Applus Services SA
MAD:APPS
Applus Services SA
MAD:APPS
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Welcome to Applus+ Full Year 2021 Results Presentation Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.
[Operator Instructions]
And now I would like to hand the conference over to Mr. Fernando Basabe, CEO of Applus+. Thank you. Please go ahead.
Morning, all. Thank you for joining our call. I am Fernando Basabe, CEO. And with me here is Joan Amigó, our CFO. The agenda for this call is that I will run through the highlights, Joan will then present the financials, and I will present the business review. Before going to the outlook, I will present a couple of slides on the continued strong progress in ESG and a summary of the strategic objectives that we presented recently for the three-year plan. At the end, we will open the telephone line to take your questions.
So, starting with the highlights. We had a strong financial performance as a result of the recovery from the low point in 2020 that was impacted by the pandemic, and we also had many operational and strategic highlights during the year. Three of the four divisions are now running at above the pre-COVID levels in total and organic, and the fourth one, Energy & Industry, is on track to be above pre-COVID levels by the end of the year.
Our operational profit margin improved significantly. One of our key focus and target is to annually improve this margin. Cash generation was good. In 2020, we had an exceptional working capital inflow. And so, in 2021, we didn't generate as much cash as in 2020. Nevertheless, it was still very good. Leverage and liquidity, very comfortable, supporting our strategy for growth and enhancing shareholder returns. We closed five acquisitions in 2021, and our first already this year in the Labs division. Many more to come. And, more importantly, the acquisitions we closed in 2021 are all performing very well.
We have stepped up our ESG focus, and last year was the first year we set targets, and I'm pleased to say that we met most of them. As of 2022, we have short- and medium-term ESG targets linked to remuneration. Another operational highlight was a new ESG rating we received from Sustainalytics in December, which was extremely good, reflecting the progress we are making. And already in 2022, we managed to obtain an extension to the auto contract in Galicia. It was due to end in December 2023. So, we were pleased to get this extension two years before the end date. And now, the contract runs until December 2027 and it can then be extended again. We conceded something on price, but it remains a highly profitable contract.
As we announced in the Strategy Plan, as a part of enhancing returns to shareholders, we started our share buyback program. And up to last Friday, we had completed 19 days of buying shares. So far, we have bought around 1% of the 5% target we've set. The details behind the buyback, including prices paid for the shares, are on our website.
And finally, our outlook for the year, I will present on the last slide, but it is fully in line with the Strategy Plan we set out at the end of November. Overall, we had a good year in 2021 and we are confident of continuing good performance.
So for the financial highlights for 2021, revenue was up 14%, of which organic was 5.5%. Adjusted operating profit was up 48% and the margin increased 230 basis points to 9.9%. Cash flow was good, but as I said just now, lower than last year due to the exceptional level of cash flow we generated in 2020. Leverage reduced to 2.7x due to the strong EBITDA increase. The adjusted earnings per share doubled from the low of €0.33 in 2020 to €0.65 in 2021, and the board will propose a dividend of €0.15 per share, which is the same amount as we paid in 2021 and in 2019.
With that, I hand over to Joan.
Thanks, Fernando, and good morning, everyone. I will start as usual with the revenue bridge. We have a strong revenue growth in line with our outlook in the mid-teens or 15.2% at constant exchange rates and 14.1% in total after FX. Organic revenue growth at constant exchange rates was 5.5% and revenue from acquisitions was 9.7%. It means an additional €150 million related to the acquisitions closed during the last 12 months. For the full year, we ended with an unfavorable currency translation impact of 1.1%, having been minus 3.9% at the half year. So, a positive currency impact of 1.7% in the second half. This was mainly from the weak US dollar against the euro.
The net resulting revenue of €1,777 million for the full year of 2021 was in line with the revenue in 2019, which was the last full year unaffected by the coronavirus pandemic. Organic revenue by division for the full year compared to 2019, Automotive is above, Labs, slightly below, and Energy & Industry and IDIADA still below 2019, but with a good recovery trend. It is expected that all four divisions will have total and organic revenue for the full year of 2022 above the levels of 2019. Below the bridge, we show the
[indiscernible]
(00:06:59) percentage changes, with total revenue up almost 15% in Q4 of 2020.
After a low profit and margin point in 2020, we had a strong recovery in 2021. The full year adjusted operating profit increased to €175.2 million or by 48% compared to the prior year. This was made up of an increase in organic adjusted operating profit at constant exchange rates of 28.1%, a 24.7% contribution from the acquisitions made in the previous 12 months, less 4.8% relating to foreign exchange translation differences.
The adjusted operating profit increase in the period came from all four divisions, due to the strong recovery in the business after the impact in 2020 from the coronavirus pandemic. The resulting adjusted operating profit margin for the year was 9.9%, significantly higher than the margin of 7.6% in the prior year, and the margin for the last three quarters was over 10%, reducing the gap versus the 11.1% margin of 2019.
