank you for your attendance. This call has been concluded, you may now disconnect.

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