Global Dominion Access, S.A. (DOM) Earnings Call Transcript & Summary

Thank you very much for coming to this presentation, this earnings release. I think that we are all aware with the fact that we are at an extraordinary quarter because it's something that we cannot compare with the past, and it shouldn't be extrapolated in relation to the future. But this does allow us to interpret how ready this company is to adapt to situations in which the activity has done and how resilient the business is and how resilient the margins are, too. The behavior -- the turnover has had under this situation is out of control of the company, and even so, the behavior has been very good. And this is thanks to our diversification that is geographic and of other kinds and to the presence in businesses that are growing with a recurrent income. And then the limited drop of margins, which means that we've closed the semester without any losses, shows how quickly our team has responded, and above all, how flexible our cost structure is. And not only that, but because we have to take into account that these margins are [Audio Gap] do not pose a negative scenario. But together with this behavior of the profit and loss account, we have a balance sheet that is still strong, thanks to the generation of positive operating cash flow that has to do with very efficient management of the working capital, of balance sheet expenses, and thanks to the contention of CapEx. There's a fundamental message embedded. We're dealing with a business, which in view of such a complex situation has been resilient, flexible and solvent. But before we move on to the details of the figures, I would like to mention at last the corporate operation that we've been carried out, it has to do with the sale of the company dedicated to maintenance services of telecommunications networks with the Telefonica in Spain. These are mature contracts that we've operated for a long time, and where the improvement in efficiency were very limited. And this is why, according to our strategic plan, we have prioritized activities and geographies where we have a global vision of the value chain and where our role allows us to implement efficiency improvements. The price of the operation covering all concepts, reaches EUR 13.5 million, which means that there's a capital gain of about EUR 7 million. But it's important to bear in mind that these activities were related to a significant funding of working capital that its sale has reduced our factoring by about EUR 10 million. So both the capital gains in terms of the P&L as well as the impact on the balance sheet have been covered by the accounts of this semester. And as regards to future quarters, as from July 1, we will deconsolidate this activity that represented about EUR 25 million in annual turnover. So moving on now to the details of the figures. We have half year with a slight slump in sales of 5%, with a net positive result of nearly EUR 1 million. In other words -- and we think and hope that this is going to be the worst quarter of the year, but we have not got negative figures. So these are figures without inorganic effect. So what we can see is that what the acquisitions of Alterna and Bygging brought about in the first quarter has been compensated by the loss of turnover due to the divestiture of our IT services that we carried out in the month of September. So therefore, the evolution that the business figure has had in this half year due to a ForEx effect that has a negative impact of minus 2% and also because there's been negative organic growth of minus 3%. So in other words, a reduction of activity of only 3% of this context means that our business was obviously in a clear situation of ex-COVID growth. As regards to margins, they reduced by about EUR 15 million and these margins include negative one-offs of more than EUR 5 million. What we have in these one-offs are, for instance, with positive effects, we have the capital gains arising from the divestitures that I've just pointed out. And the negative effect of staff restructurings, provisions, therefore, situations that are related to [ card ], also stock provisions and insolvency provisions. So maintaining these margins in view of the slump of our activities is very good news because without the one-offs, and even with the one-offs, the adjustment of costs has been spectacular. We have activity levels that are below the normal levels, and we have become more efficient. And we've not mortgaged the recovery that is getting closer. So we can see that there is a recovery of our activity, and we could not harm this substance growth. And we must maintain the pool of knowledge and the necessary resources to address it. We have also made the direct costs much more flexible in terms of leases, machinery, vehicles, and we've also changed the size of our staff. And supported by measures as those adopted in countries like Spain. And you know that we've been pretty active in adopting other measures. We've reduced structural costs by implementing different actions. We've maintained the levels of CapEx that are very controlled, but reduced the levels of amortization. We controlled financial expenses, even though we've had larger bands of liquidity. And as I said at the beginning, this means that we have a net positive profit in this half year. And this is the picture -- the accumulative picture, and this is what we usually put across, because you can see our business very clearly. But it's true that if we want to visualize the impact of COVID that arose as from the third week of March. I think that it also makes sense to explain what's happened in that second quarter. And if we look at this in a nice relative manner, sales have only dropped 10% organically. And then we have a ForEx effect of minus 3% and also an effect produced by the divestiture of nearly 3%. But if we look at this behavior by activity segment, you can see that in the case of B2B services, we have a drop on average of 30%. And it's this average drop during these very complicated months when the restrictions applied