Ellaktor S.A. (ELLAKTOR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the Ellaktor Group conference call to present and discuss the bondholders' briefing on the first half 2020 Ellaktor's restricted group results. [Operator Instructions] and the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Anastasios Kallitsantsis, CEO of Ellaktor Group; Mr. George Poulopoulos, Group CFO of Ellaktor. Also attending, Mr. Dimitrios Koutsoukos, Director, Business Planning and Investor Relations. Mr. Kallitsantsis, you may now proceed.

Thank you. Good afternoon, ladies and gentlemen, and good morning to our colleagues joining us from the U.S. Thank you all for dialing into Ellaktor's first half 2020 financial results call. I'm Anastasios Kallitsantsis, I'm the group CEO. And I'm joined today by Ellaktor's group CFO, Mr. George Poulopoulos; and Mr. Dimitris Koutsoukos, our Investor Relations Director. Before I give you an overview of our group performance and business segments, I would like to say a few words about the current macro environment. The ongoing global pandemic is still presenting the world with a very significant challenge. Global economic activity shrank significantly in the first half of 2020 due to the severe effects of the coronavirus and the implementation of national lockdowns. In its latest economic report for Greece, the OECD anticipated a decrease in GDP in 2020 by 9.8% and expects that the country will recover in 2021 at rates between 2.3% and 4.5%, depending on how pandemic progresses. In order to tackle the coronavirus crisis, the European Union has reached a historic agreement on a 7-year budget for years '21 to 2028 -- '27, sorry, of EUR 1.74 billion as well as the EU recovery fund for EUR 750 billion. Sorry, it was EUR 1.074 trillion. Anyway, from this, Greece will receive a total of over EUR 70 billion, and infrastructure is expected to be one of the priority areas in order to funnel both funds into the economy. This improves the medium-term outlook of the economy. During this very challenging period, our focus remains on securing the health of our people as well as our business. We have taken a series of measures and steps to ensure business continuity and minimize to the extent possible the effects of the pandemic on our group's performance. Respectively, with regards to the health and safety of our employees, we have introduced and implemented a series of safety protocols within our organization, ranging from personal protective measures to investments in specialized new ventilation system, while we have conducted more than 2,500 PCR tests to our employees and tend to have the entire personnel in Greece tested within the coming weeks. Before I hand over to George to run you through the financials of our group in detail, I would like to make some remarks regarding key metrics and our outlook. The performance of the first half of 2020 with EBITDA of EUR 85.7 million shows the resilience of the group as 2 out of 3 segments, the Renewables and Environment showed improvements in EBITDA year-over-year despite the impact of COVID-19. Furthermore, EBITDA margin for the first half of 2020 was 50% compared to 58% in first half 2019. Cash and liquid assets at the end of June 2020 stood at EUR 314 million versus EUR 342 million at the end of 2019. Net debt at the end of the first half of 2020 stood at EUR 713 million, with net debt-to-EBITDA ratio of 4.2 on the basis of annualized first half 2020 EBITDA. Looking at the group's business segments. In Concessions, performance was affected by the pandemic and lockdown measures imposed by the state, with Q2 being particularly adverse as the largest part of the lockdown in Greece was in April and May, significantly affecting traffic in our motorways. In April 2020, the reduction of traffic on Attiki Odos reached 72%, while there is a gradual improvement since May 2020 where traffic on this highway was minus 37%. In June, it was minus 16%; in July, minus 9%; and in August, minus 6% compared to the corresponding months of last year. This traffic evolution and trajectory of Attiki Odos is ahead of our previous base case, which is a very encouraging outcome. Our Renewables business posted very strong revenue and EBITDA growth, unaffected by COVID-19 as a result of increased installed capacity, reaching 491 megawatts. Renewables are proceeding with the installation of the final 88 megawatts of ongoing growth plan and has a further 690 megawatts with various licensing stages. Environment also showed improvement in revenue and EBITDA versus the first half '19 despite the pandemic, while Ellaktor has completed the construction of the new biogas facility in Mavrorachi and secured the renewal of water waste management contracts, which were expiring in 2020. Finally, a few words on Construction. As our strategy to focus our activity in Greece and Romania in order to protect profitability comes more and more into effect, we are seeing the expected decrease in revenue. Nevertheless, we retain a portfolio of projects, with better visibility and prospects where Ellaktor and its subsidiaries continue to win the vast majority of the available tenders in which we choose to compete. On the internal front, our restructuring program is being implemented with projected benefits expected to appear gradually in the next quarters. This includes, among others, the rationalization of the cost base with a focus on reducing HR costs and the new central procurement department, the disposal of nonoperating assets as well as the preparation of a road map alongside the Greek banks in order to further support Construction. I will now pass the floor to George to run you through our group financials in detail. George, the floor is yours.

