Ferrovial SE

Good afternoon, everybody. This is Silvia Ruiz speaking, and I would like to welcome you to FROBIAL's conference call to discuss the financial results for the nine months of 2023. Just as a reminder, both the results report and presentation are available to you on our website. I am joined here today by Ernesto López-Moto, our CFO, and by the CFOs of the different business divisions. If you have any questions, you may ask them through the forum included in the webcast. During the Q&A session at the end of this call, we will be reading out your questions and who they are from. With this, I will hand over to Ernesto. Ernesto, the floor is yours.

Thanks, Silvia, and welcome everybody to the first nine months of 2023 results from Ferrovial. Well, really, this was another strong quarter. I mean, our infrastructure assets performed really well, starting with the 407 ETR. We had distributions in the first nine months were higher than last year. And also another one was announced post-closing of the quarter. And this was done on the back of improved traffic performance. The managed lanes as well posted a strong revenue growth and additional dividends from 35 West. In airports, with a strong summer performance and improvement along the year, Heathrow was outstanding with September already above pre-pandemic levels. Construction, I mean, with a profitable quarter, the full nine months are affected by the first half year results with impact from completion of large projects in the U.S. In terms of net cash position, we closed the first nine months with a net cash of 635 million euro sex infrastructure level. And this cash evolution is driven by dividends from infrastructure projects close to 400 million, and in particular, the first one from NT35 West. The main cash outflow was the repayment of the, well, we said the buyback of the hybrid bond that implied a 511 million euro outflow. And then we invested in equity and also in shareholder remuneration, 338 million euros. Of course, these months were full of corporate events with the listing in Euronext Amsterdam. We are also progressing with the US listing that, of course, depends on SEC approval. And we announced the second script dividend expected to be paid at the end of this month. From an ESG perspective, probably I would like to highlight the issues of a sustainability link bond, our first one, 500 million euros. Okay, we move to the next slide. We start with the performance, the operating performance from toll roads. And here we see the growth, both in revenues and EBITDA. Really, the U.S. assets are contributing to these consolidated numbers, 83% of revenues and 93% of EBITDA. Segment 3C, that opened to traffic at the end of June, implies 66% additional length to the NT35W, It meant 81 million euros investment, our part, and it has a concession term that ends in 2061. and dividends from the managed lanes the main one was this 35 was that to 100 of shareholder base was 435 million us dollars but also we got regular dividends from ntn lbj and for 100 shareholder base it was 123 billion us dollars Also in NTE, I mean, the success of performance means the ultimate configuration has been brought forward. And here we're going to be building additional lanes, a managed lane in segment two and a general purpose lane in segment one. I mean, this additional capacity that was part of the concession, as I said, was brought forward, is much needed in a corridor that has more growth than expected. It's important to keep the appeal of the corridor for the long term. This ultimate configuration has been financed fully with debt. In August, we issued $414 million of private activity bonds. And of course, this construction will start soon and traffic will start to be affected since the start of 2024 next year. If we move on to the next slide, please. Here in the 407 ETR, dividends, as I mentioned in the introduction, are above the 2022 numbers. And, of course, you see that the operational performance has an important increase vis-à-vis 2022. Traffic in terms of VKTs is growing close to 17%, but also revenues at a BDA are close to 16% growth. Here we have the revenue per trip fairly stable with a little increase on average triplet. In terms of dividends, we do not only have the increase reflected in these numbers of 300 million versus 200, so 100 million Canadian dollars increase, but also there was an announcement of an additional 650 million Canadian dollars dividend. When you see the traffic, Performance, you see that we keep improving. We are closing the quarter close to a 4% drop vis-a-vis 2019 and 9.4% increase versus 2022. Clearly, we're seeing increased mobility and commuting patterns. And also, we've seen construction activities in Highway 401. I mean, this is usually done in terms of maintenance of the main alternative. If we move to the next slide, here we touch on the long-term drivers that we like to have a look at. And well, the mobility that you see is pretty much shared in comparable terms in terms of evolution between the main alternatives, the 407 and also urban transit. So you see mobility improving across the board. Toronto really is important. It keeps growing in terms of population at a high rate. It's the first of Canada's big three cities to hit a growth rate of 3% in terms of population. And, well, the Ontario population grew slightly above 3%, and you see that, in general, Canada is also growing well, and it was the highest growth rate recorded for a 12-month period since 1957. When we look into the return to the office statistics, we see that that keeps improving. Of course, the 54% is an average of peak days and low days, right? But clearly the trend is more presence in the office. If we moved on to the next one, please. Here we are. looking at the managed lanes in Dallas-Fort