to the different activities in each country have reduced the drops of up to 70% in the most difficult moments. And the activity of this segment is associated with the temporary closures of the facilities of some of our customers and also because there had been stop in activity. And the effects that started in Spain, and then in Europe, and followed later on by Latin America and North America. And today, we've recovered most of this activity, but we shouldn't lose from sight the fact that there are other regions outside of Europe where these situations are still complex. And after the adjustment measures we've implemented, we now are adjusting contracts to the new workloads, and we still expect that there will be a positive recovery in the last quarter of this year. And as the case of the B2B Projects, the 360 projects, there's been a slight slump of 2% in this quarter, and this is due to delays. In other words, temporary shutdowns and because some turnovers are being postponed until later quarters, but we're not going to lose this turnover, and there's not an impact in terms of margins that are still very high, above 17% as regards to contribution margin. With regards to our portfolio, we've invoiced nearly EUR 130 million this half year. And the new contracts, although they haven't stopped there being less. And this means that there's been a slight contraction of the portfolio, which is now EUR 585 million. New contracts have appeared in different geographies, but we have contracts, for instance, in Europe, Canada, Asia and Russia. And on the B2C segment, this is a quarter that provides a complete comparison. And here, we can see a 20% growth compared to the same period of 2019. And in this segment, we have invoiced our customers in the energy or pounds. At the communications sector, we have doubled the number of supplies compared to 1 year ago. And this recurrence is what explains that this growth that we can see in this segment, although our physical channels have been closed until the month of June. And this closure of the physical channel and the cutbacks in terms of affordabilities have reduced -- less acquisitions. And that means that the level of supplies we have are at the same level of what we had at the beginning of the quarter. In other words, just over 200,000 supplies. And at this customer base, there's been an increase in defaults because you cannot cut off supplies even though customers did not pay their bills. And this is one of the things that we mentioned on previous occasions. As regards to the current situation of the opening of physical outlets or shops. Practically, all of them have been opened, it's practically 95%. And we started to open them as from the first weeks of June. And we've opened the shops progressively, and we were very selective with those that we were -- had to open and with how many people in them, because they had to be profitable. We have observed, and this is a trend that has to be consolidated because it's still too early to know, but what we have observed in these last few weeks is that there's been an increase in sales when the shops were opened. And that there was less traffic there. In other words, that potential customers that go to our shops have a higher rate of conversion. They're not there just to look at things, but to buy. And this is -- these are the comments that I wanted to make on the different segments and on the P&L account and let's move on now to the balance sheet. Well, right now, one of the items on the balance sheet has to do with the movement of fixed assets, which is minimal. We have a CapEx of EUR 8 million, which is lower than amortization, and it's lower than the usual CapEx according to the relative current activities. And the net operating working capital is -- remains at the same levels as in December 2019, and it's true. But there could be a significant variation as a consequence of the drop in the commercialization of devices, although we've implemented very active management, where we've been able to renegotiate payments and do something about the non-collections of defaults. And that means that we've also managed to collect all the disinvestments for these projects, and we have an investment that is practically nonexistent in terms of working capital, even in spite of the situation, which I believe is positive. As regards to net equity, we have a variation of about EUR 25 million, which is -- has originated from the dividends that have been classified as pending payment, and we have a repurchase totaling about EUR 6 million, the repurchase of shares, and conversion differences in terms of foreign currency totaling EUR 8 million. And in the case of net debt or net cash, it's still above EUR 100 million. And the figure is EUR 102 million. And in this semester, and as I mentioned in the case of our equity, there have been significant impacts because of the conversion of these foreign currency conversions. It's about EUR 4 million negative. And we've had a positive cash, and we've also addressed the payment commitment that we had EUR 3 million for earnouts and EUR 6 million for the repurchase of shares. However, as a regard of this net financial debt figure, but in terms of the gross figure and our liquidity, I would also like to point out that we signed yesterday on a couple of loans with the EIB and with equal to fund R&D plus site projects. These are 2 loans totaling EUR 25 billion each with very long-term amortizations, [ 10 ] as for the moment of they become available and rates of 1.6% is not only wonderful funding and very good conditions, but I think that this would also allow us to generate innovative projects at Dominion. And I know that we'll be able to develop new solutions for the health care sector, for the industrial sector, and for smart households. And with this funding, we will maintain gross treasury positions in excess of EUR 300 million. So this is what has to do with the P&L account and our balance sheet, but I would now like to give the floor to Robert, so that he can point out the conclusions for this half year period.