Thank you, Sakis. Thank you all for joining us. I would like to present the H1 results by following some slides from our H1 2020 group's results presentation. Starting with Page 5. Restricted group revenue stood at EUR 173 million in H1 '20 compared to EUR 178 million in H1 '19, a reduction of EUR 5 million. The year-on-year decrease came in mainly from the Concessions sector, while revenues decreased by EUR 23 million, which was largely offset by increases in revenues in RES and Environment, EUR 12 million and EUR 6 million, respectively. EBITDA stood at EUR 85.7 million in H1 '20 compared to EUR 103 million in H1 '19, posting a reduction of EUR 17 million year-on-year. EBITDA margin decreased to 50% in H1 '20 compared to 57% in H1 '19. Profit before tax was at minus EUR 22 million in H1 '20 compared to profits EUR 22.7 million in H1 '19, while net results after tax and minority interest was a loss of EUR 32 million compared to profit of EUR 5.7 million in H1 '19. If we move to Page 6, we can see that the net debt stood at EUR 713 million at the end of H1 '20 compared to EUR 625 million at the end of 2019, while net debt-to-EBITDA ratio stands at 4.2x. It has to be mentioned that H1 results has the impact of the lockdown of the economy, which is not a representative of the year. On top, the debt incurred to fund growth at the Renewable level did not fully contribute in H1 '20 EBITDA but will generate run rate EBITDA going forward. If we consider the gradual normalization of the economy and the additional EBITDA contribution by refunding a newly built RES portfolio, the net debt-to-EBITDA ratio will be lower. On Page 11, total assets were at EUR 1.846 billion at the end of June 2020 versus EUR 1.837 billion at the end of 2019, recording a marginal increase of 1%. Restricted group total equities stood at EUR 484 million at the end of June 2020 compared to EUR 533 million at the end of 2019, a decrease of EUR 49 million. Total equity attributable to shareholders was EUR 380 million versus EUR 414 million at the end of December 2019. On Page 13, we present the cash and liquid assets at the end of June 2020, which decreased to EUR 314 million versus EUR 342 million at the end of 2019. At the end of July, the balance has improved to EUR 327 million. On the top right-hand graph, you see the quarterly evolution. In Q2 '20, operating cash outflows amounted to EUR 19 million, mainly due to the interest expense at -- of EUR 25 million. Investment cash outflows amounted to EUR 12 million. Outflows from financing activities reached EUR 11 million due to dividend to minorities by Attiki Odos of EUR 18 million. Now let me go through the segmental analysis of H1 '20. Moving on to Page 15, we can see the Concessions highlights. Revenues stood at EUR 80 million in H1 '20 versus EUR 103 million in H1 '19. The decrease of revenues in H1 '20 is mainly due to the decreased traffic in Attiki Odos by 26% after results of restrictions in movement and eventually full lockdown by the state in response to the COVID-19 pandemic. As you see on the bottom left diagram, there are clear seen signs of gradual improvement in Attiki Odos traffic since early May '20. Traffic reduction at Attiki Odos reached 72% in April '20, 37% in May, 16% in June, 9% July and 6% in August compared to the corresponding month last year. Concessions EBITDA amounted to EUR 51 million in H1 '20 versus EUR 74 million in H1 '19, marking a decrease of 32%. On Page 17, we present the RES highlights. Revenue stood at EUR 45 million in H1 '20 versus EUR 33 million in H1 '19 or up by 36% year-on-year due to the increased installed capacity, 491 megawatts installed capacity as of June 2020. An additional 88 megawatts is under construction. EBITDA stood at EUR 36.6 million in H1 '20 versus EUR 26.3 million in H1 '19 or up by 39%. Lastly, on Page 18, we have the Environment segment highlights. Revenue stood at EUR 47 million in H1 '20, up from EUR 41 million in H1 '19 or plus 14% year-on-year due to the increased completion rate of contraction projects. EBITDA stood at EUR 6.82 million in H1 '20 versus EUR 6.79 million in H1 '19 or plus 1% year-on-year. This concludes my presentation of group and segment performance, and I would like now to open the floor for questions.