The improvement in the margin came from both the organic business and the acquisitions. In Q4, the total adjusted operating profit was up 12.9%, with the organic component down 3.2%, plus the contribution from acquisitions of 15.7% and a neutral currency translation impact of 0.4%. The final quarter organic profit was lower than in previous year due to Automotive division, which had an exceptionally strong Q4 in 2020 due to the rapid catch-up after the station's closure.
Slide number 9, a summary of the income statement. First, we show the adjusted EBITDA of €286 million, which is an increase of 31% from last year, and at the margin of 16.1% from the 14% margin we had in 2020. Below the adjusted operating profit, we show in detail the items we adjust for. The first is the amortization of intangibles by an amount of €65.6 million, which is €7 million more than the previous year due to the recent acquisitions.
The other results of €8.2 million correspond to restructuring €3.2 million, plus transaction cost of €2.6 million relating to the recent acquisitions, plus other gains and losses of €2 million. Just to remind you that in H1 2020, we registered an impairment of €165 million, driven by the challenging marketing situation and the
[ph]
impressive degree (00:09:50) of forecast uncertainty related to COVID-19. After taking this one-off, the statutory operating profit is €101.5 million.
The net financial expense of €25.9 million, including €7.5 million from IFRS 16, is €1.1 million higher than last year, mainly due to the increase in net debt. We expect around €26 million, €27 million finance expenses for 2022. The effective corporate tax charge rate has been normalized to 25.6%. We expect similar effective tax rate in 2022. Please go to the first slide in the appendix where we detail the operational effective tax rate. Noncontrolling interest of minorities has been €17.8 million, €0.6 million higher than last year. We expect around €20 million in 2022. Overall, the adjusted net profit was €93.3 million and the adjusted earnings per share was €0.65 compared to €47 million and €0.33 of last year.
Regarding cash flow, we have got a good adjusted operating cash flow of €177.5 million, despite it being 30% lower compared to 2020 as this was expected due to the exceptional working capital inflow in 2020 following the revenue decrease due to the pandemic. Despite this working capital increase, in absolute figures, working capital is €63 million or 3.5% of our revenue, whereas in 2019, before COVID, it was 5.7% of our revenue.
Operational CapEx was €60.3 million, €50.2 million in 2020, which represents 3.4% of our revenue. It was 3.2% in 2020. The normalized tax outflow, as expected, €36.1 million, in line with the operational effective tax rate showed in the appendix. We expect around €40 million in 2022. The interest cash outflow of €12.9 million, up €1.5 million versus prior year. We expect an outflow of €13 million, €14 million in 2022.
We reinstated the dividend payout to our group shareholders of €0.15 per share, paid in July for a total amount of €21.5 million. The dividends paid to minority share interest were €18.5 million versus €11.5 million in 2020 due to higher profit in those subsidiaries. We expect around €20 million in 2022. Acquisition cost includes SAFCO, IMA Dresden, Inecosa-Adícora, Enertis, Mipel SA, plus other deferred consideration on previous acquisitions.
Then, we have the balance sheet movement in cash, starting with the new line item of around €60 million after IFRS 16 was introduced. The increase of €46.6 million in financing is mainly the
[ph]
drawdown (00:13:12) of the revolving credit facility. Overall, good cash flow generation, but impacted, as expected, by the working capital normalization as a consequence of the business recovery after COVID.
So this then takes us to my final slide where I will show you that our balance sheet is in very good shape and we have a high level of liquidity. Our total net debt at the end of 2021 was €803.4 million, €607.5 million pre-IFRS 16, €62 million higher than the position on 2020 year-end of €741.4 million.
Leverage as net debt to EBITDA at year-end reduced from 3 times at the end of 2020 to 2.7 times in 2021 as you can see in the bottom row, and 2.8 times after IFRS 16. Regarding liquidity, at year end, we had €588 million of cash and undrawn facilities available, which we consider to be sufficient for our needs and to carry out our investment strategy. So, in conclusion, good cash generation with a comfortable leverage and liquidity situation. That ends the financial slides. In the appendix, we provide further information including a slide on the main currency rates.
Now, let me hand you back over to Fernando Basabe.
Thank you, Joan. In slide number 13, it's a summary of the mix of key end markets or segments and geographies, and how it compares to 2020. Over the last few years, we're seeing the end market mix improving quality, and this will improve the group growth and margin and make us less exposed to cyclical swings in investment patterns like we've seen in oil and gas CapEx.
And as we detailed in the Strategy Plan, we are going to accelerate in this end market evolution. Renewables, Power and Infrastructure within Energy & Industry is the largest segment at 28% of group revenue, 2 percentage points more than in 2020, and this is due to the strong growth in this segment, especially Renewables, as well as acquisitions made here.
