Ferrovial, S.A. (OTCPK:FRRVF) Q3 2022 Results Conference Call October 27, 2022 12:00 PM ET
Company Participants
Silvia Ruiz – IR
Ernesto Lopez Mozo – CFO
Inaki Garcia Bilbao – CFO, Ferrovial Construction
David Kenny – Ferrovial Airports
Silvia Ruiz
Good afternoon, everybody. This is Silvia Ruiz speaking. I would like to welcome you to Ferrovial’s Conference Call to discuss the Financial Results for the Third Quarter of 2022. Just as a reminder, both the results report and presentation are available to you on our website.
As in previous results, our domain restrictions to mobility have been lifted, we would like to highlight that the financial information included in our report is still impacted by the COVID-19 outbreak. Given the uncertainty regarding the speed and the extent of the full resumption in activity, it is not possible to predict how the health crisis will affect Ferrovial’s group information and performance in 2022. In addition, the uncertainty caused by the Ukraine-Russia crisis is affecting global markets. Ferrovial will continue to closely monitor trading conditions and further evidence of wider economic impact.
I am joined here today by Ernesto Lopez Mozo, our CFO, and the CFOs of the different business divisions. If you have any questions, you may ask them through the form 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.
Ernesto Lopez Mozo
Yes, thanks, Silvia. Hello, everybody. Okay. So we are going to review the results down to the EBIT level. I mean the full financial results for the year will be discussed in February. So I mean, starting with the overview of the first 9 months with toll roads, we have seen very strong revenue growth in all the assets. I mean, the traffic has performed very well during the quarter, with September showing a good performance and peaks coming back and in general, that flowing into the revenues and EBITDA growth.
Of course, this has also been helped by the strong currency, the U.S. dollar. The 407 ETR also showed similar patterns with traffic improving along the quarter, improving along the general trend of recovery since Toronto reopened. And also, the results are helped by a stronger Canadian dollar. In airports, we also saw very strong performance during the summer and also with improvement of operational and quality service during the quarter.
Construction manage the inflationary pressure, keeping stable margins. The important thing is that construction is delivering infrastructure that is going to create a lot of value. And therefore, the recent developments like the [I-66] reopening is thanks to that excellent management and acceleration of production. The I-66 opened in advance a 9-mile segment. We’re really encouraged by the initial data we are seeing. Of course, we will be publishing a data along 2023. We won’t publish data until the full segments are opened. Also, [indiscernible] Ferrovial prequalified for the SR-400 in Georgia, we’re looking forward to this process.
In terms of strategy, we can say we completed the services divestment with the agreement to sell Amey and well, this should close in the coming weeks, months. In terms of new business opportunities, also, we achieved in June the financial close of the new Terminal 1 at JFK, an achievement that shows the quality of the asset and the project in an environment where financial close are rare. Also, we completed the acquisition of Dalaman International Airport.
Our cash position is very solid with EUR 1.1 billion. We’ve been consuming cash for some very good reasons, investment into value-creating projects like the I-66 and the new Terminal 1 at JFK, Dalaman acquisition. And of course, this is causing the working capital and cash out consumption, some construction in the delivery of these projects. And last but not least, we continue with shareholder remuneration with dividends and buybacks.
In terms of ESG, we are advancing performing in our decarbonization KPIs. We will update on that in the year-end results.
Okay. Moving on to the next slide. We start with the toll roads overview. In like-for-like terms, the growth in revenues and EBITDA is 26.1% and close to 28% with good EBITDA margins. And when we take into account the American roads in the U.S., I mean not on like-for-like terms, but the translation terms, you see that the asset revenue growth is close to 56.5%. EBITDA is growing at 48.2%, and they distributed dividends NTE and LBJ.
The main new toll roads that we’re looking forward to the opening, we have the I-66, as I said, one segment was already opened. And we expect to close at year-end and the construction and open for full operations in 2023. Still, we have EUR 180 million spending to invest here. Another one very exciting project is the 35 well Segment 3C is close to 7 miles. It’s in addition to the 35 West and we still have to invest EUR 70 million and expect opening in September 2023.
Moving to the next slide. We go into the 407 ETR. And here, we see traffic growing strongly vis-a-vis 2021, a 38% growth in VKT terms. Revenues also 35% and EBITDA 39.2%. Average revenue per trip is going up, thanks to longer average trip length. This is mainly helped by trips from the eastern part of the concession of the 407. This is an area that is — has room for growth in Toronto going forward.