[Operator Instructions] The first question is from the line of Kogge, Maxime with ODDO BHF.

I just have 2 questions. So first one is on Construction. You didn't speak that much about this division as it is not part of the restricted perimeter, but it seems that the cash flow generation of the unit was good, was not too bad in Q2 because its net debt was broadly unchanged versus 31st of March. But still you made a EUR 10 million injection to this unrestricted perimeter. So can you explain why you did this injection? And regarding Construction, it registered a 50% fall in sales. And can you also split the impact of COVID versus the downsizing of the division that you had already started in 2019 and in Q1 2020? And I have another question about the working capital slippage in Q2. I understand it was due to renewables, which had a huge increase itself. Can you revert on that and tell us if you are going to catch up this working capital in the course of Q3 or Q4?

Sorry, the line was not very clear. Can you repeat your first question, please?

Yes, the first question is on Construction because its results in terms of cash generation were not too bad in Q2. I mean the free cash flow was much better than last year during the same period of the year. But still, you made the EUR 10 million injection to the unrestricted perimeter. So can you explain to us why you did this injection? And do you plan to do other injections in Q3 or Q4?

Yes. As you're correct mentioning, we -- following the previous call, we have injected a EUR 10 million amount from restricted to unrestricted construction. So this is correct. We have seen steady improvement on the Construction segment. Following that, July and August, we haven't burned any cash in Construction, which is positive. In the first half, overall, Construction had the operating outflows to the level of EUR 70 million, EUR 75 million. That was for H1, including the EUR 10 million that we've just described. In H2, we're expecting a significant lower amount to be as an operating outflows in the segment. But during the summer, we have succeeded to manage the cash flow. But in the next 4 months with the obligations that are in place, we expect them to be some additional support, but still at a significant, much lower from what you have seen in H1 this year, and, of course, much, much lower than the previous year. So this is for the first question. The second question was regarding the working capital in Q2, correct, as you mentioned, this is what you had described?

Yes. I was wondering whether you plan to recoup the working capital slippage in Q3 or Q4. And I was wondering whether it was due only to Renewables because of the huge surge in activity or to other divisions, too?

If you go on Page 13, in which we have the quarterly cash flow movement, if you are on Page 13, we have the Q2 column on the top right hand, and you see that we -- operating activities cash flow was negative by EUR 18.8 million. That was mainly impacted by the interest expense spread during this year, with mainly the coupon for the bond. That was the main amount. So on the investment activities, it was minus EUR 12 million, which was related to the Renewable, more or less. And on the financing activity, it was minus EUR 11 million, in which we have also the payment of dividends from Attiki Odos to minority interest at the level of EUR 18 million, otherwise, it was plus EUR 7 million. So this is a movement on the restricted group cash flow in Q2. I don't know if that covers your question.

Yes. My question was more on the working capital. Working capital was a big outflow in Q2. Can you just clarify that? And whether you expect to offset that in Q3 or Q4?

