Obrascón Huarte Lain, S.A. (OHLA) Earnings Call Transcript & Summary

Good morning, everyone, and please welcome to the presentation of OHL for the year 2019. I will stick to the speech later. But first of all, I'd like to say that it's a great pleasure to have you here. It's a pleasure to enjoy because I'm sure we will enjoy together presenting the results of the work that we consider well done. Led to an image that we're especially proud of OHL, and this will be a very important year for OHL and for Madrid with the opening of these wonderful Four Seasons Hotel. So without a doubt, it's been definitely a year in which the company has met the targets that it had set, allowing us to be in a very good situation nowadays to face the normalization of the company's activity in 2020. This is a year that we approach with great hope and trust. And I'd like to use this brief introduction to thank the management team and all the employees of OHL, the ones who are here and the ones who are connected through streaming, for the great effort made throughout 2019. And therefore, a commitment that have allowed this company to be nowadays more predictable and stable and to walk firmly towards the path of profitability and sustainability. Focusing on today's presentation, I will next give the floor to Manuel Álvarez, General Director of the company, who will give a summary on the evolution of OHL throughout this year, the past year 2019, going over the main economic figures and also approaching the evolution of liquidity with the recourse of the company and the behavior of our project portfolio. Afterwards, I'll take the floor again to detail the priorities of the year 2020, making reference to strategic pillars of this company, our objectives for this coming year and the liquidity levers that will allow us to face this year with the maximum guarantees. And once finished the presentation, as we usually do, we'll open a Q&A session. Manuel, you have the floor.