Worth, and we see that all the three of them grew revenue per transaction, the average revenue per transaction above inflation. That is how the soft cap evolves every year, right? So with inflation of 6.5%, you had A double D in two of them and an 8.4% increase in NT. That has driven this growth in revenues and EBITDA, as I said, across the board with very solid EBITDA margins. I mean, NT clearly there's a strong performance ongoing with frequent mandatory modes. LBJ is still impacted by construction works in the area, the east entry point of that road. Well, an NT35 West is showing a positive performance in traffic. And independent of the additional segment 3C, right? I mean, it would have grown at 5.6%. But if we consider the increase in traffic from that segment, that is a 14.4% increase. NT and LBA also grew traffic nicely. Okay, so we move on, please, to the next slide. We first look at the I-77. That keeps beating our most optimistic expectations. Transactions growing close to 20%. Revenues more than 56%. And they beat the I-87%. So it's clearly... growing more than another. It's a fantastic asset where you see the revenue per transaction is growing at 31.8%. And on the right, we have the I-66 that is also ramping up. I mean, you have the quarterly revenue per transaction growing up. And the third quarter of the year had a 43.6% increase versus the first quarter of 2023. And traffic also going up close to 30%, the third quarter versus the first. the first quarter quarterly transaction so as we like to say cautiously optimistic but really a very strong ramp up and moving into airports we look at Heathrow well Heathrow results were released last week so probably you are aware of all these numbers but if we just stop on some of them I think that they are remarkable I mean we ended September above 2019 levels, but really it has been trading at those 2019 levels pretty close throughout the summer. Clearly demand is there and Heathrow has upgraded. the expected traffic for the end of the year to 79.3 million passengers. But it's not only leisure, inbound leisure that is experiencing a notable increase. I think that all the different segments are increasing, and it's good to see business travel reaching 27% of total traffic, and pre-pandemic this was 32%. as I mentioned, all sectors and nationalities are traveling out or through Heathrow. We look into the CMA appeal that finally came to a conclusion. The final determination didn't move much the needle. I mean, they corrected some things like the AK factor, cost of death and passenger forecast. So, to this uh i mean his expectation is that it doesn't it shouldn't have a meaningful impact and the message he through sent is that it's time to uh move on is disappointed with this time to uh to move on um and with the operation of the airport we move to the next slide please We see the remainder of the portfolio, all of it is growing. I mean, AGS is growing, not as much as Heathrow compared to 2019 levels, but it's still a very solid performance. looking for airlines to also come back or sign new flights in the area. I mean, making up for some of the airlines that left operations. If we look into that amount, that's... Much better in terms of comparison to 2019 and even 2022. So bidding in both years is close to 4% above 2019 levels and with a good showing of revenues and EBITDA. Last but not least is a new terminal one that keeps progressing and the project remains on by the schedule. I mean, there was a reaffirmation of the ratings that were done at financial close and then negotiations with international carriers are ongoing. We had the agreement with Korean Airlines previously. But, I mean, that negotiation with Airlines is in good shape. We have already contributed close to 200 million euros of the total equity. Remember that this project has investment concentrated in 2023, 2024 and 2025, 2024 being the peak of investment. And moving on to construction, as I mentioned, we had a profitable third quarter. I mean, Budimex keeps having a strong showing. Weber keeps EBIT margins stable. And then for real construction, I mean, the first six months were affected by COVID. And completion works in some large projects. Still, it's finalizing some of them, but I mean, the contribution is more in line with what we saw in a similar quarter last year. Well, order book keeps a strong showing, and you have the breakdown by geography on the slide. If we move on to the discussion of net cash, well, remember that in this quarterly information, we have the operational data. We don't have other lines of results that will come at year end. So in the net cash evolution, we have the different blocks here. And I would like to, again, underscore the dividends from projects here. block. Of course, we have equity investments and investments in other businesses. And this is basically to help self-performance in construction that helps in a stable environment. Then we have 110 million euros of shareholder remuneration. And as I mentioned in the introduction, the main cost of cash outflow is the repayment of the hybrid bond. In other financing cash flows, the main component here is the positive carry we have with the interest in the cash being higher than the interest we pay in debt. Okay, so if we move on to the last slide, clearly the portfolio is performing strongly. We have the increasing dividends helping the cash generation increase. And the pricing flexibility is providing to be very valuable in these assets. We are still looking to a very interesting investment pipeline ahead, in particular in the U.S. We are progressing with the U.S. listing application and, of course, advancing on the decarbonization roadmap. Okay, so thanks for bearing with us for the presentation, and now we open the floor to the Q&A session. Thank you.