Yes. As you are aware, during the Q2, actually, in March, April and May, we had this lockdown and the working capital in the sector in the Concessions were heated. And so in the coming -- in the second half of the year, as the performance started to recover and you see the evolution of particularly those that is recovering very fast, we're expecting to produce some positive cash flows on that front. So the performance of second half of the year should be much better than the first half, but we had this lockdown impact or which has hit also the working capital.

Okay. And there was a question which you didn't answer, is regarding Construction. There was a 50% drop in sales in Q2. Can you split that decline between the regular downsizing that you are doing since 2019 and the impact of COVID-19?

The Construction revenues turnover in the first half, they were just over EUR 250 million. That has been also some impacted, but this is mainly due to the strategic decision to reduce the operations abroad, also in photovoltaic and construction abroad. So this is the decision and the strategy that we implemented. So what you see in the second half -- the second quarter, probably that has been more impacted by the COVID. But what we are expecting for the full year is something to the range that's over EUR 500 million. So this is the development that mainly arises from Greece and Romania. The rest will decelerate fast, the -- and we are expecting to exit in all countries gradually in the next quarters, I mean, in 1 year.

The next question is from the line of Sequera, Raul with Chenavari Investment Managers.

You've kindly laid out, as you promised, actually a new restructuring plan for the Construction business, which is much more focused on the operational side. I guess you've laid out a few targets in terms of either asset disposals or a material reduction in HR costs and also procurement costs. But it seems that we don't have basically a detailed view of the agreement with the Greek banks. We were expecting, I guess, to see a new funding plan either syndicated or by lateral lines stemming out of the Greek banks to fund the Construction business either in RCF or other format. Could you actually basically let us know what you really mean by the road map with Greek banks? And whether you actually are in the process or have already signed a new syndicator or bilateral line activity from the business? The second question is in relation to the compensation from the Greek state for lower total revenues arising from the national lockdowns. Do you have any update on sort of the discussions? Any kind of numbers behind actually the potential compensation? And the third question is on the Renewable side. I've noticed that the sequential, i.e., quarter-on-quarter evolution of revenue and EBITDA is down, actually. I think 15% from first quarter to second quarter, yet I understand that actually installed capacity increased, and there wasn't any major -- sorry, changes in terms of capacity between the 2 quarters. Could you clarify what is behind that? I thought maybe the capacity factor, which is lower Q2 versus Q1 might be behind this, but just if you have a little bit of an explanation? And also related to that, just remind us how the mechanics of the megawatts in trial operation work, whether when you're in trial operation, you see revenue and EBITDA and cash flow associated to that? Or basically, that's something that will come later whenever you actually have connected to the grid.

Yes. Regarding the road map that we have with the banks, just to describe in more details, we have prepared in an agreement with the bank that has started a few months ago. We have prepared a restructuring plan. The -- some actions that we have taken on the restructuring plan, we've already presented to the market. And also, we have announced that we will follow this implementation every quarter, what is the implementation during that quarter on those in which we incorporate a new group procurement office, with the aim to reduce the cost of goods sold. Second one is a reduction of salary base and also reduce the number of employees and also refresh the organization through implementation of the voluntary exit scheme. And last one, to support the cash flow by disposing the nonoperating assets. And already, we have the pipeline, a significant part of it in place, and we have additional plans for the next year, especially. So also, we are into the banks in close discussions. And we have set up some further steps before we have an agreement in place. So we have -- that's why we described that we have agreed on the road map, how to get there with an aim to support the Construction from the banking sector also as the shareholder has support already. The company has already supported with those reduction of salaries and the other actions of disposing of assets. Suppliers have given also some support. So the banks right now, it's their turn to give their support to the Construction service. So this is part of the burden-sharing approach that we have in place, and we have agreed with the banks with the steps and we are moving to that direction. So -- and we have also mentioned that we will be in a position to provide with more details following the Q3 results will be end of November. So this is the status that we start -- that we are right now. Now regarding your second question regarding the toll roads and the revenues. Yes, regarding the compensation for the toll roads, we are going to start the process along with the other concessionaires of the other projects against the Greek state, claiming compensation for the lockdown. Though this process will take time because there are some legal steps before it -- we go to the final session. But this is underway anyway. Now regarding the Renewables, if you see on Page 17, you see that there is a seasonality in the load factor, which is recurring every year. We see the first quarter is always much stronger than the second quarter. And this is valid this year as well. If you see Q '19, these are the southern winds of winter that prevail. The second quarter is low wind. Third quarter is the northern winds, sort of the famous Aegean Meltemi winds. And they are high again. What was the last -- it was a trial operation, yes. During the trial operation, we invoke -- actually -- we are entitled with the value of the energy produced at -- close to the grid, which we invoice after we get the final operation permits. So we get the income at the end of the trial periods, but net income is produced during the prior period as well.