Automotive has also grown in the mix due to also strong underlying growth, plus the acquisition of Besikta in Sweden. And Labs also grown from 6% of the group revenue to 9%. Oil & Gas, OpEx and CapEx, both reduced a lot. Now, Oil & Gas in total is 25% compared to 32% in 2020 and 34% in 2019. And the cyclical CapEx part is only 4% of group revenue, less than half of this in profit. By geography, the percent of changes are less pronounced, with the areas more exposed to Oil & Gas like North America or Middle East decreasing. On the other hand, Europe with better end market mix and favored by the largest acquisition, Besikta in Sweden, increased 3 percentage points.
Going through the four divisions now, and starting with Energy & Industry, revenue was up almost 4% and adjusted operating profit was up 44%. Margin is still too low at 6.3%, and this will increase over the next years. As I said in my introduction, the margin is a key focus for us and this is the division where the highest margin improvement will come from.
On the right-hand side, you can see the three key segments, how they performed in 2021, and the trend over the last few years. Renewables, Power and Infrastructure and Diversified Industrials grew very well in 2021 at over 8% organic, plus acquisitions on top. And since 2014, the compound annual growth rate has
[ph]
been over (00:17:31) 6%. This is one of our key segments to grow.
Oil & Gas OpEx services increased 3% in 2021 and over the last few years is down 2% on a compound annual basis. By the end of this year, this OpEx part should be up and therefore probably flat to up over the last nine years, demonstrating its resilience. And as you already know well, Oil & Gas CapEx was down again significantly in 2021, continuing the negative trend since 2015.
I will now run through the bullets and the key points to make for this division. After the first quarter, where this division was still negative year-on-year, we had good organic revenue growth for Q2, Q3, and Q4. We expect Q1 and the remaining quarters in 2022 to continue to show this good revenue growth trend. I've already commented on the three key segments, and by geography, we've seen the best growth from Spain and Latin America.
The acquisitions we closed in the year are all performing well, with the first two, Inecosa-Adícora and Enertis, strongly aligned to the energy transition and benefiting from it. SAFCO, the acquisition in Saudi Arabia, is also performing very well, with construction in the Middle East being very healthy. So, this division is going through the greatest changes as a result of energy transition, and we are every day getting better position to benefit from this, as well as making sure we have the technology and high value services to stay ahead, as well as getting the synergies and improve mix from the acquisitions we are making.
Next division to go through is Auto. It had a very strong results with 28% revenue growth, of which 13% was organic. The inorganic was 10 months from Besikta in Sweden, as this was bought in Q4 2020. 2020 had a revenue shortfall due to the four station closures for part of the year and the catch-up came in the second half of 2020 and the first half of 2021. In addition to this, the business has performed very well, with market share gains in several countries and especially Spain and Sweden. And you can see from the bar chart on the right-hand side, organic revenue from every quarter in 2021 was above 2019, demonstrating the strong underlying organic revenue growth in this division. This strong revenue growth has helped the margin which remains high at almost 22% and this is despite the country mix change which has more revenue from lower margin contracts.
I've already mentioned we were pleased to extend the Galicia contract. We made €53 million of revenue in 2021, so it's one of our largest contracts. We agreed a net price reduction of just under 1.5% and we will also invest mainly to increase capacity over the coming years. In the future, prices in this contract will increase at inflation minus 0.5%.
This continues our very strong Renewables track record. Over the last 10 years, we've had 20 contracts coming up for renewal of which we have succeeded with 18 out of the 20. The next big contract we hope to have good news on is Costa Rica with €34 million of revenue in 2021. And the net end date in July this year, we are confident of reaching an agreement with the government before then it to extend it for another two or three years.
We have previously told you that we've won small contracts in Ecuador and Mexico and they have been delayed starting due to COVID. We expect them to generate around €5 million of revenue in 2022 which should compensate for the loss of Connecticut that ended in September 2021. And as we've said before, we expect more opportunities to come mainly in Latin America.
Next division is IDIADA. It had a very strong year-on-year growth in 2021 with revenue increasing 11% and profit, 69%, both of which were almost all organic. As you can see on the right-hand side, compared to 2019, the business has steadily recovered. And in 2021 and in the last quarter, year-on-year growth was more than 20%. We are expecting the improvement trend to continue in 2022.
The recovery in the division has largely come from the return of our customers coming to our facilities for their car testing, especially the higher margin proving ground in Catalonia. This is steadily improving and we are now running at about 80% capacity utilization. The recovery of revenue and in particular the increase in revenue from the proving ground, has helped the margin increase by 300 basis points to 8.7%.
