VINCI – Annual report – 31 December 2020
A. Key events, accounting policies and specific arrangements made in the context of the health crisis (extract 1)
1. Key events
Covid-19 was declared a pandemic by the World Health Organization on 11 March 2020. Faced with this unprecedented global health crisis, VINCI’s absolute priorities are the safety of its staff, partners, subcontractors, customers and stakeholders, along with the continuity of the public services for which it is responsible.
The Group’s business levels and earnings were badly affected by the pandemic, in both Concessions and Contracting.
- Consolidated revenue totalled €43.2 billion in 2020, down 10.0% relative to 2019 and down 11.1% like-for-like.
- Operating income from ordinary activities was sharply lower than in 2019, amounting to €2,859 million. Operating margin on ordinary activities was 6.6% (11.9% in 2019).
- Recurring operating income – including a negative contribution from companies accounted for under the equity method – totalled €2,511 million (€5,704 million in 2019).
- Consolidated net income attributable to owners of the parent was €1,242 million in 2020, compared with €3,260 million in 2019.
- Net financial debt at 31 December 2020 was €18.0 billion, down around €3.7 billion relative to end-2019, due to very strong free cash flow of €4 billion, close to the 2019 figure of €4.2 billion.
The report of the Board of Directors contains information on the operating performance of the Group’s various business lines.
The Group has not changed its financial performance indicators. The effects of the pandemic are spread across the income statement and certain elements cannot be isolated, either because they resulted in a decline in revenue or because the Covid-19 impact cannot be determined reliably.
Recurring operating income was affected by the fall in revenue, which resulted in lower-than-normal business activity – particularly in France during the first lockdown – along with reduced productivity because of the introduction of new health standards and containment measures on worksites. Additional costs mainly concern:
- the cost of demobilising, shutting down and remobilising worksites, and measures taken by the Group to ensure the on-site safety of staff members given the health risks;
- fixed personnel costs, partly offset by furlough compensation payments;
- the cost of unused premises and equipment.
These additional expenses incurred in 2020, and more specifically in the second quarter of the year, are not included in the measurement of progress towards completion of construction contracts, and so did not result in the recognition of any revenue.
Some income statement items – such as impairment charges on goodwill and certain material assets, and restructuring costs relating to consolidated subsidiaries – are presented under non-recurring items, as they had already been in the past. However, non-recurring items relating to subsidiaries accounted for under the equity method are presented under recurring operating income.
Financing transactions and liquidity management
The Group took steps to protect and strengthen its financial position in 2020.
At 31 December 2020, VINCI had total liquidity (including commercial paper) of €19.2 billion, comprising:
- managed net cash of €10.0 billion, resulting from excellent control over the operational cash position during the year;
- a confirmed revolving credit facility remaining unused by VINCI, totalling €8.0 billion, due to expire in November 2024, extended in November for one year for €7.7 billion;
- €1.2 billion of commercial paper in issue at 31 December 2020 (€0.8 billion at 31 December 2019).
Given its very high level of liquidity, the Group did not exercise the extension options for its €3.3 billion short-term credit facility arranged with a syndicate of 11 banks between April and May and due to expire in October 2020.
A. Key events, accounting policies and specific arrangements made in the context of the health crisis (extract 2)
3. Specific arrangements made in the context of the health crisis
Against the background of the current health crisis and to ensure that the correct accounting treatment is applied to the consequences of the Covid-19 pandemic on the Group’s performance indicators and financial position at 31 December 2020, specific instructions were sent to all Group subsidiaries.
3.1 Contract-related expenses and obligations
Revenue relating to construction and service contracts is recognised in accordance with IFRS 15. Progress with construction and service contracts is measured using either the physical progress towards completion method or the cost-to-cost method.
Incurred costs that do not contribute to an entity’s progress in satisfying the performance obligation (costs of significant inefficiencies such as the unexpected costs of losses of materials, labour hours expended or other resources consumed) are not included in measuring progress towards completion and do not therefore generate revenue. In the context of the health crisis in 2020, this mainly concerned worksite demobilisation, shutdown and remobilisation costs.
The Group has also reviewed its long-term contract completion forecasts, with the yet-to-come portion now including Covid-19-related additional costs and future disruption costs. Where those additional costs resulted in an onerous contract, a provision to cover the future loss on completion was set aside at 31 December 2020. VINCI has also worked hard to comply with its contractual obligations. At 31 December 2020, it did not identify any material events such as contract terminations, late performance penalties or disputes with clients or suppliers capable of materially affecting the financial statements.
3.2 Goodwill and intangible assets
In accordance with IAS 36 “Impairment of Assets”, an entity must assess on each reporting date whether there is any indication that an asset may be impaired. The material decrease in revenue in the Concessions and Contracting businesses in 2020 constitutes an indication that assets may be impaired. Impairment tests were carried out at 31 December 2020 for:
- all of the Group’s cash-generating units (CGUs) and intangible assets with indefinite lives;
- intangible assets or property, plant and equipment with definite lives where there is an indication that they may be impaired; based on analysis carried out by the Group, the consequences of the health crisis could cause the recoverable amounts of these assets to fall below their carrying amounts.
Additional information is provided in Note E.9, “Goodwill and goodwill impairment tests” and in Note H.17, “Other intangible assets and property, plant and equipment”.