Sorry. And on that, what is -- do we see any movement on the balance sheet or receivables during that auction? I was looking at accrued income on the receivable side, on the asset side. Would you see, for example, some of that energy or, sorry, electricity producing trial operation period in that item? And then effectively, a revenue that is booked afterwards against this accrued -- sorry, this accrued asset? Or no?

Actually, so not -- I mean, it's not material. It doesn't materially affect the results. Because every -- I mean, the big projects that we have put in operation over the last 10 months were between, let's say, 45 and 45 megawatts one; 43 and 45, again, the other, if I remember well. So this part started trial operation first, then came the second, then came the third, then came the fourth. So it's a gradual effect on the EBITDA and revenue.

Okay. But as long as you're in trial operation, you don't see any movement on the revenue in your gross margin or EBITDA, not also the balance sheet as well?

Yes. But some, I don't have the exact dates, but during the first half, most of the installed capacity has completed trial operation and are producing normal revenues. And not -- if you need, we could come back to you and say the details how it is split [indiscernible].

The next question is from the line of Cantor, Adam with Knighthead Capital Management.

Congrats on a strong quarter. I want to understand -- for my first question, I want to understand the EUR 111 million of CapEx that you'd flagged for the Renewables business in 2020 and 2021. How much of that EUR 111 million has been spent already? And how much is remaining to be spent and over what period? And then my second question is, can you help me understand how much incremental restricted payment and permitted investment capacity there is to move money over to the unrestricted group for Construction?

Okay. Out of this EUR 110 million, about 10% max will be deployed in the year 2020. The core of outflows will start on the second half of 2021, actually, and will be completed end of 2021 to beginning 2022.

Regarding the capacity from that...

For the 88 megawatts.

Yes. So moving to your second question, regarding capacity for the unrestricted group. As you're probably aware, the program permits restricted payments to be made subject to certain conditions, providing the notes. Actually, there are 3 main baskets, the main rules of which are the following: we'll have the build-up basket, which is primarily equal to 50% of consolidated net income of restricted group for that period. We have almost covered that already until -- as we speak. Of the general restricted payments basket, up to EUR 40 million, which we haven't touched yet this basket. So it is free to be used if it is needed in case that's decided. And we have the general permitted investment baskets, which allows outstanding investment up to EUR 25 million. Already, we have used some like EUR 22 million, EUR 23 million. So this is EUR 2 million to EUR 3 million potential ability to use it. So this is the 3 baskets that we have in place and the users that we have done as we speak.

So EUR 40 million plus EUR 25 million plus EUR 14 million, and it sounds like you think that you've used approximately EUR 36 million to date. Is that right?

We have used EUR 23 million plus -- yes, more or less, yes, you are correct. Correct.

Okay. So my math says that the advances to the unrestricted group have been more like EUR 55 million based on the disclosure in the original bond perspectives and the current intercompany loan balances. So if you could just help me understand maybe the difference between sort of the mid-30s number that you calculate and the EUR 55 million number that I calculated?