In terms of financial position, the company has a strong liquidity, no significant maturities ahead in 2022 and 2023. And it distributed for the full equity CAD 200 million in the third quarter. At the October Board meeting, an additional dividend of CAD 350 million was approved. It doesn’t show in our accounts yet of course.
In terms of the Schedule 22 and the force majeure event, there have been questions regarding the agreement with MTO, in particular, if the agreement imposed restrictions on the ability of 407 ETR to raise tariffs. The answer is very simple. No, there is none in the agreement. Therefore, it comes down to an economic decision, 407 ETR will raise tariffs when it makes economic sense. The agreement is available in 407 ETR’s website if you need to check.
The other question we were getting is when does the force majeure event end. There are 2 conditions. If either of them are met, the force majeure event will terminate. One is if the 407 raises tariffs. The other is if average peak hour traffic reaches the average peak hour traffic for the period of 2017 through 2019. 407 does not provide data on peak hour traffic. It has chosen to communicate average traffic as a good proxy to follow for assessing the duration of the force majeure event. Average traffic is likely to recover ahead of peak traffic.
If we move to the next slide, we see the traffic patterns compared to 2019. I mean, the 407 released results some days ahead. And therefore, this is no news, but it’s good to see the trend. And in particular, I would like also to look at the graph of the return to the office. I mean, it’s low. It’s very low compared to the areas where we operate, but the trend is clearly there. And September was probably around 32%. October first days, weeks is around 34%. Okay. So still is low compared to other areas where we operate. Toronto reopened much later than other cities and has had a slower start, but the trend is improving.
In terms of the economy ahead, I mean, we have shown here some forecast from the conference port of Canada and Statistics Canada. So even in an uncertain macroeconomic scenario, they — I mean these institutions expect to — I mean, still growing in real GDP, CPI to moderate, the household income to grow and employment also should perform well. Okay. So I mean, the area is looking more resilient than maybe others in other parts of the world.
Okay. Moving on to the next slide, we go into the Dallas Forward managed lanes. And here, I would like to focus on different patterns. I mean the first one is, let’s say, pattern inside the quarter. As we can see in all the roads, improvement in traffic was clear with September being stronger. So NTE clearly stands out and is having more mandatory modes due to congestion. When we look into LBJ, you have to bear in mind that the comparison to 2019, 2019 had a flattering numbers in this last part of the summer and also in the fall, as we will see, because — I mean, one of the completing roads to LBJ started works, another one that was a feeder open. So this is a comparison that probably does not resemble properly what the traffic evolution is. But we can see the improvement in the quarter. That’s clear. And also in the table below, we can see the growth vis-a-vis last year.
Of course, the LBJ still has works on the eastern connection and whereas there are at high levels and people are avoiding the corridor. A similar story in terms of works regards the Segment 3 — regarding Segment 3C is affecting 35 West. We are checking that useful drivers are avoiding that corridor and that is affecting traffic, traffic that, in any case, keeps performing very well with a high proportion of heavies. We show there a picture of how 3C is affected by works.
Okay. So when we look into a willingness to pay in the region, we see the growth in revenue per transaction of the different roads. So all of them clearly above inflation. Inflation that at the beginning of the year was at 7% and that was the upgrade or the uplift in the cap that was applied, okay? So still performing really well.
If we move to the next slide, we can see that the revenue outperformance compared to the pre-pandemic levels is huge and it happens in all the roads. In particular, the last one, I-77, I will cover later because it’s also improving and showing excellent performance above our expectations.
Moving into the next slide, we can see Dallas Forward in use. And the influx of new businesses remain. I mean, you see Wells Fargo is building a new corporate campus, probably with 4,000 workers. Goldman Sachs is expanding to Dallas as well, office space for 5,000 workers. Oneworld Alliance, headquarter will relocate from New York into Forward. So the area keeps attracting businesses from all across the country. And when you look into the drivers for future growth, that’s something we need to keep insisting given that this reflects on much more value going forward is the population growth and the employment growth.
Okay. So moving into the next slide to cover the I-77, it is clearly growing maybe even faster in terms of revenues and EBITDA than the rest, right? So it’s catching up in terms of revenue per transaction or per mile with other roads. The area is also growing well. And well, the higher revenue per transaction that was mentioned is 43.9% growing compared to last year.