Also on the margin, we have shown a separate line excluding the accelerated depreciation. We talked about this as the strategy update on November 30. And as a reminder we have to speed up the depreciation of the assets of this division so that they have a net zero value by September 2024, which is when the current concession expires. By showing the margin excluding this accelerated depreciation, we can see the underlying operational margin performance of the business. This is 10.6% of 300 basis points from last year. The auto industry continues to invest heavily in new technologies, especially those associated with electric and hybrid engines. And IDIADA is ideally placed to perform the testing of this and support the development of these cars and novel technologies. This gives us the confidence that this business has a strong growth potential for the coming years.
Finally, the tender for the concession, still we are waiting for it to be launched. Our latest information is that it will be in the next few months. And, of course, we'll let you know when it is formally announced.
And now, for the final division, which is Labs. Like IDIADA, a very strong Q4 growth in the double digits, and this is despite some challenges in certain end markets. And also like IDIADA, the Q4 organic revenue is above Q4 2019, and this should now continue to be the case into 2022. The margin of 6.7% is the highest margin we've seen for this division, and it is sustainable. Labs is the division where we've made the highest number of acquisitions. In the last five years, we've made 12 with total annual revenue of €84 million. And in 2022, we've already made our first acquisition, Lightship Security, which is a cybersecurity certification company based in North America.
The division is completely aligned with the megatrends we talked about in the strategic plan, energy transition, electrification, and connectivity. And this helps to direct our investment priorities and gives us the confidence of continued good growth and high margins. And we plan again to double the size of the division in the next three years through the strong organic revenue growth and acquisitions.
So, now before we move on to the summary and outlook, I'm going to say a few words on the progress we've made in ESG and on the strategic plan. We've been taking steps every year to improve our ESG credentials and to
[ph]
be deflective in floor (00:26:03) operations, and we've done really well in this regard. For the environment, it's not just about reducing the impact of our operations but of course an increasing amount of the work we do helps our customers to reduce theirs.
The targets we set relate to our own operations. And after the first year of introducing targets for 2021 for which we achieved most of them, we've set targets for the annual bonus this year and also for the three year long-term incentive plan, as you can see on the slide. And I mentioned at the start that we were pleased to have received a new rating from Sustainalytics. The score they gave us was 15.6, which they categorize as low risk. This is a really good result and we feel confirms how well we are performing here. And it is in line with the ratings we've had over the last few years from other agencies, and these are renewed every year at strong rates despite the bar increasing year from year.
We presented our three-year strategic plan to you on November 30, and this is a summary. We will continue to improve our portfolio mix towards high-growth end markets that are more long-term sustainable and aligned to the key global megatrends that we can mostly benefit from: energy transition, electrification, and connectivity. We've already been successfully doing this, allocating more resources and effort to these areas including acquisitions, and indeed we aim to accelerate these with more acquisitions and also now some disposals. This will generate higher revenue growth and margins and strong cash flow, and we have ambitious targets for these.
Through these actions, we plan to enhance returns to our shareholders using our strong cash flow generation and following a value-added
[ph]
dev (00:28:05) capital allocation strategy that includes maintaining the annual dividend and the new share buyback program with a targeted increase in the return on capital employed from the current 10% to above 12%. And all of these within the framework of responsible and sustainable business management as I just discussed on the previous slide. Our objective is clear. We intend to unlock shareholder value by delivering on this plan.
And this brings us to my final slide. In summary, we've had a strong financial performance with recovery led by Auto and Labs, IDIADA and Energy & Industry not far behind. Margin and EPS have also recovered well and on track for further material increases. Good cash flow, comfortable leverage and liquidity, allowing us to follow on this strategic plan. In the last two years, we've made 10 acquisitions for over €300 million spend and taking on almost €200 million of additional annual revenue at high margin. We continue improving on ESG, which will now be linked to remuneration.
On the outlook for this year we expect organic revenue to increase by mid- to high-single digits, at constant exchange rates, the margin to continue increasing and we are targeting to complete some divestments this year and of course continue to make acquisitions.
And that concludes the presentation. Joan and I are now ready to take your questions.
Thank you.
[Operator Instructions]
Our first question comes from the line of Simon LeChipre from Stifel. Please go ahead.
Yes. Good morning. Simon speaking from Stifel, and three questions, please. First of all, looking to your 2022 outlook, could you just give us some details on the phasing of the organic growth at the group level? And, secondly, looking to E&I, could you comment in a bit more detail on what you expect for this year for the OpEx and CapEx parts of the Oil & Gas business? And, lastly, just on working capital, if you could give us some details on the dynamics for 2022? Thank you.
Okay. Let me start with your third question about the working capital for 2022. So, I think, in this 2021, working capital has been normalized. As I said, right now is around 3.5% of our revenue. What we expect is that we should maintain in this level, 3.5%, 4% of our revenue, so it means that the increase that we should have in working capital should follow more or less the increase in the revenue. So I expect an increase of working capital not higher than, let's say, €10 million, €15 million.