Can you hear me? Thank you. Thank you, Patricia, and good morning, everybody. Well, after the presentation that has been delivered by Patricia and considering that we are experiencing some exceptional moments, we consider that what we have to do is underscore some messages as well as our short and medium-term point of view from Dominion. This has been an extraordinary semester in our 20 years of history. We have responded to the situation by resulting to the principles of our own business model that cannot be negotiated, which I think shows that it's absolutely resilient. And this word seems to have become very fashionable lately. And it's nothing new for us at Dominion. Well, as I said, this company, since the beginning of March, entered the survival mode. The status that most of us here have already experienced in the past and past years. And when you're in the survival mode, what we believe -- what we think is that you do not compare yourself with the historic figures. The only yardstick you have is that of absolute values, which are those that speak for themselves. So this is why the headlines of what Patricia pointed out, EUR 30 million in EBITDA, a net profit of nearly EUR 1 billion, positive contributions in all business segments, even including the absorption of accumulated one-offs, more than EUR 100 million in terms of net positive cash. So at the end of the day, and as we already mentioned previously, this is what we want to put across you, that although Dominion has dealt with one of the most complex and challenging semesters of its history, and in spite of all these difficulties, we are generating value. And I think that this shows that when we were listed on the stock exchange, we designed a company that was there to protect its shareholders. And we are proud to say that we are achieving this objective in spite of these adverse circumstances. And after these very demanding months, we are also convinced that we should have more opportunities in organic terms as well as in M&A terms for Dominion. And we believe at this company that -- compared to what happened in the crisis of the year 2009, where we had a scarcity of liquidity for a company that was solvent, the current monetary policy is inundating with liquidity, a business sector, which could be, let's say, deterring or delaying its solvency contrast. And that's when that opportunity arises, when we have to be ready to incorporate other companies to our perimeter. Because please allow me to say that we believe that we are sufficiently liquid and solvent. And as an example of this, as Patricia pointed out, we have the EUR 320 million of gross cash that are available in our assets. And we believe that Dominion in this environment that is about to arrive offers a big opportunity and could generate more growth and more value through the organic and inorganic pathways. So I would like to conclude and talk about our guidance for the year 2020 and where do we stand and what could happen of these half year results. So we expect to be able to improve this worst scenario, which we said in the previous quarter that we would not go in to harm our cash, and we were going to achieve an EBITDA of more than EUR 6 million was going to produce a net positive profit. So I think that we can improve these expectations by the end of the year. And above all, the message in relation to the future with what we see strategically is that we want to go back. We want to -- in 2021, we want to go back to the same levels we had of EUR 100 million of EBITDA that we achieved in 2019. And we want to leave behind the year 2020. And we've said it's like a sort of stop and go. It's like a parenthesis in this execution of a strategic plan, which, because of 2020, we've had to extend for 1 year to achieve total compliance. But I would like to underscore this. Why in 2021 are we going to be able to improve predictive to 2019? Well, I think that there are several reasons and I am going to briefly explain the different business segments. One, well, first, I think because we are still in the world of 360 projects with a very good pipeline of opportunities and a backlog that is very good. Because from a sectoral perspective, we are focused on the world of power, hospitals, et cetera. So I think that this is something that should be maintained in the future. And I think that there are going to be very clear opportunities, too. Secondly, because in the B2B, well, you know that, fortunately, we are located in sectors that we consider essential and that have behaved much better. And then we have our resilience and our restructuring exercise that has already been carried out. And we believe that customers are going to prefer to stay with Dominion as a partner, and we should even gain more market share, organically speaking. And I'd like to finish with the segment that is becoming more and more visible, which is B2C, which I think in 2020 is going to be a transition year. But let's say that we've done our homework because we've transformed that acquisition we did at CPH and we've now achieved a diversified duality. We are a multichannel retailer plus an integral supplier of household multi-services. Patricia also pointed this out with all this acquisition, with attention we're paying to the online channel, we expect that 2021 will start with cruising speed in terms of acquisition and customer portfolio, and supplying services, which means that every year, things will only go better in terms of figures and in terms of profitability. So this was the message that I wanted to deliver. And if you want, we can now move on to the Q&A session. Thank you very much.