Good morning. Just like Jose Antonio, I'd like to express my gratitude for your presence here in such an important day for us, which is 2019 results presentation. So before we deal with figures, and even though many of you know us well, I'd like to begin by making a brief summary of what OHL is today. OHL represents more than 100 years of history and 18,782 workers. We're international company with more than 75% of our business out of Spain, but with a firm interest in keeping increasing our presence in the national market. We are in position 49 within the 250 largest international building companies, according to the rank published by the prestigious, Engineering News-Record magazine, ENR. This publication has awarded our company, Judlau, as the best building company in 2019 New York. We are mainly a building, industrial and services group, with a clear strategy to be a supplier for infrastructures at a global level that highlights our experience in real estate development and infrastructure development. We are strategically positioned in 3 regions: Europe, United States and Latin America. And to finish this brief introduction, and if you allow me, which is not easy, I will sum up in 2 words how we like you to identify what OHL is today with its workers, and this will be the 2 words: integrity and commitment. In our results presentation last year, we announced that 2019 will be a year of transition for OHL. It has been. So it's also been a year where mainly, we have confirmed our ability to generate positive EBITDA in all the group solutions, Building, Industrial and Services. We confirm, though, the generation of positive operational results, EBIT, as well as a reduction of structural expenses. And we also confirm the ability of cash flow generation of the activities of Building, Industrial and Services. But with considering the deficit projects, called legacy in the past, have been able to generate EUR 158 million in 2019. If we look at the figures that we show with -- shared with you in February 2019, and we compare it to the date of the closing of the year, we can say that this company is today more predictable in meeting its targets than it has been in the recent past. Our sales have exceeded EUR 2.9 billion, placing itself in the top range of the bracket of EUR 2.5 billion to EUR 3 billion. EBITDA, as we have said before, has been EUR 64.8 million, which is 44% higher than the estimate of EUR 45 million. In a difficult environment to increase our line of guarantees and bonding, we have kept our portfolio level at EUR 5.5 billion, even having canceled, in the first quarter of the year, the contract with Aleática for a amount of EUR 0.5 billion. We placed our net debt recourse target for 2019 in a range of minus EUR 150 million and minus EUR 200 million, having finished the year at minus EUR 106.5 million. The estimated range included the most substantive figures, the payment of Mayakoba for amount of EUR 91 million, and we still need to recover 23 million of -- EUR 23 million. Also the recovery of the debt of Grupo Villar Mir and Pacadar for an approximate amount of EUR 122 million, and that was announced -- in June this year. It was extended until September 2020, affecting both to the achievement of the objective. Our structural costs have been EUR 4.8 million lower than our forecast of EUR 150 million, confirming the effectiveness of the savings measures that we set as an objective at the beginning of the year. As the main figures in this year 2019, we may highlight following. Our sales have been in line with the sales of 2018, having registered a slight increase to the total figure of EUR 2.96 billion. Our EBITDA that has meant a significant change of trend from negative EUR 496 million in 2018 to EUR 64.8 million. Those are positive figures in 2019. And we also need to highlight consistently with quarter-on-quarter average values of EUR 9.1 million in the first quarter, EUR 22.7 million in the second and EUR 40.1 million in the third quarter. The EBIT has been positive and EUR 2.9 million, just like it was in the quarter before. Our hiring has increased to EUR 2.66 billion and has allowed us to finish the year with a total portfolio of EUR 5.45 billion, 10.4% lower than the figure at the end of 2018, mainly due to the impact of the cancellation of the contract with the Aleática this year. In a not very favorable environment, all divisions of the company have kept the portfolio levels of 2018: in Construction, from EUR 4.24 billion versus EUR 4.96 billion of 2018, really eliminating part of the contracts with Aleática; Industrial, EUR 249 million versus EUR 260 million in 2018; in Services, EUR 365 million compared with EUR 376 million of the year before. For 2020, before the signs of the recovery of our company, we aspire to have an additional definite support of the referenced entities. That translates into an increase of the guarantees and bonding lines to achieve to being high figures in the next few years, above EUR 3.5 billion as without a doubt we would have reached in the former year 2019. Despite the obvious operational improvement of the company, the generation of positive business results, the net result has been negative for an amount of EUR 128 million, mainly due to the attrition of several assets, that have meant minus EUR 71 million and financial costs that have represented minus EUR 35.9 million. OHL has finished 2019 with a liquidity with a recourse of EUR 782 million. That has represented a reduction of EUR 251 million. This is the EUR 1.033 billion with which we began the year. The items with most impact for the year, some of them nonrecurrent and others, some of which we estimate improvements in future years are the following; the deficit projects where we have the projects, formerly called legacy, and that have meant a cash flow exit of EUR 146 million versus the EUR 161 million estimated; the relativity of the business has generated a cash flow for an amount of EUR 158 million, with a reduction of the carry out works planning to be certified and the certification pending recovery in the year for more than EUR 72 million as structural costs for an amount of EUR 100 million, representing an important outflow in the cash flow consumption. However, we do not estimate significant improvements in this area that with the current strategy would allow us to be below EUR 130 million in future without affecting the operational ability of the company. The gross financial costs have represented EUR 52 million, and these costs are above our competitors. And therefore, we are assessing the measures to be applied to improve the financial structure of our balance sheet. The sum of investments, divestments and CapEx has represented an outflow of EUR 44 million, where the largest amounts correspond to the projects of Canalejas in Mayakoba. Per division, we'd like to highlight the growth and operational strength of all of them. Construction has reached sales of EUR 2.45 billion and an EBITDA of EUR 75.5 million, 3.1% of sales, representing 83.2% of the total of the company's activity. Industrial, with sales of EUR 218 million and a growth close to 15%, has generated an EBITDA of EUR 9.8 million, 4.5% of sales, representing a 7.4% of the total. Services with sales of EUR 275 million and growth higher than 4% has generated an EBITDA of EUR 12.4 million, that is 4.5% of the sales, representing a 9.4% of the total. In all of the divisions, there has been a significant evolution of the EBITDA margin when we compare them with the figures of the year 2018: from the 300 -- from minus EUR 329.6 million to EUR 75.5 million, that is positive figures in Construction; from minus EUR 63 million to plus EUR 9.8 million in Industrial; and from EUR 1.3 million to EUR 12.4 million, both positive in both years, in Services. These figures show clearly the return to operational profitability of OHL in all the divisions, with EBITDA percentages on sales in line with our targets. Our sales and portfolio per region reflect the consistency with our strategy to reduce the risk profile of the company, working in the areas where OHL has bigger technical abilities and better enough knowledge. Europe, with sales of EUR 1.36 billion, has represented a 46% of sales with an EBITDA of EUR 33 million and finished the year with contracts that represent 43% of the total portfolio. North America, with sales of EUR 1.003 billion, representing 34%, has had an EBITDA of EUR 31 million and final portfolio in the year that represents 34%. Latin America has had sales of EUR 545 million, that is 18% of the total, with an EBITDA contribution of EUR 34 million, and its portfolio represented a 22% of the total company. Take into account the sales of 2019, the portfolio represents 20.3 months of activity and is concentrated in 99% in the regions that we have decided to be the most strategic for the company. Last, and before I give the floor to our CEO, Jose Antonio Fernández Gallar, I'd like to share our firm belief that OHL is a [ suitable ] company with a better monetary discipline in [ reducing ] to generate EBITDA and EBIT, both positive, in all its divisions; with a clear target for management, prioritizing cash flow; and a contract policy in agreement with the risk profile per geographical area, type of contract and size according to our objectives. It's a transparent, predictable and committed company with a compliance of our ethical code. Our next target is just obtaining positive results in the -- in our balance sheet. We are well aware of the work that we have left to do, but we do not hesitate to doing it, how we did it in the past year will be successful. To all the employees of OHL, thank you. And many of you are here, thank you for the work done in this year 2019. And in the Q&A session, I'll be available for any questions you may have. And next, I'll give the floor to, Jose Antonio, our CEO, and thank you very much, once again, for being here with us.