Thanks. And, Simon, on your first question I understand was about the organic growth that we are expecting on revenue. Our guidance is mid to high single-digit. So, for us, that means from 5% to 8%, that's what we are expecting for next year.
On your second question on oil and gas, CapEx and OpEx, what we expect is similar to what we have seen. So, CapEx will continue decreasing. So, we are not really focused on it. So, we do continue bidding for projects, but we are not interested in low margin projects. We are not interested in investing in that area. So, it will continue decreasing. On the other hand, the OpEx side, we think it's a good business. It is sustainable. It is resilient. The assets are going to be there for long. We have good relation with many, many customers around the world. So, we expect that to grow in 2022 and probably continue growing in the coming years, I would say, low to mid-single digit and with healthy margins.
Thank you. Just a quick follow-up on my first question, I was actually asking for the phasing of organic growth during the year. So, should we expect more the strong start to the year or back end of the mid-year?
The seasonality with COVID has changed quite a lot. So, I mean, I really don't think there's going to be a big difference between the quarters. Traditionally, Auto was strong in half one and weaker in the second half whereas Energy & Industry was the opposite. So, I think I would expect similar quarters over the year, similar quarters in terms of revenue growth, not in terms of absolute figure.
Okay. Thank you.
Thank you.
Our next question comes from Paul Sullivan from Barclays. Please ask your question.
Yeah. Good morning, everyone. Just sort of following up on the organic growth points. The consensus has mid-single-digit, I think, about 5% or so for this year. So, where does the upside to high-single digit come from? I don't know if you can provide us a more specific guidance by division.
And then on margins, any further color on the organic uplift you expect this year? And can you just confirm the IDIADA drag?
And then just on Oil & Gas disposals, it sounds like you're saying over the next 12 months, do you think the timing of news around Oil & Gas disposals would be more second-half weighted? Or should we expect some movement over the next six months? Thank you.
Okay. Thank you, Paul. On the revenue, where do we see the upside? I would say Auto is not going to surprise us, so it's more predictable. I think IDIADA, if there's no further waves of COVID that impacts quite a lot on our facilities here, we can see some upside there and really good growth. And on Energy & Industry, we are still – and that's something that has obviously impacted a lot in 2021, and I would say the margin of the division at group level continues suffering from restrictions in the Middle East and in Asia Pacific. So, there is, I would say, there's some upside there if we don't see or if the current restrictions are lifted and we don't see further waves. So, Energy & Industry and IDIADA are probably where we see the upside to that guidance we are giving.
And let me answer the third one before handing over to Joan on your second question. On disposals, you mentioned disposals on Oil & Gas. We never said our disposals were going to be exclusively in Oil & Gas. So, we intend to do some disposals in areas where are not so strategic for the group now and where profitability is not what we would like it to be. Yes, you mentioned the second half probably or certainly this will be more in the second half than in the first half of the year.
And regarding the margin improvement for organic, Paul, what we expect is to deliver what we said in the strategic plan. So, organically we were thinking to increase around 130 basis points in three years. So this year, 2022, should be in line. So, it means in the range of 30, 40 basis points organically.
Remember that one of the key points in the improvement of the margin is the potential divestment that we expect to do as much as possible this 2022. So, in case that we were able to do these divestments, this could be also a significant positive impact.
And finally, regarding what you are saying about the IDIADA, the accelerated depreciation. So, this year, the impact has been around 20 basis points at group level. And what we expect for 2022 is that the impact should be in the range of 35, 40 basis points. So it means that we'll have a negative impact in the range of 15, 20 basis points due to this acceleration depreciation in IDIADA.
Okay. That's great. Thank you.
Thank you. Our next question comes from Pablo Cuadrado from Kepler Cheuvreux. Please go ahead.
Hi. Good morning, everyone. Just one quick question on my side and probably a follow-up. I wanted to have a view a little bit on the margin on the Auto division which last year it went down slightly versus 2020. And now with the new agreement in Galicia that you pointed out that you refer to a little bit of a price decrease and also with the upcoming review process at Costa Rica, do you expect that 21.9% margin should be lower during this year?
And second question on the follow-up is on the D&A as well. I don't know if, Joan, you can give us a little bit the impact in a different way. Basically looking at 2022 and reflecting this higher asset depreciation, where do you see, let's say, the P&L in D&A? I think it went up last year from €100 million to €110 million, €111 million. Where do you see that during 2022?