In terms of regional update, again, this one continues to grow. Population is expected to grow 1.6% growing at the moment. And well, the Charlotte population is set to surge by 47% from 2010 to 2030, okay, so another area of growth where we are well-positioned.
Moving into airports. I’ll start with Heathrow. I mean, Heathrow results were out yesterday, so probably you’ve seen the traffic performance. And well, Heathrow has lifted the expectation for passengers for the year with a range of between 60 million to 62 million passengers. So I mean, of course, inbound leisure was been the — has been a main driver of the recovery. But I mean, inbound leisure and business travel is also showing signs of recovery.
So business travel in the third quarter that reached 21.5% compared to 28% pre-pandemic. So you see that demand to travel is still there. I mean, the temporary cap on the part in passenger side that was introduced in July, so that all parties around the airport could have the smoother operations will be lifted from October 30. So I mean, Heathrow was the busiest European hub this summer and consumer services quality improved along this quarter. So everybody in the sector is focusing on building back capacity and scaling up resources.
In terms of financial performance, I would like to highlight that Heathrow keeps delevering and the net debt to the regulated asset base at Heathrow Finance reached 83.7% at the end of the quarter. Okay. Now we are waiting for the CAA’s final proposals, and we’ll comment when they are out.
Okay. So moving into other airports in the next slide. We also see that AGS performed well in the summer. It’s Glasgow showing a 23% drop versus 2019 in the third quarter, but clearly improving from year-end and from last year. And I’m happy to say that Dalaman that we closed in the summer is showing good performance, strong recovery of traffic, in particular, just close to 7% drop versus the third quarter of 2019. And now you see the U.K. representing 46% of all passengers. So it’s becoming more and more a very attractive destination.
In terms of what I highlighted at the beginning, New Terminal One, very important to mention that project is on schedule. And I mean, some milestones like the demolition of the Green Garage and the AirTran closure currently are underway. In terms of equity contribution, as of September 30, we have injected EUR 34 million.
Okay. If we move into construction. So we remain with flat margins. Here, clearly, we have to differentiate between the — I mean, 2 big projects that are dragging margins down, but are very important. I mean, the first one is the I-66 that, as I mentioned, is helping us to open a very exciting infrastructure. And the other one is the I-285 that is at the heart of the new projects coming up in Georgia, the SR-400 and others and is helping us really with a relationship with contractors in the area. So all that experience should be valuable.
In terms of how are other parts doing? Well, in the — I mean not on the slide, but you can see in the release that has been filed, Webber that operates in the U.S. is at 3% margins and Budimex is well more than double that. Okay. So very good management on an intense environment, complicated projects with fixed price, delivery is taking place and that should bring value from infrastructure.
In terms of the backlog, it’s also high and it has some pending items to book like the subway line in Toronto that should incorporate EUR 2.3 billion. I mean, we’re looking forward to that project as well. In terms of cash consumption, yes, the U.S. is still expected to consume cash in the remainder of 2022.
In terms of services on the next slide, we completed pretty much the process with the sale of Amey, some small pieces remain like mining services in Chile and waste treatment and energy from waste in the U.K., a long time that will go. But I mean, the focus now is not on these sales processes. These operations will remain and the idea is to improve their results, in particular, waste management, Chile is doing quite well.
In terms of the sale of Amey, some details, you saw the enterprise value of GBP 400 million. And in terms of net debt-like items, the main item that was incorporated was GBP 148 million. That is really for pensions. It’s a proxy for a pension scheme buyout. I mean the scheme has a surplus in [IAS 19] in technical provisions, is very well-funded. But clearly, the negotiation implied that we had either to keep that risk for us or take it as a kind of a buyout solution.
Okay. So in terms of the final completion is subject to regulatory clearances that are expected in 2022. In terms of the capital gain estimated is around EUR 50 million. This all was disclosed in our communication to the market at the time.
If we move on to the cash evolution. We see the different components, I mean, the help from dividends from projects and then we see the main cash drain that we have. The working capital evolution is related to construction, a little bit in services, but I mean, construction, the delivery of these projects that I mentioned before is causing this drain.
Taxes are mainly related to Poland. And then, of course, we have investments and shareholder remuneration and the main costs here. In other financing cash flows, we have here the dividends to minorities in Budimex. We have the deconsolidation of net cash position of businesses that have been sold, have been divested and then FX, the exchange rate impact.