Thank you very much, Ernesto. The Q&A session will begin shortly. Please stay tuned. Okay, so starting with the first set of questions from Nicoló Pessina from Mediobanca. First question, is 407 ETR's peak traffic strong enough to allow for a tariff increase in 2024?

Thank you, Nicoló. This is José Velao from CFO Trintra. You're right, the peak hours traffic is strong and is growing during these nine months. But at this moment of time, we have not any update about the rate increase. We are pointing in the right direction, is what we can say.

Next question from Nicolo. Can you provide an update on the tender for the SR400 project?

Of course, the tender is progressing well. We are working hard. just to submit our proposal in the coming months. So everything is working under expectation.

Last question from Nicolo. Would it be fair to expect a sizable increase of the dividend to for real shareholders in 2024, considering the increase of dividends received from the underlying assets?

Thanks, Nicolo. Well, I mean, you're right to point out that the strong showing of all the infrastructure assets and their dividends. I mean, the board will have to make a call on this, of course, taking also into account that we are facing quite interesting investments ahead. So it's not the time to discuss that. But I mean, we're very happy with the performance of the assets, as you mentioned.

Next set of questions coming from Philip Leite from CaixaBank. First question, dual listing process. Is the process to be listed in the U.S. stock market delayed? Why and when do you expect to have the process completed?

Okay, well, really the US stock market listing, we are running as fast as possible. Of course, it's the prerogative of the SEC. So we'll have to see how the process evolves. So I don't think it's... It's delayed. It just takes the time it takes. Okay, so the most likely outcome now could be a first quarter listing. But as I said, it's the SEC prerogative.

Next question from Philip. On 4.7 ETR, until when should the 4.1 be impacted by expansion construction activity?

Hi, Philip. This is Jose Vela from Cintra again. The 401 construction works is a normal course of business. It's part of the plans on the MTO that is published. And in the case of the current construction works that affect the central section of the 401, we expect it to continue until 2025.

Next set of questions coming from Robert Johnson from BNP. First question, with the run rate of 407 ETR workday traffic around 8-10% below the 2019 baseline during May-September, to what extent would potential toll increases in 2024 be dependent on further traffic improvement?

Hi, Robert. As I said before, we are in the right direction in terms of traffic performance. The traffic performance that we're seeing right now in this type of month is above our expectation. But we cannot have any update about this total increase. We'll see in the future when it makes economic sense.

Next question from Robert. With COVID restrictions in Ontario ending almost 18 months ago, is the 407 NTR under any pressure from the MTO to end the 2021 First Mayor Agreement?

Hi, Robert, again. There's a fluent communication between the concession and MTO, but this is not one of the topics that they are treating. They have a lot of things to speak about. It's not on the table.

Last question from Robert. When the US listing is completed, is Ferrovial committed to maintain a listing in Madrid?

Hi, Robert Ernesto here. Well, more than using the word commitment, I think it makes sense to maintain the listing in Madrid for European funds and retail investors alike, right? So, yeah, it would make sense to keep the listing in Madrid.

Next set of questions coming from Fernando Lafuente from Alantra. First question, strong quarter in construction with EBITDA margin of 3.7% versus 1.1% in the second quarter and 2.9% in the first quarter. What are the reasons for the improvement? Is it sustainable in the forward and onwards?

