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

Welcome to OHL First Quarter 2020 Results Presentation. The management of the company will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions] I now hand over the call to the OHL management team.

Good afternoon, ladies and gentlemen. My name is Manuel Álvarez. I am the General Manager of OHL Group. Together with me in the room are Mr. Jose María Sagardoy, CFO of the company; and Mr. Pedro Arellano, Investor Relations Manager. I hope that you all and your families are healthy and managing as well as possible in the current situation we are all facing because of COVID-19. Like yourself, at OHL, we are also hoping for the return to greater freedoms and stability as soon as possible. In these extraordinary circumstances, I especially thank you for your attention and interest in the performance of our company over the first quarter of this year. Before going through the operational first quarter 2020 results in detail, in response to the current global uncertainty, I would like to highlight some measures taken by OHL to tackle the situation and mitigate the initial adverse impacts on our stakeholders and company. Social and health care measures recommended by the health authorities have been adopted, including the use of protective materials, more flexible working hours and working from home. The primary purpose in all cases is the protection and health of our employees and partners. A 3-month temporary layoff measure, ERTE, has been implemented under an agreement with the worker's legal representatives, mainly in the construction business in Spain, which affected over 1,300 workers. A 50% reduction has been applied to senior management salaries during the ERTE, 30% for other managers and 20% for Board members. The group's liquidity was reinforced by obtaining a syndicated loan of EUR 140 million on the 30th of April, granted by the Spanish government. It should be noted that OHL is a key operator in activities classified as essential, including hospital management, road cleaning, home services, maintenance and energy efficiency. The group is in permanent contact with clients and health authorities to assure the efficiency of these public services, which are so critical in the current situation. Be assured OHL is working hard to keep all areas of the company functioning as efficiently as possible. Although the total impact of the COVID crisis cannot be predicted, we are collaborating with clients, suppliers and other stakeholders to mitigate its ramifications. I'm pleased to report that our team are already detecting and preparing for opportunities arising as a result of the situation. The effect of COVID-19 on OHL's first quarter results was not significant. The activity declined, particularly in construction business in Spain, was offset, thanks to the group's geographic diversification and improvement in the construction activity in the U.S. and LATAM and the growth in the services business. Unfortunately, any estimation of the impact that this pandemic will have on the group's financial highlight this year, is difficult to quantify at the present time. Let's go now through the operational first quarter 2020 results in detail. In the first 3 months of 2020, OHL continued with the trend shown during 2019 with positive figures at operational level in all the business areas of the company. The main figures for the period are as follows: sales reached EUR 655.6 million, which are 4.3% lower than in the same period of 2019, due primarily to the decline in European business, more specifically in Spain, caused partially by COVID-19 and offset by growth in the U.S. and Latin America. Even so, OHL has achieved a positive EBITDA of EUR 13.6 million, a 49.5% improvement on margins with respect to the same period of 2019. At an operating profit level, the EBIT figures totaled EUR 0.8 million as compared with the losses posted in the same period of the previous year. The total order book as of March 2020 amounted to EUR 5.3 billion. 98% related to the 3 core regions of the group, with new awards in the period of EUR 624.9 million as a whole company. Of the new awards, more than 89% are works that have been awarded solely to OHL, and approximately 84% are from private/public sector clients. Results by division. Construction division. Sales of the construction division totaled EUR 537 million, representing a 4.2% decrease year-on-year. As I mentioned before, this slight decline on sales is related mainly to the decline in European business caused partially by COVID-19 and partially offset by business growth in the U.S. and Latin America. Construction EBITDA reached EUR 14.4 million in the period with an EBITDA margin of 2.7% in the first 3 months of 2020, improving on the first quarter 2019 figure. The construction order book totaled EUR 4.1 billion as of March 2020, representing 20.5 months of sales. It is worth mentioning the healthy geographical variety of the backlog where 98% of the work is located in our 3 main regions as well as the variety in both size and typology of the projects. During the first quarter of this year, OHL added EUR 426.1 million in new construction awards, mainly in U.S.A. Related to the Industrial and Services unit, the recovery trend as shown at operational level in both divisions along 2019, is shown again in the first quarter of this year. The Industrial division has registered sales of EUR 46.4 million, 14.4% lower than that in March 2019, which is mainly due to some EPC projects that are in the final phase of some new projects that have been started in 2020, which have not yet reached maximum productivity. Our Services unit sales amounted to EUR 69.9 million, representing a 4.7% increase over the same period, the previous year, boosted by maintenance and urban services. Altogether, the EBITDA figure in both division totaled EUR 5.7 million with 5.6% and 4.5% EBITDA margins, respectively. Regarding the property development divisions, last April, Canalejas project obtained the first occupancy license. However, the state of alarm due to the COVID pandemic postponed the grand opening, and it is now expected to take place in September 2020. Before the Q&A session, it is important to highlight the EUR 73 million bond repayment carried out in March at maturity. Concerning the Amodio family transaction, in light of current uncertainty due mainly to the coronavirus, both parties have agreed to stop negotiations and finish the exclusive period of their merge offer made in February this year. We also want to communicate that the Villar Mir Group has informed the company that the Amodio family contacted them expressing their interest in acquiring part of their stake in OHL. As a closing comment, the company has not yet made any provision to cover the impact of the COVID pandemic. We consider it wiser to wait for the results of the activity-by-activity analysis currently underway and expect to provide reliable provisions in the results presentation of the second quarter of 2020. Thank you to you all for your attention. And we are ready to start with the Q&A session.