If we move into the closing remarks, we’re really seeing very good traffic in this quarter with good trends, a good recovery. We have — our infras are really long term and located in areas that keep growth in countries that are stronger than others. And well, we see that the infrastructure assets are benefitted from inflation.
Construction is delivering, and this is very important in this environment. And we look forward to attractive investment opportunities. Our focus, of course, is on complex infra projects in the U.S. In terms of ESG, as I mentioned at the beginning, we are advancing on the raw mat to decarbonize the business, and we’ll update in the KPIs at year-end and also important to be looking to business opportunities from this effort. In terms of remuneration to shareholders, the Board approved the second scrip dividend that will take place along November.
Okay. So thanks a lot for bearing with us in the presentation and we’ll move into the Q&A session.
Silvia Ruiz
Okay. Thank you very much, Ernesto. Q&A session will begin shortly. Please stay tuned.
Question-and-Answer Session
A – Silvia Ruiz
Okay. So let’s start with the Q&A session. First set of questions comes from Luis Prieto from Kepler Cheuvreux.
First question. How should we think about the cost inflation dynamic on the construction front in 2023? Is it fair to assume a full normalization of margins by 2024, recession allowing?
Inaki Garcia Bilbao
This is Inaki Garcia, CFO of Ferrovial Construction. Yes. I mean the big part of the huge increase in inflation is already in our backlog and a big part of that will recover in 2022. I mean remember that, that is not only in the contracts that have profit, but also in loss-making contracts. And this cost of inflation has been already accounted for.
So for 2023, of course, I mean, there is inflation in the final result of the contract. So because of the percentage of completion, a part of this much less, I mean, that in 2022 will be considered. And for 2024, we don’t see impact unless, I mean, a very huge impact on inflation that has been covered also in some of the latest contracts signed now. So my question will be — my answer will be 2023 small inflation impact. 2024, we don’t see inflation impact in this moment. So we can keep the guidance of 3.5% EBIT at the end of the year.
Silvia Ruiz
Next question from Luis. Could you shed light on how you will account for cost inflation and/or volatility in your bids for feeder management projects like the SR-400 in Georgia? How does the approach change in a potential much more adverse economic and financial environment?
Inaki Garcia Bilbao
This is Inaki again. In every new contract that we are signing, we are being prudent. I mean, in terms of finding the ways to have this protection through index formulas or considering in our cost or whatever escalation of prices that we could [go].
Silvia Ruiz
Next set of questions coming from Sathish Sivakumar from Citi.
First question, can you comment on traffic trends into October across ETR and other managed lanes?
Unidentified Company Representative
This is [Timo] from [Tintra]. We are seeing similarities of traffic patterns in October with no relevant changes. The traffic trend is pointing in a right way. So further information will be provided in the next quarter.
Silvia Ruiz
Next question from Citi also. What percentage of order book is inflation-protected?
Inaki Garcia Bilbao
Inaki Garcia again. About 80%, 90% of inflation is protected in our order book. Remember that is not only in the section formulas that you have in Spain or in Poland, but also kind of contracts, the type of contracts that you have in some of them, you have caps in some others, some materials are included. And in some others, I mean, there are habits that in the moment, they are reading you know exactly, I mean, which bases can be closed.
Silvia Ruiz
Next question coming from [Anna Aarko] from BBVA.
Following [indiscernible] recent decision to call and not replace its non-call 2022 hybrid, could you please provide any color as to what options you may be considering at the moment regarding your own EUR 500 million, EUR 3.124 per hybrid bond?
Ernesto Lopez Mozo
Thanks, Anna. Well, I mean, the purpose of having a hybrid bond is that it sits nicely in the capital structure, right? I mean, it’s a hybrid. This has subordinated — deeply subordinated issue, right? So I mean we would be looking at the different alternatives. If calling of the bond is too expensive at the time, we would extend and we would look forward to other opportunities.
I mean, after 2023, you can be calling that recurrently. So we would be looking at other opportunities. But as I said, it sits very nice in the capital structure, okay? So we will be considering all the different opportunities that there are, issue a new one, calling it with cash or the most likely probably would be in this current environment of uncertainty to keep it because it has value from its [cost] equity characteristics.
Silvia Ruiz
Next set of questions coming from Robert Joynson from BNP.