Thank you, Manuel. Well, thank you for presenting these results from 2019. The company and the employees are very proud of them. So once finished this presentation, I'll next mention the priorities for 2020 and the mid-term objectives of the company. OHL has advancing its recovery, thanks to the implementing measures articulated around a strict income control and the project cash flow as well as the reduction of operational expenses and structural expenses. Due to the management we've put out who are building business, it's profitable then, reaching positive EBITDAs in all the business lines in the 4 quarters of the year, as Manuel has mentioned. As stated by the General Director, Manuel, we have met the targets set for 2019. Even at the beginning, we called it transition year. Therefore, OHL is nowadays in a better starting point to face the year 2020, which should be a year of consolidation for the company, in which, as we will see next, we do hope to reach sales of between EUR 2.5 billion and EUR 3 billion and EBITDA above EUR 70 million. And all that, with contracts above EUR 3 billion, which will leave the company prepared for a good year 2021. Regarding the strategic pillars, we're going to focus on the next bit. Corporate governance. OHL has nowadays -- our corporate governance is more solid and independent. And our Board of Directors is integrated by 10 people, most of them being nonproprietary Directors. Depending on reporting to these Board of Directors through its Audit and Compliance Committee, we should highlight the actions carried out in compliance, internal audit and risk control that allow us to promote the good governance criteria in the organization. Likewise, the Appointments and Remunerations committee obviously is transparent and independent, and works continuously to align the objectives of shareholders and employees. Regarding the focus on cash flow generation, the company has established as a main priority in its decision-making to prioritize the strict cash flow control, a culture on which we have delved in, in depth in 2019 and which we'll keep working in 2020, acquiring positive cash flow on our projects and trying to monetize nonstrategic assets. So cost control. OHL, as we have mentioned before, has worked intensely in reducing structural costs throughout 2019. We have closed 2019 with EUR 145.2 million in total costs, that is 4.9% on sales. But we had begun in 2017, I should remind you, in EUR 240 million, that is 7.6% on sales. Despite the effort made, we'll continue with our adjustment policy, understanding, however, that we have carried out the main effort, and then now we just have a small review pending. Portfolio management and risk control. Without a doubt, in 2020, we'll believe in a good, sustainable management for our portfolio, reinforcing the offer risk control with an approach on the assessment of geographical and economic risks, but also assessing the technical, legal and resource availability internally, implementing, therefore, the management of contracts culture versus the project management culture. I've repeated that before, and I'd like to repeat it again. And regarding profitability, the targeting contracts will be to have margins higher than 8%. Regarding the Concession business, our Concession subsidiary, Senda Infraestructuras, is ready to add new assets to its portfolio throughout 2020. Therefore, OHL believes in being a developer of concessions and developments by generating contracts in Construction, with margins higher than average, minimizing the capital contributions and with the future policy of asset rotation. As far as 2020's objectives, we're going to focus our management and our attention in the 5 following points: an increase in new orders, an optimization and improvement of the operational margins of fine-tuning structural cost and boosting our Concessions portfolio; we're going to focus on cash management; we're going to continue giving value to the Canalejas project. It's going to be a major year for this project, and we want to reduce leverage. And these are, therefore, the following objectives. Sales between EUR 2.5 billion and EUR 3 billion; EBITDA over -- as I said before, over EUR 70 million; overheads, lowered to EUR 140 million; and new orders above EUR 3 billion. As far as the liquidity levers OHL has for 2020, let me highlight the following. The Old War Office building. With regards to these projects, there is a pre-agreement to sell our stakes to our partner. This, under the fulfillment of specific conditions, of course, that will be formalized as soon as possible. OHL has taken this decision in line with our divestment policy in order to meet our strategic plan, divesting in nonstrategic assets. Though OHL still thinks that it's a great project, but it's maybe too demanding in resources. And we considered also that as we're not going to carry out the works, London doesn't have synergies with our building company, therefore, it's not our core market anymore. Canalejas project in Madrid, OHL has -- still had talked with different investors with regards to a possible financing with guaranteeing the equity of Canalejas. Although the company is still advancing these talks, as of today, there is no final agreement. Of course, we always look for enlarging the value of this project, giving value to the upside we have. We want to open the hotel in this next month of May. This is a great piece of news, as I was saying at the beginning of my speech. It's great for -- not only for OHL, but for Madrid and for tourism industry in Madrid. As far as lawsuit, we will continue trying to recover and monetize these lawsuits. And as for our third-party debt, we will have an active management