[Operator Instructions] The first question is from Miguel Gonzalez from JB Capital Markets.

I have several questions. Do you want me to pose them together to speed things up a bit? Well, the first one, in B2B services, you, Patricia, were pointing out that there was a slump of nearly 70% in terms of activities in the worst months of the year, which were April and May. But I would like to know if you have or if you could give us an indication of how activities have evolved in June or in these first weeks of July compared to last year. And the second question. Could you please tell us how much you've spent on restructuring by divisions and in the quarter so that we can have a clear picture of how the margins have changed? And then the third question, I'd like to confirm the cash-in of the sale of Dominion networks in this quarter. Because I think that not everything was going to be included in this quarter. And if that is the case, when do you expect the rest of it to be included? And then one final question, if you will, allow me to. You mentioned that no contracts have been canceled as regards of the 360 projects operators [indiscernible]. And I would like to know if in the case of services, if there have been any contract cancellations. And I'd also like to know how things have evolved in the pricing of these contracts. So have you felt any pressure or has any pressure being exerted by customers as regards to reducing prices?

Thank you, Miguel. This is Patricia speaking. If you want, I will answer the first question -- well, the first and last question when you spoke about B2B services. And you were firstly asking us about what kind of evolution has taken place in the quarter, considering those drops or slumps of 70%. You must think that this decline in activity or in turnover in this second half -- in this half of the year has been on average 30%. In other words, for weeks, during some very specific weeks, we've reached these slumps of nearly 70%, especially in relation to those weeks when nonessential activities were shut down in Spain. And this also coincided with other impacts in Latin America and in Europe. But then after that, we've recovered. So just imagine, to reach these average levels of 30%, and we've recovered most of our operations in Europe and Spain. And well, we mustn't forget either that Latin America. In Latin America, the current situation is more complex than what we have here. And this obviously has an impact on our contract and operations, too. But in any case, let's say that we have reached a level of activity about 90%. And then as you also mentioned, and this is related to services, we have the issue of the cancellation of contracts. We haven't had any contract cancellations in this world of B2B services. We do have an adjustment of contracts according to new levels of activities. Our customers have less activity, and they -- well, in the case of industrial customers, they won't have all the lines in operation. So that means that we also have to adjust our activity levels. So that's what we're doing. We are adjusting our company to activity volumes, but we're not renegotiating prices, as you pointed out before.

Yes. And I'm going to answer the other 2 questions. The issue of restructuring expenses, well, you know what our policy is like. This company, we try to cover positive one-offs with negative one-offs. And in this case, too, what I dare say is that we focused on the same segment. So I would like to explain this. The company has restructuring costs, negative costs in the B2B and the B2C sector. But what happens in B2B, which is about EUR 7 million. This is compensated by the capital gains that have been put about by the sale of Dominion Networks. And these EUR 7 million, more or less responded -- and I'm speaking out of memory here. We were reviewing this yesterday. This is -- about 3,600 people that have left of the Dominion payroll. Of these 3,600, only 500 have had a cost attached to them. And this has represented a permanent restructuring in the case of our structures. So these 522 people have had a cost of about EUR 3.6 million and EUR 2.2 million, EUR 2.4 million have to do with B2B and EUR 1.1 million have to do with B2C. So we believe that we have done a very important resilience effort. We've made a very big resilience effort with a very low level of impact. And in B2B, and in certain Latin American activities, we have decided, well, let's say, to discontinue one of the mine activities we had in Chile, with an issue that had to do with industrial services that has produced an impact of about EUR 1.5 million and some other projects that were a little worse off in Chile and Peru. So this is where -- this, together with an additional provision due to insolvency has provided the necessary coverage for extraordinary capital gains. But what Patricia pointed out is that at the level of the company, the net effect is about EUR 5 million or EUR 5.5 million of negative one-off this comes directly from B2C. And in B2C, basically, we have just there for EUR 1 million in terms of restructuring at the beginning of what we call the transformational costs incurred in this division. And then the rest has been -- well, with the shops closed for 2.5 months, we've had a stock impact, and we are pretty cautious here. And over time, we have provided shops with the provisions. And with the sale of stock, we had by reducing the price or by having a few extraordinary losses, we have an impact of about EUR 2 million. And then finally, what Patricia mentioned in -- as -- during the lock down, we have not been able to sign contracts in terms of gas and power supplies, and we have a combined effect of EUR 2 million. And together with defaults and provisions of about EUR 700,000 on the closing date of June. So these are the major figures or those are the details that I can give you. But as regards what you said about the cash-in of Dominion Networks, I'd say that there's no additional impact to be expected in terms of cash. And this is covered by net debt, or this is covered by the net cash position that is, together with the capital gain. It's true that there's a minor payment pending and some -- there's no significant variations that are expected. So let's say that the impact of the operation has been covered in the first half of the year.