Thank you, Fernando, for the question. This is Iñaki García from construction. Yes, this is basically that Budimes and Weber are keeping the same trend of profitability that we saw in previous quarters. And the result of the rest of the business of federal construction that was hugely impacted by the provision of losses in the U.S. projects finishing this year was mainly accounted in second quarters or in the first half of the year. In terms of sustainable for the fourth quarter, we expect the same trend in Weber and Budimex. And we think that we have accounted for all the losses in these ending projects in the U.S. Thank you.

Next question from Fernando. What is the expectation of dividends from concessions in 2023?

Hi, Fernando Ernesto here. I mean, we don't provide that kind of information. I mean, there's very strong performance. We don't provide this short-term guidance. Sorry. Thanks.

Next question from Luis Prieto from Kepler Chevro. Any hints you could provide us to understand a bit better the potential stream of Schedule 22 payments we should see over the short or medium term?

Sorry, I had a problem with my computer, Luis. I can provide you some hints about how it's working. I think it's part of the contract, as you know. We have depends on the traffic on peak hours and the threshold just to calculate the amount of scale 22 payments. But as you know, we don't need to read, because we repeat in previous calls, we don't need to read 2019 traffic levels to increase toll rates. That means that we can pay a significant amount of Scalding 22 in the future, but with the compound effect of the revenues, when we increase stalls, we will offset this amount of payments.

Next set of questions coming in from Satish Sivakumar from Citi. First question, can you comment what percentage of contracts in the construction segments are still on 2019 to 2022 pricing?

Yeah, thank you for the question. All our contracts are with current prices. I mean, the value of the contracts are updated with the current costs. In terms of the sale and in some contracts that there is an intersection of prices, it has also been updated. So we can say that all the contracts are at current prices. Thank you.

Next question from Satish also. What is the reason for increasing revenue per transaction of I66? Do you expect it to continue to increase further going forward?

Hi, Satish. This is José Belaguen from Sintra. The main reason here is that the asset is ramping up. We are seeing a good value for money in peak hours for customers, and that is good for revenue as well.

Next set of questions coming from Martin from Bank of America. First question, do you anticipate the 407 ETR to distribute another dividend before the end of calendar year 2023?

After the additional distribution approved in October by the board, we reached a level of $950 million Canadian dollars. I think it's a good level of dividend for this year, thanks for the good performance of the asset. it's not likely to see an additional dividend during this year.

Next question from Martin also. Can you comment if the I-66 is so far performing in line or above your internal forecasts?

Hi, Marcin. The ISIS-T6 is performing quite well according to our expectations and continuing, as I said, ramping up. The corridor volumes have already reached pre-construction and some segments are above pre-construction levels. And customers, as I said, are experiencing unattractive time savings during peak hours. And we are seeing a really good performance of heavy vehicles as well. So the perspectives are quite good.

Next question from Martin. Do you expect Heathrow to distribute dividends to its ultimate shareholders in 2024?

Hi, Martin. Here Laura Lopez, CFO, Ferrovial Airports. Hydro in last week all stated that they don't expect dividends in 2023. So no further comments here. What is important is to highlight that the asset has the leverage more than expected. And at the end of the day, operational performance will be key for dividends. As Ernesto mentioned before, the performance is being remarkable. Thank you.

Next set of questions coming from Elodie Ralph from JP Morgan. First question, what is the minus 18 million reported and others on the EBITDA line, please?

Hi, Elodie. Probably it's not minus 18. It's another figure, but I mean in the others. we have the costs from the restructuring transaction and the listing in the US. So you have all these sort of fees that goes from the advisors, auditing of PCOB accounts, lawyers for 20F. So you have all that main impact over there.

Next question from Elodie. Do you have an update on the timing of the US listing? What are the main considerations? And also on timing of your upcoming Capital Markets Day?

Hi. Well, we commented before, right, that, I mean, timing is probably more likely to have a U.S. listing in the first quarter of the year. But, I mean, we cannot be more precise, given that it's SEC's prerogative. And, well, the capital markets day, when we have visibility, will be announced. We're looking forward to it.

And last question from Elodie. If you maintain a listing in Madrid, do you expect to get sufficient liquidity in the U.S. line to move the primary listing to the U.S.? Or you think the U.S. will be a secondary listing most likely?