Hola, Pablo. So, on Auto, on the margin in 2021 was despite the revenue growth, margin went slightly down. The impact coming from highest growth was Ireland, which is a very large contract. That was very impacted by COVID in 2020. So, 2021 was significantly higher. This contract has a lower margin than the average of the division. And the other is Sweden. Sweden was not in the group, only a few months, two or three months in 2020. And again here, the margin is lower than the average of the division. So, as I think I mentioned in the call, it's the mix of countries, but not that we are in any specific region suffering on margin.
For this year 2022, I would expect despite this decrease, slight decrease in price in Galicia, we should be able to maintain a similar margin than in 2021. So, I mean, there are other contracts that we benefit from inflation and the mix shouldn't be negative this year. So, we've always said our target is to maintain margins above 20% at this division and, for 2022, I think we'll be able to maintain 2021 margin.
Yes. And, Pablo, regarding D&A, the increase that we have had this year in 2021 versus 2020 from €100 million to €110 million, most of them is related to M&A. And remember that here in D&A we have also the impact of the IFRS 16, the leases. So, within this increase of €10 million, almost €6 million correspond to the leases of the acquisitions.
You were asking as well about the impact of the IDIADA, the acceleration depreciation. Just to let you know that, in 2021, in absolute figures, the acceleration depreciation in IDIADA has been €4.2 million, whereas in 2022 what we are expecting is around €6.2 million. So, it means an additional couple of million euros. D&A for next year should be quite aligned with this year, and obviously, it will depend the potential additional M&A that we could have. So, I didn't really expect any significant higher amount than these €110 million except for the potential M&A that we could have.
All right. Thank you. That's very clear.
Thank you. Our next question comes from Gonzalo de Cueto from BNP Paribas Exane. Please ask your question.
Hi. Good morning and thank you for taking my questions. Most of them have already been answered, but I still have two left. The first one would be within Energy & Industry. I mean, could you give us more color about pricing trends behind Renewables, Power and Infra? And is there any material difference that you're seeing in these businesses? Also, my second question would be on your M&A pipeline. What's your M&A pipeline looking like for 2022 and what's your firepower capacity for this year? Thank you very much.
Thank you, Gonzalo. On your first question was about trends in Renewables, Power, Infra, I think we see initial acceleration in the demand of everything around investment
[indiscernible]
(00:42:38). We acquired a company, Enertis, which is doing extremely well, much better than the business plan. We expect to be able to do some more acquisitions in this space during 2022.
And well, I think this is an area that now is only Renewables, 5% of the division of Energy & Industry, probably 6%, 7% if we take the pro forma of Enertis of the full year and I think it will grow 20% in the next years. At least that's what we are seeing.
In Infrastructure, this is more local, and depending on the different regions around the world. Here, we mainly operate in Latin America and the Middle East now and in Spain. We are seeing in the Middle East huge growth for this company. We acquired this, again, growing more than 20%, and we expect this investment in everything around infrastructures building in the Middle East and
[ph]
Saudi Arabia (00:43:48) to continue in the coming years. Latin America, also growing well. Spain is more flat. But again, this is an end market and an area where we intend to continue investing. So I think those are the main trends. On oil and gas I already commented before.
I think the M&A, we won't continue with our strategy. So, obviously, our focus is mainly in the Labs Division. As we said, what we would like is to double the size of the Division in these three years' time. And also, in the case of Energy & Industry, in the segments of Renewables, Power and also Infrastructure, these are the main segments and where we want to invest. We have several opportunities and we are analyzing several companies.
In terms of the firepower, well, we said in the three-year plan that we have in the range of €300 million, €400 million for these three years net of potential divestments. And annually, what we expect is more or less one-third of that. So, in the range of €120 million, €150 million, and also it will depend on potential divestments. So, this is what we are managing in terms of the M&A, but we have several opportunities there.
Right. Thank you.
[Operator Instructions]
Our next question comes from Arthur Truslove from Citi. Please ask your question.
Good morning. A few from me, please. I guess first one was just around wage costs and a bit of pass that through. So, what do you think about the business as a whole? What level of wage growth are you seeing? How able are you to pass that through to your customers?
Question two, how should we think about the impact of the recent EU taxonomy on the oil and gas-related business?
And thirdly, what are you seeing terms of the multiples that you're having to pay to make acquisitions within the areas that you're focusing on? Thank you.
Thank you, Arthur. So on your first question on wage cost and pass-through, I mean, we operate in 70 countries and each one is different and has different dynamics. This is now the time in the year where we will – where we are already negotiating this. What we think is that for the group it's going to be neutral, so we expect some areas to be more impacted than others. I mentioned before, for instance, in the Auto business, we have a large number of contracts where increasing prices in automatic and by inflation, or with inflation minus a small difference, whereas in other divisions it will be tougher to pass through the prices. But overall, what we think is that it's going to be a neutral for the group.
I will let Aston answer your second question because he's quite an expert on the – on this space.