of debt recovery. Objectives for the future. In order to face the future, we have good tools on our hands. We've got an efficient structure, business-oriented, solid presence in the different geographical areas where we want to be, a proven track record and know-how that the company has, active management and control of all the risks inherent to our sector. We're independent in the management, and we've got a management team, which is fully aligned with the strategic plan. The clear objective is a simple one. It's simple to explain, but we have to get there. We want to get back to the -- get back in track of profitability so that our company in -- soon will be having sales above EUR 3.5 billion. It has got the capacity to do it, and the geographical areas will allow us to get to that figure. We have to seek and get an EBITDA margin in businesses above 4%, and we must reduce progressively our leverage. With regards to corporate governance, we have a solid and independent corporate governance. As I've already said at the beginning of my talk, OHL, this corporate governance, is a fundamental pillar to boost growth and wealth generation in this company. And its Board members, OHL has anticipated to meet the recommendations, saying that 30% of our Board members, mostly women, therefore, meeting, since 2018, the objective set by the Good Governance code. Likewise, the 3 organization units that depend on the Board member, the fulfillment, risks and audit management, have made major advances all through 2019. So fulfillment, OHL articulated its commitment with good entrepreneurial practices through its ethical code. That is enforced since 2010, and it stems from the code of conduct that was created in 2002, its anticorruption policy and crime prevention policies. And all of this translates in a rigorous fulfillment that goes beyond the criminal legislation and norms of anticorruption that are applicable in Spain. So if we focus on 2019, let me highlight that OHL has renewed crime prevention system and has been awarded with International Certification's ISO 37001, the anticorruption and management system and the UNE 19601, referring to the criminal compliance management system. With regards to anticorruption policy, it was approved by the Board of Directors in June 2015, and it was reviewed in July 2019, reflecting the position of the Board of Directors of 0 turns before any kind of bribe, corruption, both in the public and private sectors. So all through 2019, OHL has updated its also crime prevention model that was created 2016, adapting to the organizational changes that OHL has had. This has given rise to a crime prevention system which is robust, allowing to mitigate criminal risks that we have -- that we're exposed to, according to the specificities of OHL's structures and its business. Likewise, in November 2019, the Board of Directors of the company approved the crime prevention guidelines and policies that substitutes the rules of the crime prevention model that was created in 2016. These all are under our commitment to operate in a responsible action environment in social, environmental and governance terms, allowing to be aware and respond to the changes, needs and expectation of our interest groups. With regards to the risk management, OHL is exposed to different kinds of risks. So in order to face these risks, we have opted to have an efficient management of risks. Therefore, we have opted for integrating in the business processes a follow up all through the life of the project. And we have, of course, reinforced their identification and assessment since the offer and tender phase. As for internal audit, this management helps -- very pleased with the organization to meet its objectives and to have a systematic and disciplined approach to assess and improve the risk management process -- processes that control -- of control and corporate governance. And finally, as a final reflection, let me say that today, ladies and gentlemen, OHL is a sustainable, profitable company in terms of EBITDA, with positive growth in its main parameters, with a solid presence in the 2 continents that have already been mentioned, and where the programs and budgets for investment in future infrastructures make us think that we have a promising future ahead for the company. As far as the real estate development is concerned, 2020 will become a milestone for this company, with a put into service of all the Canalejas complex, proving the excellent management capacity in the hotels and real estate projects that we want to have in the future. As far as OHL Services is concerned, today, it will consolidate its good results that it has had during 2019, and we expect to increase its portfolio. And Senda Infraestructuras will have to look for new concessions and analyze the asset rotation that are not strategic that we have. These achievements of the past and objectives of the future are and will be the consequence of our effort of the management team and all the staff working in OHL, and I want to thank all of them for their firm commitment. And I also want to thank the trust given by shareholders, investors, clients, suppliers, and especially the trust given by our reference banks, insurance entities, bonders and all those who provide support so that we can meet our business plan. As I've said on several occasions, this is a company that is centennial, deserves to get back to its place amongst the biggest groups of infrastructures in the world. This is all. This is the end. So let me now open the Q&A session for the people in the audience. So if there are questions, please raise your hand. The General Manager, me, myself, are ready to answer, but please wait for the microphone.