First question regarding the 407 force majeure agreement, Slide 5 of the presentation stated that average traffic is as good an indicator for the expiry of the scale on ’22 waiver as peak hours traffic. But Ernesto subsequently said that average traffic is likely to recover ahead of peak traffic. The 2 statements seem inconsistent. Could you please clarify which is correct?
Ernesto Lopez Mozo
Yes, hi Robert, thanks for the question. Well, basically, the 407 ETR does not disclose a peak hour traffic. I mean this is very sensitive for commercial reasons, right? So if you are not going to release that for commercial reasons, probably for the public, the first thing is to provide the most readily available traffic that is the average one. The reason I’m saying is as good a proxy is because weekend traffic, it has recovered than the other one.
Of course, it’s true that all the growth now is coming from the acceleration of the weekday traffic, right? But I mean, it’s, I would say, prudent to say because it would lead to maybe an earlier date. So that’s the reason why we think it’s a good proxy and it’s prudent. Okay? So that’s maybe a little bit inconsistent as you say, but this is probably the right way to proceed if you don’t want to provide the peak hour traffic.
Silvia Ruiz
Next question from BNP. By how much was average peak hour traffic below the 2017, 2019 average level during September?
Ernesto Lopez Mozo
We don’t provide this information, as I mentioned, is commercially sensitive.
Silvia Ruiz
Last question from BNP. Concerning the duration of the force majeure agreement, is there any time limit? Is it feasible that the force majeure event will still be deemed valid if peak traffic has not recovered to the 2017, 2019 average level by let’s say 2030?
Ernesto Lopez Mozo
I mean you can take the agreement, as I mentioned is in the website. I mean, there’s 2 conditions and they are not time-related. So there’s no time limit. But of course, I mean, probably things will move much faster than the days you are suggesting.
Silvia Ruiz
Next set of questions coming from Jose Manuel Arroyas from Santander. First question, 407 ETR, when you look at the traffic patterns during the day in 407 ETR, how far is traffic from the 2019 level at different times of the day, in particular, with the increase in e-commerce, is there upside to increased tariffs during the midday hours of the day?
Unidentified Company Representative
Thank you for your question, Jose Manuel. This is Timo from Tintra. As Ernesto said, we cannot provide any information about peak hours for commercial– because it’s commercial sensitive information. And in the end, but what we can see, as you see in the presentation, the performance in this quarter is quite good, mainly driven by the war days and again in peak. So we are in the right direction. In the case of the e-commerce, what is important here is how is the evolution of the right traffic. The e-commerce is important, but the traffic is key for the war days and the peak hours.
Silvia Ruiz
Next question from Jose Manuel Arroyas [indiscernible]. Can you update us on the liquidity situation of these 2 entities? How much cash is available for dividend distribution in the second half 2022?
Ernesto Lopez Mozo
Okay. The performance of these 2 entities is quite good. The cash at the end of the year will depend on the traffic performance in the last quarter. But we can say that the liquidity is in line with the performance of the asset. We are expecting, if everything goes well, more than $100 million of dividends in the 2 entities for the end of the year.
Silvia Ruiz
Next set of questions coming from Marcin Wojtal from Bank of America.
First question, when is the soft cap for U.S. managed lanes going to be updated for 2023? And what revision do you anticipate?
Ernesto Lopez Mozo
The soft cap will be escalated by CPI in January 2023, with the CPI at the end of the year, the December compared with the December of the previous year. So it will depend on the CPI evolution, but we — according with the consensus will be higher than 6%.
Silvia Ruiz
Next question from Marcin. What gives you the confidence Ferrovial is well-positioned to win the SR-400 project in Atlanta, considering 2 other consortia are also competing?
Unidentified Company Representative
Hi, Tim again. We have 2 competitors. It’s going to be a really good competition in this project. But as you know, Ferrovial has an integrated business model with a construction company who is working with us and we will be able to allocate the rigs separately and be as competitive as possible in this project. If the competitors are so aggressive, so it’s something that we need to see. But we have all the skills and all the things that we need to be competitive in this grid. We are confident.
Silvia Ruiz
Next set of questions coming from Filipe Leite from BPI CaixaBank. First question, why LBJ traffic recovery is still lagging significantly when compared with the other managed lanes?
