Obrascón Huarte Lain, S.A. (GGAL) Q2 FY2025 Earnings Call Transcript & Summary

Welcome to the OHLA Group earnings conference. Senior management will address the main milestones, and we will then give way to a Q&A session. [Operator Instructions] Thank you. Senior management has the floor.

Good morning, all, and thank you so very much for being with us today. This is going to be a conference. I'm Tomas Ruiz, CEO of OHLA Group. And with me is our CFO, Victor Pastor; and Pedro Arellano, who is Head of Investment Relations and Capital Markets. I would like to begin this call by sharing with you our vision of how the group has performed over the past 6 months, the first half of '25, in which we have advanced and executed our strategy in a disciplined manner with financial accountability in mind and a long-term vision. In operational terms, I would like to underscore the fact that OHLA Group has made sales of a total of EUR 1.690 million (sic) [ EUR 1.690 billion ]. EBITDA is of EUR 84 million, which is a growth of 46% if we compare with the first half of 2024 with a margin over sales of 5% This, I think, reflects the efforts underway carried out by the company in order to improve the margins. As you know, all of these numbers exclude the Division de Servicio, the Services division, which at this point is being accounted for as an interrupted activity. It is very important to underscore these facts, and it is important also to understand the context because they spell a milestone in our operational evolution. We've been working along these lines and improving over the past few years. These half year results, I think, cast a strong light and allow us to understand clearly the achievement of our plan that we advised the market of some months ago and as was ratified a couple of weeks ago in the GSM. And thus, as a proxy and what in the Anglo-Saxon terminology is known as last 12 months, we have abided by and complied with the guidance announced for 2025 in terms of sales and EBITDA. In other words, these results that we share today with the market give visibility, confidence and credibility to our road map in operational terms for this year. Now apart from EBITDA, the EBIT and the attributable net profit or results compare better than the same numbers for the first half of '24. Please remember that in the first half of 2025, Grupo OHLA satisfactorily achieved the recapitalization, which has resulted in a nonrecurrent or one-off increase of the financial expenses to the tune of some EUR 15 million and which if we take into account the negative rate of exchange of EUR 6 million have affected the attributable net results. If we exclude this amount of pretty well EUR 21 million, which are, of course, because of the specific one-off events in the period, Grupo OHLA is about to break even. Now new contracts in this half year amount to EUR 2.218 million (sic) [ EUR 2.218 billion ], which is a book-to-bill ratio of 1.3. which means that we continued to onboard new healthy portfolios at a brisker pace than that of execution. This, of course, completely and fully complies with internal diversification criteria, be it by geographies or by project size and concentrates in our 3 main regions, which are North America, Europe and Latin America. These new contracts explain that the total portfolio for the group at the end of 2025 amounted to EUR 8.628 billion, which is 2% more than at the end of 2024. At Grupo OHLA, we continue to ensure that control is tight in operational and portfolio terms. Let me underscore the fact that this portfolio is validated by all of our internal committees and is subject to ongoing periodical reassessments and revisions, which helps us, of course, improve our response to any unforeseen events or contingency. So by divisions, Construction, which is 94% of group sales, has grown its business by 4% and has generated an EBITDA of EUR 109 million, and the margin is of 6.8%. These numbers are more than 68% of the EUR 64 million that we saw in the first half of 2024. Now this improvement is the result of the control of the follow-up and of the hard work in operational efficiency terms that we have been backing for time now. New contracts in the division over these 6 months has been of EUR 2.176 million (sic) [ EUR 2.176 billion ], which explains that our short-term portfolio is of EUR 7.662 billion, which is over 25 months of sales at current levels. Let me repeat that, 25 months, that's more than 2 years. Allow me to very briefly explain to you what the Industrial division does. This represents 5% of the total of group sales. And sales are of EUR 82 million in the first half year. EBITDA has been minus EUR 13 million. This result can be fundamentally explained by the impact of an unfavorable decision issued in Chile, which has to do with an old project, which has been in the courts for some 10 years now, and the decision was known of in July, as I said. Although it is an event after the end of the semester, we have implemented the impairment in accordance with a principle of caution in accordance with best accounting practices. I would underscore the fact that this has not affected our