Thanks, Elodie. Well, the U.S. initially will, I mean, is expected to be a secondary listing. But the idea here is that given that our business is in the U.S., we lack U.S. investors and we have so much growth ahead is that it will become more and more relevant. So, I mean, it would be natural to have more weight in the U.S. in the long term, but initially we shouldn't expect that to happen.

Next set of questions coming from Jose Manuel Arroyas from Santander. First question, on 407 ETR, can you please outline the main factors that matter in defining the dividends that 407 ETR can pay in 2024, and in particular, the interplay of debt maturities, liquidity, and the ability to issue new bonds?

Hi, Jose Manuel. Of course, the main factor is the performance of the asset, the traffic performance, the revenue. It's a main factor of the 407 ETR. Of course, we need to deal with other stakeholders like rating agencies. And that means that we need to solve them. How strong is the performance of the asset? Yes, to ask for additional debt or negotiate with them the liquidity at the end of the year. But it's part of the normal course of the business. But these are the main factors. These are the main factors.

Next question from Jose Manuel also. On construction, can you provide an update on cash outflows from construction in full year 23? Have your expectations changed relative to the first half when you hinted that outflows of 120, 100 million could be possible?

Yeah, thank you, Jose Manuel. Well, as you have seen in September, the working capital in construction has been minus 193. As you know, in the last quarter of the year is when usually we have advanced payments from certain clients, particularly in and specific contracts. So, yeah, we can keep this forecast of gas consumption in working capital of between 120, 150.

Next set of questions coming from Pierre Rousseau from Barclays. Heathrow, what's the plan to adapt to the new pricing environment?

Hi, Laura again. Currently, Heathrow is working in the update of the business plans. In December, they will share more detail updated in the investor report as they have announced in last week. Thank you.

Next question from Pierre. One billion US dollars of orders in the US announced in September. Are they risky projects? What is the margin outlook? Is it instrumental to get to your construction margin target?

Thank you. Thank you, Pierre. Well, as previously mentioned, our backlog in this moment, once we finish the current periods in the U.S., is quite healthy. I mean, with protection against inflation and and the bid was in a better situation, knowing the impacts of inflation, COVID, etc., and prices of the materials. So we expect profitability on those, but remember that they are in earlier stages, like October. like Ontario or some others, and probably the margin will be shown more as the projects progress.

Last question from Pierre. You mentioned performance for I-66 and I-77 compared well with your most ambitious expectations. Could you share them?

Hi, Pierre. And we cannot share with you future projections, so sorry for that. But I agree with you that the I-66 and the I-77 are having a really good performance.

Next set of questions coming from Agustin Sender from Stifle. First question, LBA, could you please elaborate on the LBA traffic recovery in context of work from content and of the ongoing works? Do you have any visibility on the timing of a recovery?

Hi, Graham. Yes, I can give you. Sorry, Agustin. Thank you for your question. Yeah, I can elaborate. The LBJ is performing quite well. The general mobility and the congestion is improving in the area. Thank you in part for this recovery in the presence in the office and the economic growth of the area and the corridor. I think the LBJ performing is in the right direction and good. And the only issue that we can see in the traffic mobility in the area is the 635 East construction works that are expected to end at the beginning of 2025. But the LBJ, as a conclusion, I can say that it's performing quite well.

Next question from Agustin. For real construction, I understand that the end of the I-285 project has been delayed to the first quarter of 2024 from the third quarter from 23, and that discussions regarding the I-66 contract are still ongoing. Should we then expect further losses from the for real construction division, or is it mostly behind us?

Thank you, Agustin. Well, substantial completion of the I-285 project is going to be in this year. I mean, probably there will be some further works, but there's more in terms of panellists and other small things. But substantial will be in Q4 2023. Regarding losses, I mean, as of September, we have considered all the potential losses that we can have in this contract. So in terms of this particular price, yes, I think that the worst is behind us. And now it's time, I mean, for the, we are in both in mediation processes, I mean, with the clients. So we expect that there should be recovery on claims. Thank you.

Next set of questions coming from Graham Hunt from Jefferies. First question for the I-77. Can you talk about the developments you're seeing around the corridor, which is supporting such strong volume and price growth from the corridor?