Unidentified Company Representative
Thanks for your question, Filipe. It’s true that LBJ traffic is lagging compared to 2019 significantly, okay, compared with NTE you can have this perception, but the main reason of this is because we have as Ernesto mentioned before, construction works in the 65 is — this is taking out volume of traffic, mainly in light traffic from this area. There’s — and you know this 65 is a good figure of LBJ. There’s something related to the working from home because the area where LBJ is has more exposure to people who can work from home. But mainly we think that the main impact is the construction work that is temporary, will finish in 2024. We are expecting to see after this construction is done how the — as performance of traffic in this asset evolve.
Silvia Ruiz
Next question from Filipe. Selling your stake at Heathrow is a possibility or the investment in the airport is core for you?
David Kenny
David Kenny here from Ferrovial Airports. Airports are a core area of Ferrovial’s business and we’re committed to growing our airports portfolio. In respect of Heathrow, strong focus at the moment is on supporting the Heathrow team in delivering a best-in-class major airport in terms of quality and service. And also we’re currently supporting the airport in the process of finalizing a fair and sensible outcome on 87 user charges. We’re not considering any change in the approach to our investment in Heathrow in the short term. And that’s all that’s the case for our other airport investments.
Silvia Ruiz
Next question from Filipe. Can you give us any visibility regarding pipeline for 6, 12 months?
Unidentified Company Representative
Here’s Tim again from Tintra. I’m going to answer this question on the side of Tintra. We are very optimistic with the pipeline in the following 12 months regarding the high complexity projects that we are ahead of us in U.S. One of these is the SR-400 and it’s part of the yield Georgia realty program and the other one is the I-10 in Louisiana. As you know, we are prequalified by — for these 2 projects.
We have — we also have — or we expect it to be — to present a bid in outside the U.S. in a couple of contracts in Chile and Colombia. We have India. As you know, we have an investment in — we have a stake in a company in India is called IRB and India is booming in terms of pipeline and we have a lot of projects ahead in the following 12 months. So as I said, we are optimistic with this pipeline.
Silvia Ruiz
Last question from Filipe. What is the total cash consumption expected for 2022 from U.S. construction projects? Should we expect also cash consumption in 2023?
Inaki Garcia Bilbao
Thank you, Filipe. Inaki Garcia. Well, cash consumption by the end of 2022 is going to be around the EUR 300 million, EUR 350 million. I mean, more or less, this is the numbers. For 2023, our main contracts, I-66 probably will be almost closed, I-285 will have some consumption. But remember how is our business. I mean, on the other hand, we have contracts, our new contracts. These contracts usually have advanced payments. So this is part of our life. So in 2023, probably there will be further compensation. Thank you.
Silvia Ruiz
Next question from Stephanie D’ath, RBC. Well done on completing the Services division sale. Any other parts of the business you could consider divesting, in particular, in construction?
Ernesto Lopez Mozo
No, we’re not concerned at the moment or having any process to sell any other business. Construction is really been key in delivering the fantastic infrastructure that we can give us a greenfield or yellowfield, if I may. So no, we’re not considering anything. Of course, it’s true that we rotate assets and we receive from time to time interest from buyers that we have to consider each at a time. But I mean, we are not in the process of divesting anything at the moment.
Silvia Ruiz
Next set of questions coming from Graham Hunt from Jefferies. First question, can you provide some details on the actions you’re taking to mitigate cost pressures in construction projects in the U.S.? Are you seeing material and labor headwinds is at all?
Inaki Garcia Bilbao
Thank you, Graham, Inaki Garcia again. Well, I think we have explained the main actions that we are taking that they go from hedging some of the materials, more sales performance, also closing long-term contracts, I mean, with subcontractors. So these are the things that we can do. I mean as a sample in San Antonio, I mean, we are still in the design phase, but we have closed most of the concrete beams that we’ll put in place. And regarding material and labor, yes, of course, I mean, we see that the cost of labor is increasing. In material, in certain states, I mean, like Texas, I mean, for example, shortage of cement, but we are leading this. Thank you.
Silvia Ruiz
Next question from Jefferies. When are the works mentioned around the [FDA] expected to be completed?
Unidentified Company Representative
This is Timo from Tintra. TxDOT assumes a substantial completion in late 2024. So it’s expected to be open in 2025.
Silvia Ruiz
Last question from Jefferies. Can you remind us of the phasing of equity contributions for the GFK for 2022, ’23 and ’24?