cash. Absent this extraordinary element, EBITDA would have been positive and higher than that of the first quarter of 2025. As reported then, we continue to forecast progressive improvements margins-wise, and in terms of the division -- this portfolio throughout the second half of 2025. Now from a financial point of view, Grupo OHLA has completed the first half of 2025 with a total position of EUR 663 million, which is similar to the same period in 2024. Among the more important relevant facts apart from our operational activities, I would underscore the following. First, on February 13, we successfully completed our recapitalization, and this included the extension of the maturity until December 2029; the release for the first time in 10 years of EUR 110 million (sic) [ EUR 100 million ] pledged and the payback of the debt to the tune of more than EUR 190 million. This improvement in our financial profile means that Grupo OHLA has reduced the leverage ratio from over 11 4 years back to the current 2.2. Secondly, we successfully completed our second capital increase in May with an excess demand to the tune of EUR 50 million, which more than offsets the unfair execution of the Kuwait guarantees. Third, we have renewed the Board, 5 new top-level members. This governance body is more professional now than it has ever been before. And now 50% of the members are independent. Fourth, in the month of June, after having reported the successful capital increase and renewal of the Board of Administration, thus clearing away those 2 points that were underscored in the credit watch, Moody's rating agency downgraded Grupo OHLA from B3 to Caa1 stable. This decision is not to be explained, especially in view of the fact that our indicators and financial ratios have improved. Our corporate governance has been strengthened. We have successfully completed a capital increase amounting to EUR 50 million, and we find the second one for EUR 50 million, and we find ourselves in a better position in operational terms, in financial terms, having done away with risks from our balance sheet. If we think of all of the above and in view of these facts and in line with the group's positive evolution, the external auditor of Grupo OHLA, who is fully familiar with the company, has redacted from the inform and this limited reassessment of the first 6 months of 2025 those 2 paragraphs that were included in those accounts in the month of December 2024, the concepts being going concern -- a going concern, I repeat, and potential effects of the Sidra arbitration. And fifth, from a strategic point of view, in May, we approved a new corporate reorganization plan, which focuses on efficiency, and we aspire to consolidate a savings to the tune of EUR 40 million, this for structural costs. And this plan will allow us to reduce in the upcoming 18 months the structural cost of 3.8% of sales to yearly levels, not reaching 3%, and this is in line with best practices in the sector. Now from a legal point of view, we have seen very important decisions that do away with material contingencies that were of import. On March 3, the International Chamber of Commerce reported that favorable award, Doha Major Stations sentencing Qatar Railways to paying EUR 315 million to a joint venture in which OHLA has a share to the tune of 30%. This is very positive in accounting terms and in financial terms as well. We expect to receive the gross amount before 12 months are up. Additionally, on July 1, we reported to the market the resolution of the final award regarding the request of the parties in the contract. This, of course, having to do with the Sidra Hospital in Qatar. Qatar Foundation requested approximately EUR 1 billion, but the award specifies only EUR 24 million in the sentence, of which EUR 13 million, would correspond to OHLA Group because of that 55% stake in said joint venture. As of the very first moment, Grupo OHLA has been very prudent and has so explained openly, it has registered provisions amounting to EUR 30 million, no variation and always in line with best practices because what we aim to do is protect our shareholders', employees' and stakeholders' best interest. And thus, we had provisions amounting to more than EUR 13 million, which would have to be paid out now in cash in our accounts. I think this speaks for our serious, responsible and reliable managerial activity. The possible reversion of these provisions will represent a positive impact in all terms. This sentence, and I need to underscore this, this sentence does away with any possible uncertainty and does away with the most important risk that OHLA Group has faced over the past 11 years. And I'm coming to the end now. I'd like to say that this first half of 2025 speaks for tangible improvement in terms of profitability, efficiency in operational terms and contract capacity in line with what's been announced. Again, we have proven our resiliency in the face of adversity. We can make good on our commitments and we, in fact, are prudent and cautious in our activities. Thank you, all, ladies and gentlemen. And we have time now for questions. We will be happy to take questions now.