Thanks, Fernando. I wouldn't call myself an expert. But on the EU taxonomy, we have reported for the first time – as you know, it's obligatory from this year – the revenue that falls under it. And it's a small number because it only includes two out of the first, I think, six groups that they're implementing, and the numbers come out at about 3% of revenue, currently falling within the EU taxonomy. It's in the report and accounts.
It doesn't impact Oil & Gas. I mean, there is no – Oil & Gas is not included within there. The number, of course, will go up as they start increasing the scope in future years. I think what is important, though, is we previously talked about €200 million of green revenues. So, this is services that we provide that support the environment such as auto emissions inspection and testing of electric vehicles and testing of renewables infrastructure. That previously was €200 million in 2021. That's grown to €300 million in 2021. So, sorry, €200 million in 2020. €300 million, 2021. So, basically, we're doing a lot more work around the green services.
Okay. And your third question, Arthur, was multiples on the acquisitions. And the type of companies we've been acquiring of that size, we are paying, I would say, 8 to 9 times EBITDA pre-IFRS and we haven't seen a change from the last two years. So, assets in the space of a larger size are much more expensive, especially in the Labs area. But that's the type of multiples we are paying and it's not very different in the pipeline and the companies we're analyzing.
Thank you very much.
Thank you.
Our next question comes from Pedro Alves from CaixaBank. Please ask your question.
Hi. Good morning. Thank you for taking my questions. Just two. The first one on the margin guidance for 2022. Not sure if this is possible, but if you could provide more granularity between the organic improvement, you mentioned the 30, 40 basis points. But then so what could be the impact from inorganic from the M&A that you already made and the expected divestments for this year?
I remember – if I remember correctly, that one year ago you mentioned that you would expect to recover 11% margin level of 2019 in 2022. So, I was wondering if this is still the case, you are comfortable with this level.
And the second question is, for the Energy & Industry division, with all the situation in Ukraine and probably the uncomfortable dependence that Europe has of gas from Russia, could this eventually lead to, obviously, both higher renewables acceleration over the coming years and perhaps also LNG imports to Europe? So, could this – are you seeing eventually here an opportunity for your power and infrastructure division? Any early feedback that you're having on this front would be helpful.
Okay, Pedro. Regarding margin, yes, you are right. In terms of the organic, what we said is this, 30, 40 basis points. In terms of inorganic, well, it will depend on the potential acquisitions that we'll do during this year. The carryover that we have from the ones that we have already done in 2021 is not really relevant, so let's say about around 10 basis points or more or even a little bit lower right now.
And regarding your point about if we would be able to achieve the 11% margin, the critical point here is the divestment. So what we said is that the potential impact of divestment was really material. So, if we are able to do the divestment, obviously, then the margin without this divestment could increase and achieve 11%. Without this divestment obviously in 2022, organically, we would not be able to achieve it.
Okay. And your second question, Pedro, is a difficult one. I think it's too early to see what's going to be the long-term consequences. The way I see it is, I think, fossil fuels, nuclear will stay longer than what probably was foreseen a couple of years ago or a year ago and that's good for our OpEx business. And at the same time, I think the investment in renewables and clean energies will go faster. So, I also think that trend will be good for us on the short term.
We don't have operations in Ukraine and very small operation in Russia from IDIADA and from Energy & Industry. I think it's 0.3% of the revenue of the group, 30 staff. And so, short-term, little impact; medium, long-term, I think all these disruptions will be good for our business.
Thank you very much.
Thank you. Our next question comes from Álvaro Lenze. Please ask your question.
Hi. Thanks for taking my questions. The first one is just to confirm whether the 30 to 40 basis points increase in margin expected for 2022 organically. This already includes the increase in accelerated depreciation from IDIADA.
The second question would be on the potential impact of further waves of COVID. You mentioned that potential upside could come if there are no additional escalation or increase in the number of cases from new COVID waves. But it does not seem to have had any material impact on IDIADA during Q4 despite the severity of the Omicron variant. So, I don't know whether additional waves would really have that much of an impact.
And the last question would be if you could provide us an indication on, other than Oil & Gas, what would be the markets or industries that have lower than average margins or growth prospects that could also be sources of divestments. Thanks.
Okay. No, regarding the margin, yes, 30, 40 basis points is mainly organic, and then we have the impact as we presented in the three-year plan separated of the IDIADA. So we consider this acceleration as depreciation. The margin increase could be slightly lower, but we should be in this range.
Okay. On the impacts of the waves on COVID, you said the IDIADA didn't have an impact on Q4. It did. It had some and it has had also in January. But it's not only IDIADA. It impacts – the main impact for us is in Energy & Industry in Middle East and in Asia Pacific. Those are the areas where we have suffered more and we still have restrictions on visas to the expats to go in the Middle East and to work. And in Asia Pacific, Australia has very recently lifted the restrictions. So those are, I would say, the areas or the places where we could have upside if in 2022 there are no further restrictions.