David Kenny
Sure. David Kenny here from Airports again. Can I refer you to Page 46 of our June investor presentation, but also just to give you those numbers which appear in that previous disclosure, in 2023, it’s around EUR 230 million; in 2024, around EUR 500 million; 2025, EUR 260 million; and in 2026, around EUR 70 million. The total commitment for Ferrovial is at around USD 1.14 billion.
Silvia Ruiz
Next set of questions coming from Antonio Rodriguez from ODDO. First question, in the first half results presentation, you provided a positive message regarding working capital expectations for full year 2022. Are you still positive in this respect? What should we expect?
Ernesto Lopez Mozo
Well, rather than a positive message, we talked about seasonality, right? And usually, the fourth quarter tends to have more inflows in terms of working capital. So we’ll have to see. As we mentioned in the presentation, we have contract spending to be incorporated into the backlog at quite a substantial amount compared to what is customary. And while it does materialize, we will have some inflows from there. But at the same time, we also mentioned that in the U.S., we will keep consuming cost from the delivery of these projects, right? So we’ll have to see how that’s balanced, but definitely some seasonal inflows will happen as in what happens normally. But I mean I won’t basically provide any specific guidance on the final sign of the quarter.
Silvia Ruiz
Next question from Antonio Rodriguez. LBJ traffic in your estimates, has the impact of the works in feeder motorways being higher in the third quarter than in previous quarters?
Unidentified Company Representative
Thanks for your question, Antonio. We are not seeing more impact. We had to take into account what Ernesto mentioned in his presentation that we are comparing with 2019. And there are some construction works that were ended in that year. So there has some distortion in the comparison. So you have to take into account this impact not only the construction works when we are talking about the comparison of this 3 quarter with the previous ones.
Silvia Ruiz
Next question coming from [Carolyn Bruger] from Allianz. What is the purpose of keeping the hybrid bond outstanding as you are not getting any equity content from S&P, given the cost of reset, wouldn’t be senior debt cheaper?
Ernesto Lopez Mozo
Well, I mean, S&P is not providing equity content now because we are in a very solid position with a lot of cash, right? But I mean, if there were to happen investment opportunities, we could use that cash, then it would make sense. I mean, the purpose of the hybrid, it fits in the — as a layer in the capital structure that optimizes the capital structure, right? So we’ll keep an eye on that to see the best outcome. Maybe the best outcome is senior debt, but it’s not the fact that it’s cheaper implies that is the best solution because as I said, it fits well in the capital structure.
Silvia Ruiz
Next question coming from Nicolas Mora from Morgan Stanley. Traffic [indiscernible] at NTE35 West in June, July, slowly recovering in August, more strongly in September. Is this due to the phasing of construction work on Segment 3C? Until when do you expect such works to weigh on traffic?
Unidentified Company Representative
This is Timo from Tintra. [Ph] I think that the traffic that you see stronger in September is part of the trend that we are seeing in the area, that’s better mobility, thanks to back-to-the-school or back-to-the-work in September. We are doing our best working with our contractor in order to mitigate the impact in traffic during this construction at the Segment 3C, but you have to understand that our priority is to develop and finish this project in time, which is very relevant for us. Thanks.
Silvia Ruiz
Next set of questions coming from Elodie Rall from JP Morgan. First question, in contracting, what kind of inflation protection do you have in your contracts? What proportion is fixed cost? And are you using cost plus fee mechanisms?
Inaki Garcia Bilbao
Yes, I think I mentioned that 80%, 90% of our backlog is inflation-protected. This protection comes from different kind of potentials. I mean, countries like Poland or Spain is indexation formulas also type of contracts that you have, where, as I mentioned, part of the materials can be covered. Can you include formulas — indexation formulas with your client? So I mean this is the protection you have. Of course, I mean, we have contracts, cost-plus. I mean, as you include in your question, this basically, for example, target costs in the U.K., but there are other countries that this is not the case, no. And for new contracting of what I mentioned, I mean, the escalation is considered and the main big contracts that we are signing, some of them, all of them — some of them, sorry, are including any protection, no.
Silvia Ruiz
Next question from Elodie. On the [Forward 7], do you think traffic recovery is getting close to a level where you feel comfortable increasing tariffs?