[Operator Instructions] Good morning, all. I'm Pedro Arellano. Thank you very much for having spent time with us. And we begin now with our questions. I am receiving questions via the application. [Operator Instructions] Having provided these instructions, I will begin with Ãlvaro Navarro's question, analyst and makes a reference to the EBITDA construction. I understand that you mean it's high. And is this going to be a constant element throughout the year? Another question has to do with Industrial activities. I think that's clear. And says, without that award, would numbers have been better than last year or in the first quarter? And then kindly confirm guidance for the rest of 2025.

Ãlvaro, let me respond. With regard to EBITDA, it is due to the construction activities underway. It is the execution of contracts, which is underway. And we do not believe that there is anything extraordinary that we could report on regarding the second half of the year, which means that Tomas has repeated what the guidance is until the end of the year. We are feeling comfortable. And our earnings for the first half, I think, is a sufficiently strong foundation to allow us to achieve the objective. And as Tomas said, last 12 months in excess of that objective result, EBITDA, EUR 175 million for this year. Allow me to remind all of your good selves that EUR 175 million at the end of the year, EBITDA-wise includes the Services division and the numbers we are reporting on today exclude the division. So we see the last 12 months, that's where we are. But Services, of course, would always be an additional amount to the results. Now as to Industrial, EBITDA, I would need to underscore here what has been explained by Tomas over the past few minutes, it's negative, including best practices. And because of that cautionary principle, although it is an event that takes after July, we've included it in our numbers for June, which means what? Well, it means that as Tomas rightly pointed out, were we to adjust that EBITDA, the result of EBITDA Industrial for the first 6 months versus first quarter of 2025 would have been more than. So the division would be improving. It would have a positive trend, and it would be on the upswing EBITDA-wise. I would underscore what we heard before: we expect margin and new contracts to improve throughout the second half. Now there's a number of questions which have to do with cash flow, numbers and so on; explanations which I think, Ãlvaro, after the call perhaps we could agree on everything that we could discuss.

Tomas, Victor, we are receiving questions. I'm seeing questions which have to do with the award -- the award because of the Villar Mir debt, I don't know whether you want to add anything?

Well, with regard to this debt, let me answer by saying that a number of actions are underway with regards collection in accordance with the contents of the packs of agreements with Grupo Villar Mir. So far to date, and to the best of our knowledge, the group has, in fact, completed the different tranches of the debt. And should that not be the case, we, if it were necessary, would of course take the case to court in the case of any possible noncompliance by the Villar Mir. The debt, I believe that, that was a question also, amounts to approximately EUR 28 million.

Thank you, Tomas. And there's another number of questions. Investors -- we're receiving these questions and well, 2 of them. Services and Canalejas, what is in the pipeline? Is it going to be sold? What is the calendar?

Let me answer by saying that both assets are indeed up for sale. In the case of services, however, at this point in time, there is a reorganization, a restructuring underway. After 2 years of results that were less than expected with shrinking margins in the face of the conditions, this sector in general in Spain, and because of that, we have decided to introduce major changes. First, an administrative reorganization or reshuffling, which is going to actually be spelled out in a shrinking structure. We're going to be leaner. It's going to be more efficient and the margins, therefore, will be better. This process will, of course, need additional time, months. So our long-term plan encompasses a sale in the second half, probably the last quarter of '26. In the case of Canalejas, indeed, yes, we are looking for a potential buyer and at the same time, we are constantly in conversations with our partner in order to see potential exit strategies. OHLA Group would share its -- and sell its stake in Canalejas because it is not an absolutely essential asset for the company.

We have a question from Imperial Capital. The question is, could we break down region by region of information regarding cash?

Ethan, we never provide this granular information. Please go to the document, Page 10. Every quarter, we publish and we differentiate between assets and capital and liquid assets. On the one hand, we explain that pledged amount, EUR 3 million in different bank accounts and other elements as well. And then we have the accounts that we know, liquid assets and cash. That is the company. That EUR 559-plus million would include EUR 303 million, which correspond to JVs in English, joint ventures in English, UTEs in Spanish. Why? Because that is the amount that we manage ex company for all JVs because we have the working capital outside of the joint ventures and in all of the regions where we have a presence. Any other detail and so on? The question wasn't actually very specific, but I am, of course, available, and I will be more than happy to provide clarification and perhaps give a little bit more background regarding what the company is doing.

Another question. This one has to do with intermediates. We just published this information, provisional numbers and the explanations there regarding pending sentences. And I'm going to group them together. First, pending. As I say, there's an explanation there in terms of amounts, the material elements which await the company. So explanations of Sidra in those accounts, what we see is that we have requested clarification which might represent a variation in favor of the JV. So we want a little bit more flavor. We want to know when Sidra is going to be finally resolved.