And on your last question, on which end markets have a lower profitability, so that we are thinking in divesting; I mean, we are not organized by end markets. So, when we talked about Energy & Industry and the end markets that doesn't mean that we have an oil and gas operation. Our operations are geographic and by service. So, we have NDT operations. NDT is non-destructive testing. It's the main service that we provide within Energy & Industry.
And in whatever the geography, the inspectors and the people that do NDT, they cover the different end markets. They cover power, they cover nuclear plants, they cover petrochemical plants, they cover refineries, pipelines, etcetera. So, when we are thinking in divesting and in that division, we are talking about geographic areas which may be exposed to oil and gas, but also to other end markets.
Which ones are more profitable or less profitable? Oil and gas, especially the ones that are most exposed to CapEx, are less profitable now than they used to be and less than the average, but what I would also like to emphasize is that our profitability many times in many cases does not depend that much on the end market
[indiscernible]
(00:57:09) or the competitive landscape in the different geographies. We do have very profitable Oil & Gas operations, and we have very low profitability operations in construction and power. So, it depends, as I said, a lot on what is the competitive landscape and what is our position.
So, it's a combination. But we are thinking in divestments, our operations where the main exposure to end markets is not what we would like for the company in the future. And at the same time, due to size or competitive environment, we don't see that those should remain within the group.
Out of Energy & Industry, we also have in our auto business some areas where we don't see profitability good now we don't see potential to get where we think that division should be. So, it's not only in Energy & Industry where we are considering divestments but also in the other divisions.
Thank you very much.
Thank you. Our next question comes from the Nicole Manion from UBS. Please ask a question.
Hi. Thank you for taking my question. I think most of them have been taken, actually, so maybe I'll just ask a more general one about whether the renewal of the Galicia contract is giving you more confidence in all the upcoming renewals and whether you can give an update on timing of IDIADA within that. Thanks.
Thank you. Well, yes, it gives us more confidence. I think it was very, very important to extend that contract in Galicia and especially two years before it came to an end. The next big one we have, as I mentioned, is Costa Rica. This is €35 million, €36 million revenue in 2021. It's a very nice contract where we are the only operator in the region. And I think you can follow in the press in Costa Rica the contract we are pretty sure will be extended for at least two, three years more because there's no real time to go for a new tender.
And of course, you mentioned IDIADA. This is really the largest contract for the group. The contract runs until 2024. The government of Catalonia said already more than two years ago that they were not going to extend it but go for a new tender and they hired consultants to help them do the tender, but then we had elections in Catalonia longer than expected to have a new government. We have a new governor now for almost seven or eight months. We know they're working on the tender. And what they've said is that tender should be out in, I would say, half one this year. So, that's what we are expecting.
We are comfortable. We know we are doing a good job. We know they are happy with us. We have almost
[ph]
build up that (01:00:22) business from scratch after more than 20 years. So, we think we are well-positioned and we have – we will have a great opportunity to win the new tender.
Great. Very clear. Thank you.
Thank you. Our last question today comes from Pedro Alves from CaixaBank. Please go ahead.
Hi again. And sorry for insisting on this margin outlook. Just wanted to be sure that this 40 or around that this 40 or around 40 basis points improvement organically, or 30 to 40, if this already includes the accelerated depreciation of IDIADA? Meaning that if you are expecting to improve by 30 to 40 basis points organically, and plus, I'd say, 10 basis from the acquisition that you have already done, if this could be erased just from the 40 basis points that you are expecting from the accelerated depreciation? So basically, on a reported basis, including the accelerated depreciation, if you are expecting an improvement of margins? Thank you very much and sorry for the clarification again.
Okay, Pedro. At the end, this is an estimation, and this is what we expect to do. So, organically, without considering these acceleration or depreciation of IDIADA, what we expect to do is this 30, 40 basis points is a challenge, but this is what we want to do, okay? And top of that, we have the impact of this acceleration depreciation, but anyway, this is what it is. And in organic, as I said, you know, is a few basis points right now with the acquisition that we have done. And on top of that, let's see if we have an upside coming from the additional acquisitions that we could during this year.
Okay. Thank you very much.
If you want us to be too precise, Pedro, we said our target is to reach 12% margin by 2024. And of course, it's difficult to foresee what acquisitions and divestments we are going to do during the years. So, I think we should be able to do some divestments and that should help as well as acquisitions. But, I mean, say, 10 or 20 basis points is difficult to precise to that level.
That's pretty clear. Thank you very much.
Thank you, Pedro.
I think there's no further questions. So, thank you all for joining us and have a good day. Bye.
All right. Thank you. With that, we conclude our conference for today. Thank you for participating. You may all disconnect.