Unidentified Company Representative
Well, we are seeing that in September, we saw an improvement in [Vortex] traffic and AMP, which is positive, but we need to still monitor the traffic because we need to see some — we have to have more visibility of the usage patterns related with the working from home and there are some construction works and alternatives that we need to take into account as well. So for the moment, we are in the right track, but we need — it’s early to say, we need time.
Silvia Ruiz
Last question from Elodie. On the I-66, could you give a rough idea of the expectations for 2023 revenue and EBITDA?
Unidentified Company Representative
As you know, we cannot provide information for 2023. But as Ernesto said, we are receiving information from the first segment that we opened a few months ago, the information that we are receiving is encouraging. Thank you.
Silvia Ruiz
Next set of questions coming from Augustin Cendre from Stifel. First question, will the losses that for [indiscernible] construction Agroman continue in early 2023 as the I-285 project is being finished?
Unidentified Company Representative
Well, the I-285 is not finished by the end of this year, we’ll finish mid next year. But as you know, it’s a contract with losses. So losses are provided in previous years. And the only thing that you can have is internal fees that you cannot provide for and there will be a small amount of losses coming from this contract.
Silvia Ruiz
Sorry, next question from Stifel also. Why is Budimex Q3 2022 EBIT margin so strong, 7.4% versus 5.8% year-on-year. What drove the division’s drop in revenues during the quarter?
Inaki Garcia Bilbao
Yes. Well, Budimex basically is — some contracts are finishing. Some of the contingencies due to the occurring work that were in the contracts have been released at the end of these contracts. And basically this is the main reason. The other one is that the climate in the third quarter has been better than expected. So that gives you a better margin, no.
And regarding the drop in revenues, this quarter compared with the previous is quite similar. I mean, so I don’t know if you are referring to the previous year when you know, I mean, that there were other businesses like SEC or the real estate business that give us also some sales. But there are no — there is no real drop in revenues. And with the backlog we have, there is not going to be a drop in the future, no.
Silvia Ruiz
Next question from Stifel. The airports’ top line performance looks strong. How much of that can be attributed to Dalaman?
Ernesto Lopez Mozo
Excellent question. Dalaman is the only airport within our portfolio that we consolidate. So for that reason, it does account for around 80% of that top line revenue number that you can see.
Silvia Ruiz
Last question from Stifel. When Schedule 22 resumes, do you intend to recover the tariff growth loss during the COVID-19 crisis? Or should we expect a lower rate of increase in line with inflation?
Unidentified Company Representative
Yes. Once it makes economic sense to raise it all and we made the decision, the most likely scenario is a fast catch-up with inflation. Thank you.
Silvia Ruiz
Next question from Sathish Sivakumar from Citi. Can you quantify the impact of currency on earnings given a strong U.S. dollar?
Ernesto Lopez Mozo
Okay. So — I mean, since we report down to the EBIT level, I will report to the EBIT level, right? So you have 2 impacts, a positive one on concessions of EUR 32 million equivalent of improvements thanks to the strength of the dollar. And you have a negative of EUR 10 million in construction. The reason I separate that is because we see construction as temporary and finalizing these important assets is not something that should be recurrent. So I would suggest you to stick to the concessions positive impact of EUR 32 million. As I said, to the EBIT that is up to the level we are reporting today.
Silvia Ruiz
Next set of questions coming from Marcin from Bank of America. First question, do you anticipate 407 ETR to distribute any further dividends in calendar 2022?
Unidentified Company Representative
Yes, it’s likely to see further dividends, but is subject to the performance of the asset. That trend is positive. We will see what happened at the end of the year and what is the decision of the Board, but we are positive on that. Thank you.
Silvia Ruiz
Next question from Marcin also. Can you remind us how 407 ETR peak hours defined for Schedule 22 penalties calculation?
Unidentified Company Representative
Summarizing how it’s working in the scale of ’22, it’s taking into account the 60% of the business days of the year and inside of this — and taking into account this is 60% of this stage, the 2 business hours. And this — you are setting a record with this traffic during these days that I just defined. And if you are below this threshold in terms of traffic is when you have to pay this penalty. But I think that is better if you — one more detail and understand better fiscal ’22, you have the provision in the [407 West] and you can check it out. Thank you.
Silvia Ruiz
Okay. It seems that there’s no more questions.
Ernesto Lopez Mozo
Well, thanks a lot guys for bearing with us and I hope you enjoyed the results as we did. Thank you. Take care.
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