Let me answer first by addressing Sidra, and then I'll take the other question. In the case of the Sidra sentence, which looks at those requests of the different parties in that arbitration which, as I said, is nearly 10 years old, I would say that the result is very favorable for OHLA Group. Grupo OHLA has a stake, as I say, it's one of the parties in this joint venture, 55% stake actually. And the sentence, the award actually addresses a payment of EUR 13 million for OHLA. The total amount is of EUR 24 million. I would underscore the fact that, yes, indeed, a clarification has been requested of the arbitration court because in our opinion, there is an arithmetical problem here. We believe that the amount would actually be lesser, it might be an amount that would be in favor of the joint venture. But this is going to depend on the clarification. We believe this will be an additional 2 to 3 months. As to the other question, yes, it has to do with what is pending. That is included in the financial statements that we've published. The auditor is well aware of all of the information. The auditor is familiar and those paragraphs have been redacted. There is a part that addresses litigation, addressing sentences, but there is no further information apart from that which exists there. This was published this morning.

Tomas, Victor -- I think that this is a question for Tomas. There are a number of investors who have questions one way or another about internal investigation and publication in the media, news that have been published recently. So is the Board stable? What can we expect with regards to share price? Of course, we can't say anything there. And about research and investigation, I believe that many are not familiar with that relevant fact, CNMV, the conclusion of that investigation. But it would be, I think, interesting to give a little bit of flavor.

Let me answer by saying yes, yes, I'll be happy to do that. Regarding that point, I would underscore that internally, in other words, via compliance, a number of reports were addressed; previous members of the Board regarding related party transactions and so on, including myself. And that whistleblowing, that investigation really led to no findings of any irregular activity. This was so determined, and this was so reported to the CNMV. The CNMV has, on 2 occasions, requested of the company that information be provided in this regard. This information has been provided in a satisfactory manner, and the CNMV has not made any further observation. The CNMV has not addressed any other issues, so we believe that this issue has been resolved. No irregularity has actually been proven.

Now as to the Board, I would repeat what Tomas just said. This governing body has been bolstered. There are 5 new directors, top-level professionals. Two more questions, which have to do with MOHARI and I think Canalejas and the complications because of the different awards, OHLA and MOHARI. And then a little bit more information about BiobÃo.

Yes, I'll take these questions with pleasure. First, regarding MOHARI, I would say that, in fact, arbitration has been wrapped up. And what MOHARI requested vis-à-vis the shareholders' agreement, the expectations only in 1 of 4 points has been approved. I'm not going to go into the specifics, but what this means is that of a total of over EUR 40 million, this was in quantitative terms, it has flushed out in an award or a sentence that mandates that the company pay approximately EUR 3.5 million, which, by the way, have already been paid out. So I think it's fair to say that 3 of 4 points were confirmed to be right, the interpretation of said contract. As to the second question, BiobÃo. What I can say about BiobÃo is that at this point in time, the company is active in 2 fields. You have the jurisdictional field, if you will, the Chile because I need to underscore this was -- the desire was to reach conciliation. And should no agreement be reached, there would be a sentencing and it was the purported noncompliance of the concession. Now I think that what we're seeing here is the delay in the works because it is a very complex work, which includes 4 hospitals in 1 single concession. Because it is one single concession, the activities cannot be looked at independently or separately because everything that has to do with this concession, including the financing thereof, is assessed by any potential investor as a single event. And any possible complication, and there were complications in a number of hospitals that slowed down the commencement because of permits and licenses, I believe, is to be attributed to the client here, the Ministry of Public Works, Ministerio de Obras Públicas. They say no, they say that some of the noncompliances is our responsibility. We are debating this in formal terms. But parallel to that, we have conversations underway with the client. We are on a very positive track, and we do believe that we will shortly in a couple of weeks' time, be seeing a conclusion thereof.

Thank you very much, Tomas, Victor. I don't think I'm forgetting anything. I don't see any question that is pending response. If this is the case, please our team, of course, our Investor Relations team will be more than happy to continue to address questions with all of you. Yes, we know that Navarro and another explanation regarding treasury, so cash flow and treasury and then the sentences that are pending, MOHARI, Sidra, BiobÃo, Servicios or Services and Canalejas, corporate governance. I think that all of the questions have been dealt with. And if that is not the case, I repeat, we will be delighted to provide all and any information, confirmation and details necessary. I think that we have come to the end of our call then. Yes, let me just say thank you very much to all of your good selves.

Thank you very much. I hope everyone has a great summer. Thank you, and goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]