3.3 Trade receivables
Financial difficulties related to the health crisis are creating an increased risk of bankruptcy for certain clients and/or partners. The Group’s exposure to credit risk was the subject of specific analysis and an in-depth review of trade receivables, which led to additional impairment being recognised, particularly in relation to airlines but also to amounts receivable from clients operating in countries deemed risky. Additional information is provided in Note H.19.2, “Current operating assets and liabilities”.
3.4 Deferred tax assets
The periods for recovering deferred tax assets were also specifically assessed at 31 December 2020.
3.5 Hedge accounting and covenants
The Group has not reviewed its hedging strategies and has maintained its hedge accounting policies as described in the financial statements in Note J.27, “Financial risk management”.
The main exposures hedged concern interest rate risk and currency translation risk. At 31 December 2020, the Covid-19 crisis had had little effect on the highly probable nature of the hedged cash flows. Construction and debt drawdown schedules had not been materially affected. As regards currency translation risk, the net positions of hedged subsidiaries were closely monitored. The change consisted of the partial derecognition of hedges relating to London Gatwick Airport to take account of the reduction in its equity in an equivalent amount. The principles used to measure financial instruments take into account changes in counterparty credit risk, along with the Group’s own credit risk. VINCI’s risk management policy already included setting strict limits on the basis of counterparties’ ratings, and so the impact of the crisis has been limited.
The Group also paid particular attention to finance agreements that could give rise to risks of it failing to comply with financial ratios in the short and medium term. Additional information is provided in Note J.25.3, “Credit ratings and financial covenants”.
9. Goodwill and goodwill impairment tests (extract)
Given the Covid-19 situation, impairment tests at 31 December 2020 were conducted on the basis of management assumptions for the various business lines and divisions, in accordance with macroeconomic forecasts in their business areas and the regions in which they operate:
- VINCI Airports: assumption that passenger numbers will return to pre-crisis (2019) levels between 2023 and 2026 depending on airport and type of customer. Return of passenger numbers to their level initially projected for 2030;
- VINCI Highways: assumption that traffic levels will return to pre-crisis levels in 2022;
- ASF group: assumption that traffic levels will rise back in 2022 close to their 2019 level;
- VINCI Energies North America: operating assumptions have been reviewed as a result of the Covid-19 crisis, which had a particularly significant impact on some activities and areas of this CGU in the first half of 2020. An impairment loss of €67 million was recognised in 2020, of which €50 million at 30 June 2020.
The vast majority of other CGUs in the Contracting business saw business levels return close to 2019 levels in the second half of 2020.
17. Other intangible assets and property, plant and equipment (extract)
Given the uncertainty relating to the Covid-19 crisis, additional sensitivity tests were carried out at 31 December 2020. A 100 basis point increase in the discount rate would reduce value in use by €2.4 billion. In this case, value in use would still remain higher than the asset’s net carrying amount at 31 December 2020.
19.2 Current operating assets and liabilities (extract)
In the context of the Covid-19 crisis, the Group adopted closer monitoring of its trade receivables. Impairment of Group trade receivables includes a net charge of €74 million added for 2020, relating in particular to industry sectors or countries hit hardest by the pandemic.
At 31 December 2020, trade receivables between six and 12 months past due amounted to €381 million (compared with €435 million at 31 December 2019). Impairment in the amount of €35 million has been recognised in consequence (€64 million at 31 December 2019). Receivables more than one year past due amounted to €449 million (€386 million at 31 December 2019) and impairment of €321 million has been recognised in consequence (€276 million at 31 December 2019).
25.3 Credit ratings and financial covenants
Credit ratings At 31 December 2020, the Group’s credit ratings were as follows:
In 2020, the rating agencies updated their views as follows:
- Standard & Poor’s maintained its long-term ratings for VINCI, ASF and Cofiroute, but revised its outlook from positive to stable for all three companies.
- With respect to Gatwick Funding Limited:
o Standard & Poor’s cut its long-term rating from BBB+ to BBB and placed the entity on CreditWatch with negative implications (as compared with a negative outlook previously).
o Moody’s cut its long-term rating from Baa1 to Baa2 and downgraded its outlook to negative.
o Fitch downgraded its outlook to negative.
Some financing agreements include early repayment clauses applicable in the event of non-compliance with financial ratios.
The Group regularly monitors developments in relation to these financial covenants and, in the context of the Covid-19 crisis, has paid particular attention to finance agreements that could give rise to risks of it failing to comply with financial ratios in the short and medium term. Talks have taken place with lenders to inform them of potential instances of default related to such failures. Group’s entities that entered into negotiation regarding financing condition reached agreements. In particular, waivers and amendments were obtained were obtained by London Gatwick Airport in September 2020 in relation to its bank and bond debt (for an amount of 3.4 billion sterling.). The agreement mainly consisted of:
- an exemption from the requirement to comply, in December 2020 and June 2021, with the two financial ratios (interest coverage ratio and debt ratio) provided for in its financing agreements;
- a change to the method for calculating the debt ratio until June 2023;
- authorisation to draw on the Bank of England’s Covid Corporate Financing Facility, with London Gatwick deemed eligible to receive £300 million.
Other agreements subject to covenants do not involve material amounts (individual amounts below €300 million).