The next question comes from Carlos Trevino from Santander.

I've got 2 questions. You said that B2B services activities have become normal in recent weeks, but I also wanted to ask you, what do you think -- or what can you say about the backlog or what's happened in the last few weeks at the end of June or beginning of July? Have you seen a little bit more commercial activity? Or what do you think you have in the pipeline and how do you think that this could evolve on a short term basis? And then my second question has to do with the comments that you made, Robert, in terms of M&A. So what is your vision? What is your historic vision as regards to seeking opportunities that are suitable? Or do you believe that there's a gap there somewhere that you might have to cover in the portfolio, specifically in B2C?

Well, I'll answer, Carlos. Good morning. And this is what I said before. I think that there are major possibilities, and you know that I'm more -- related to this, but I think those are major opportunities of carrying out operations at 9 to 12 months in advance because of the solvency that must arise. And perhaps, well, there might be some zombies in the market, because of the liquidity aid that has been provided through ICOs, but we are analyzing opportunities. And obviously, along the way, we always have things in the portfolio. And there are some small operations there. And we are always very active. And what we are doing is looking around for different possibilities. As regards to B2C. B2C, what I dare say is that I think that there are major possibilities in terms of organic growth because, obviously, we do have the issues in the pipeline that we're seeing. But let's say that we have more possibilities for joint ventures and very special acquisitions or growth in terms of recurrences in the customer portfolio, and we want to make customers loyal, and we want to improve those last time values and churns of the customers we have. And with the multiples that are used by Dominion, you know that sometimes attracting portfolio operations, multiples that we believe produce dilution effect and especially in the current circumstances. So what I think is that we're going to have a very -- we have very interesting prospects in terms of B2C, organically speaking, that we are giving more visibility to our strategic plan. But in any case, in principle, and although we haven't ruled anything out, I don't think that there's going to be a bit of an acquisition operation in terms of B2C. That's what I'd say. Well, regarding the evolution of the backlog, Carlos. Well, you know that here, we only -- we include what we call the 360 projects. In other words, the solutions projects. We don't do the same with the other projects. And now, there have been some delays because, well, the pandemic has had some very harsh moments. And we've had some delays in operations in Chile and in some of the offers. What is going to be -- what was going to be submitted on July 7 is going to be submitted on August 7. So things are moving and things are speeding up. Some of the power lines that we had in some countries are also being set into motion. And in some of the companies where we are operating, we've been lucky because they've adapted their budgetary spaces to loans that came from China, tough loans. And this is why we've been favored by the European funding, because the rates are much lower. And we have a budgetary spaces opening up that we didn't have before. And in this regard, we do feel optimistic in the 360 area. As regards services, and this is an answer to Miguel's question, to the previous question regarding services. Yes, we have had some renegotiates with customers, but they are not really related to prices, but rather more to activities. You know that our vision with customers is based on partner approach, not as if they were contractors. At least that's our approach. And what we've done with some of the customers, with Michelin, for instance, they've now working on a 2-shift basis instead of 3. So we adjust our services. And in exchange for that, we've asked for extensions of contracts. In the case of Michelin, we've extended the contract of services for another 2 years with them. And they haven't been very aggressive with the prices. We have been understanding, we have accepted this because they've had a slump in their activities this year.

Yes. An additional question, if I may. As regards services and as regards what you said that in Latin America or in some countries, the situation is still very complex. Are -- is there any country that you're specifically more concerned about where things could even get worse? Or do you think that we can only improve?

Well, firstly, I'm very grateful for not being in Brazil because we are lucky not to be there. And the situation in Chile is complex, but the truth is that they behaved in a very normal manner during the pandemic. We've had variations in Peru, especially in telco, in the power sector. I'd say that there has been a normal behavior. And then in Mexico, the situation is complex because in -- well, it's very variable there. And not only that, the messages from the government are complex, and they're not clear, and you don't have a clear picture of what is going on. And I think that the complications are focused on Mexico. But our service activities are relatively small in that country.