Hi, Graham. Thank you for your question. This is Josebela from Tintra. What we are seeing in the area is that it's very attractive and it's attracting a lot of new employment. And the population is growing as well. And we think that the trend will continue in the future. We have to take into account that there is not a real alternative. And this is part of the reason that it has this volume, you know, strong volume. Thank you.

Next question from Jeffrey. So for the A66, can you provide any more color on how the consumer is responding to the ramp up of pricing? And did you see a meaningful change in heavy vehicle contribution in the third quarter versus the second one?

Yes. What I can say here is that there's good safe travel times during peak hours. And this value is attracting users to use our highway. And at the same time, the heavy traffic vehicles are having a good behavior during this quarter. So both factors are impulsing our revenue.

Last question from Raham. For NTO, what percentage of NTO capacity is now covered by airlines agreements? And have there been any discussions with retail partners for the commercial operation?

Hi, Raham. Thanks for the question. Out of the 2027 traffic, around 25% is committed with current international careers contract, Air France, LOD, KLM, EFIHAT and Korean. In relation with the retail, NTO commercial program is managed by URW through a master concession agreement. And URW is progressing along with NTO with the definition of the program, launching the procurement process during next year. Thank you.

Next set of questions coming from Nicolás Mora from Morgan Stanley. First question. Can you help us understand the traffic performance on NTE 35 West? Underlying it's up only 5% despite end of construction disruption. Why is traffic failing to recover against the very disrupted third quarter 2022 basis? Are you charging the same price per mile on the segment 3C that rest of the segments A and B?

Nicolas, thank you for your question. First, I don't think that it's underperforming. You have to take into account that after a long period of construction and disruption in the corridor, you know, there's some ramp up here. And there's still been some construction works in the US 175 connector that is affecting to the general mobility as well in the corridor. So I think that things are progressing well in terms of traffic performance in the segment A, B, and the segment C. In the segment C, we are seeing a strong ramp-up. And in terms of tariffs, toll rates, the segment 3C is in line with the toll rates of A, B.

Next question from Nicolas Mora also. On the use management lanes overall, are you starting to see some fatigue from the U.S. consumer?

No, Nicolas. The answer is no. I think there is a lot of value in that the users are evaluating. And we see that in different polls that we are sending to our customers. And we don't see any fatigue from our U.S. consumers.

Okay, another set of questions from Stifel. Tobias Werner, first question. The buyback of the hybrid bond has reduced your NCP quite markedly. Are you comfortable with this level of cash? If not, what are you going to do about this?

Yeah, hi, Tobias. Yes, we are comfortable with the level of cash. Actually, cash should be used to earn double-digit returns or return to shareholders, right? So, I mean, we've been holding cash and looking for opportunities. We are in a very comfortable position, so there's no need to raise any additional hybrid or to look for new cash.

Next question from Tobias also. Given the CMA decision, have you changed your attitude to your stake in Heathrow? If so, would you consider selling it?

Well, thanks. Well, Heathrow, I guess that the answer is like any other asset in the portfolio. I mean, we are... open to different alternatives as with any other in the portfolio. So if an opportunity keeps knocking on our door, we will look at it on financial merits. Thank you.

And last question from Tobias. Can you give us a bit of color on the progress seen at NTO and what this means in terms of timing of the development of this asset, please?

Hi, Tobias. Really happy to share the progress in NTO. The project is in good progress. So when in the third quarter it truly visible at once, the steel of the forefront of the terminal has been erected with the first steel three columns. The total demolition is almost completed and the air training closure is well advanced, targeting to be open very soon by Thanksgiving. The design phase is 97% achieved. There's really good progress if you have in mind that we are in a complex context of fully redevelopment of GFK with interferences, service effectors from all the works that are being performed at the same time in different terminals. though there are effective mitigation plan in collaboration with the Port Authority and we are confident in the satisfactory delivery of the project. Thank you.

Okay, so it seems that there are no further questions.

So thanks, Silvia, and thank you, everyone. I mean, we're looking forward to what's coming up and the potential US listing and the Capital Markets Day. So hope to see you soon, guys. Thank you. Bye now.