So we have EUR 37 million already used as we described, correct? And on top, during this year, we have used EUR 30 million, and we have transferred, which was an agreement, it was an intragroup loan facility from Brazil group to unrestricted that was signed before the issuance of the notes. We have also communicated that in Q1 results, so that is already an assignment before the note has been issued. So this is the amount that has been transferred. And then this is the amount that has been through those two, EUR 37 million and EUR 30 million. We have also used from normal cost of business, but this is normal cost of business between restricted and unrestricted, which is funding or called some performance guarantee in Australia, which also has been also described in the notes before the issuance of the notes. So this is the sum of the amount that has been paid during the Q1. So during Q2, only EUR 10 million has been transferred from restricted to unrestricted. All the rest was up to Q1 that has been in place.

All right. And as of today, what is the remaining liability related to faulty photovoltaic projects?

Look, as you probably -- we have also communicated in the past that the final release from the projects and some performance guarantees for final acceptance are -- occurs 2 years after their completion, which is provisional acceptance. So we, therefore, expect to gradually be released from these guarantees between November '21 and '22. So this is part of the contingency liabilities, if I can say. Performance so far indicates that contingent liabilities related to power production is very low risk. So this is the latest information that we have. On the other hand, yes, so this relates to the contingency liabilities in Australia.

The next question is from the line of [ Olsvik, Marcus ] with [ Vontobel ].

Congratulations to the results. I have 2 questions. Can you repeat, once again, like, the CapEx guidance? So it's 10% of the EUR 111 million to be spent in 2020, and then the rest in 2021, is that correct?

Yes, that's correct.

That's correct. And then from my understanding, just liability to unrestricted group in the balance sheet. So something like popped up there, which is EUR 23 million now. Can you explain that? What is meant with this?

Can you repeat the item, please, on the balance sheet?

The liability to the unrestricted group, it's about EUR 23 million. It's on the balance sheet.

So let's see this figure and discuss, and we'll give you the information as we don't -- I don't have a separate sheet on this liability. But let's see that and then coming to you or at the end of the call just to find the figure, okay?

Yes. Yes. We can also -- if you don't mind, we can also follow up in a separate call.

Yes, yes. That will be fine.

The next question is from the line of Memisoglu, Osman with Ambrosia Capital.

I just wanted to -- I guess, this will be somewhat of a follow-up with the previous questions. In your related party transactions, we see a receivable increase for the first half of roughly EUR 76 million. And I'm guessing EUR 40 million plus EUR 10 million, total of EUR 50 million loans is part of this. What is the remaining EUR 26 million for? Maybe you answered some of this for Q1. But if you could clarify, that would be helpful.

Yes, as -- there are, as I mentioned, we have EUR 37 million that we have used from the basket during the first half of the year. EUR 13 million has been -- in Q1 has been contributed through an intragroup loan facility from restricted group to unrestricted, and that was signed before the issuance of the notes. So we don't have any use from the baskets. So the rest amounts is related to normal course of business between restricted and unrestricted, which part of that was the funding of so called performance guarantee in Australia, which has been paid in Q1. So those are the 3 different items that has been through in that amount.

There's a EUR 5 million, I think, in Q2 as well because the gap from Q1 to Q2 is EUR 15 million. EUR 10 million is explained, I'm guessing, by the loan. I'm wondering what the other EUR 5 million is?

I have to come back at this. This is normal course of business between the segments. It's not something special. There's not a funding from restricted to unrestricted, but it's normal course of business because of the transaction we have in between. But let me check this figure, but it's not some sort of funding that has become -- it's part of the normal course of business.

And if I can follow-up very briefly. On the Renewable -- well, related to Renewables, maybe. Can you confirm there was a question earlier for the restricted group working capital increase. The primary driver was not Renewable, but Concessions because of COVID? Did I understand that correctly? Because initially, I had thought this trial thing was causing you to see receivables moving higher, but that -- didn't sound like that was the case.

So one thing about the relation between...

The receivables increase in the restricted group. I just wanted to clarify, I think earlier, you said that was Concessions business related and not Renewables business related, if you could confirm that.

They were downpayments for the 88 megawatts that are underway in RES.

Okay. So there are some advanced payments there.

Yes.