Daniel Gandoy from JB Capital Market. Four questions. The first one, could you make an update on the cash outflow expected for legacy projects? I think that a year ago, you talked about EUR 330 million, EUR 146 million have been used. Do we have to adjust new subtraction? Or should we take into account any new figures? Second question. I don't know if you want to go one on by one? Or should we -- should you take all questions?

We confirm, EUR 330 million to EUR 146 million have been used this year. I'd like to make a major -- special nuance here because it could be read wrongly. We've never been comfortable with saying legacy, never. We've never liked that word, and we've said it since the first day. The company is a construction company, a building company that generates cash in the all kinds of projects. So it was very important to give transparency to the market, and that's why we gave guidance. We still dominate legacies, but realities is that let's forget about those projects. The company has captured those projects in those EUR 330 million. These have represented this year, EUR 146 million, and we do not expect -- and we're doing an active management of these assets, we do not expect any change because there's no information negative on that side. No new information has been issued, otherwise, I would have -- we would have told it to the market. So we're going to continue to manage the differences, EUR 180-something million, the best way possible between 2020 and 2021. Last year, we gave guidance of EUR 107 million for 2020. And if we save EUR 15 million, we will see how we do it in the coming years, so that we do an active good management of those assets.

Have I answered? So we confirm EUR 330 million that we said back in time.

Excellent. Second question, could you explain which are the reasons of the valuation reduction of Canalejas and Old War Office? Is it because the discount rate increases? Or is it because of a reduction of the income?

Well, as far as Canalejas is concerned, it's just penalties because of delays in the project. And delays are the consequence, of course, of -- it's a very complex project when getting the licenses of the first occupation, the LPO licenses. It's a very long process. We thought it was going to take 4 months, it's taking more time. But it's just that, it's just accounting those penalties because of delays in the case of Canalejas. In the case of the Old War Office, as you've -- as I've said in my speech, we've received an offered, and we've done adjustments according to how we think the transaction may end.

Third question is EBITDA of Services and Industrial has been quite strong in the last quarter. You've said, you want to consolidate Services for 2020 mainly. So I'd like to know if there's any side which is nonrecurrent or the figures for EBITDA of the year-end could be considered as a reasonable basis to estimate the growth for the future.

The answer is yes, it's a recurrent EBITDA and the basis for the future, and we expect for that to consolidate and gain as much as new orders as possible.

Okay. Last one. There's EUR 33 million in EBITDA that you say it's corporate. Those EUR 33 million are included in those EUR 145 million of structural cost overheads. So for the future, in order to estimate these figures, that EUR 33 million, should we consider them as overheads, the ones that will be broken down as corporate structure? Can we use that figure for future estimates as a basis, as recurrent?

Well, that's a matter of accounting internal organization. We've organized that EBITDA for corporation, and that way, we add all the EBITDAs of all the business lines. That's the figure that -- how we get to the figure.

Yes, but for future estimates, we've got 3 divisions with a reasonable margin?

Yes, it's going to be recurrent for the future. We will be using these magnitudes.

Microphones? Someone speaking without microphones, be introduced cannot hear. More questions, more questions? Anyone that's coming from the website? There's another question to your right.

From SANTALUCÍA. Could you give us some guideline of cash generation as you did last year because that will depend on divestments? But we all know how to do subtractions and additions. But can you tell us how you're going to manage the divestments for net cash at the year-end? And can you tell us something about actively managing the financial structure? You've said that you're going to pay the bond of 2020, does that include anything else for 2022, 2023? Or...

Well, to the second question, we refer exclusively to paying the 2020 bond. And for the first question, Manuel is going to answer. But let me say that the divested cash is uncertain. That will depend on the divestment when they happen. And as for cash generation for the recurring business, José María is going to answer. Please use a microphone. The interpreters need a microphone. Otherwise, we cannot hear what's being said.

This is amount that was material. Since we have given that figure and we have ratified the amount. So we understand that, that is what you need to know. The rest is that recurrent generation of our business, and the rest is typical operations that we have explained today. One is on the leverage of Canalejas, we want to lever equity to get the biggest value. Divestment of Old War Office, that is meaningless to give you a fine-tuned figure. It's like telling you the prices of the operations that we're negotiating that right now. So ordinary business cash -- ordinary cash generation, the deficit area in projects we've given you -- we've already given figures and extraordinary elements, we've already said what we can say. Thank you.

More questions from the floor?

Guillermo Fernández-Gao from [ KPHB ]. Could you give us more information about the operation you have in Canalejas? The equity leverage, is it going to increase cash, recourse cash, levering the project more? Or how are you going to do it?