[Operator Instructions] The first question comes from Maxime Kogge from ODDO BHF.

[Audio Gap] to be done. Second question is on the timing of Canalejas and Old War Office possible disposals. I understand that Canalejas will be levered -- will be inaugurated in September. So I guess that disposal could take place at this time -- at this point in time? And third question is on the cash collateral of EUR 140 million you still have. Is there any possibility to release that cash collateral to -- given the expectation of potential further cash burn in Q2 and Q3?

Sir, I'm not sure we understand you. Okay. The first question, we didn't hear anything. So if you can repeat the first question, it will be very good. Regarding the second one...

First question is on the repayment of the Villar Mir loan that are due next July. Do you still expect them to be with...

Okay. I understand the question now. So regarding this debt that the family of Villar Mir has with the company, the only we can say this, every time we ask them in the Board of Directors if they are going to honor the debt, the answer goes always, yes, we are going to do that. So it's the only we can say in that regard. And regarding the second one of the project in Canalejas and Jose María is going to speak with you regarding the cash collateral. The only we -- I'm going to say is that the current expectation of opening of the Canalejas project is in September, but it's also depending on the status of the lockdown. And we do see what is going to happen with this status.

Yes. In relation to this question, the COVID-19 has delayed some transactions related to OHL, the assets that were going to take place and to provide liquidity to the company in year 2020. And that was the reason, therefore, that we decided to reinforce the liquidity through a syndicated loan provided by our relationship banks. I mean, this transaction has the collateral, of course, of those assets since there is a delay in the divestment of the assets. It provides the liquidity that the company needs. And once we sell the assets, we will be repaying even if the value of the assets reach higher than the amount of the transaction. In relation to those assets, the first asset that the company would be ready to divest would be the Old War Office asset and in relation to the second one as -- and we were saying, I mean, the [ ADA ] is opening their hotel in September and then analyzing the evolution.

Okay. Regarding Old War Office, you were recently in discussions with the other shareholder. I understand these discussions are now stalled.

No, no, that's correct. We still maintain those conversations, and he still maintains the interest in buying the acquisition in the participation of OHL. However, there will be a delay in the transaction.

Okay. And regarding the cash collateral on the guarantee line, no? It will stay in place, no hope for potential release.

No. there isn't. [Foreign Language] No. Then -- no, no, there is no changes. So the collateral as they are -- they were. There is no change in the collateral with the banks.

[Operator Instructions] Your next question comes from Beltran Palazuelo from SANTALUCÍA.

If you could give us a little bit of color just to see what would Q2 look like in terms of execution and in terms of intentions on liquidity? Because currently, you're not giving us any color on what would the Q2 look like.

Now, we gave you the figures of this first quarter. And regarding the outlook for the rest of the year, we are still studying it project-by-project and activity-by-activity, and we will see in the next quarter results, if we could refer any guidance regarding this cash consumption. It's that all we can say.

So currently you don't know what is your gross cash position?

Mine? Sorry?

The gross cash position. Currently, the company does not know what is the gross cash position of the company.

No. The current -- the current cash, you have the numbers. Let me check with the figures. The current is EUR 543 million is the current liquidity.

Those numbers are from the 31st of March. It's very good to 60 days after 50 days after of the COVID prices to see more or less how the company...

We are now in the first quarter result. We are not going to give any guidance either the current situation of the company in April, neither the situation that is going to be at the end of the year because we are in a study of that. So currently, we are in a presentation regarding the first quarter results of the company. We are not going to give any guidance and information regarding the current position of -- the cash position of the company.

The next question comes from Maxime Kogge from ODDO BHF.

Yes. Thank you for taking another one. There will be under -- additional cost to COVID-19. And can you provide some -- your views on whether you are going to be able to share them with your clients? Do you think you will be able to pass them through to clients? I mean, perhaps you can give some color whether these clients are public, private or depending on countries, too?

Okay. Well, depending on the clients. Private clients, maybe we are going to be in talks with them in order to maybe share the impact of the coronavirus. With the public clients, it depends on each project. According with the law, if they have stopped because of the consequences of the coronavirus, according with the current legal clauses of the contract, we have in some of them, right to recover part of our cost. The impact is completely different according with the regions. We haven't had any very significant impact in Europe, in general. We have a very significant impact here in Spain. Europe, Peru and Chile and Colombia, they have -- they are still in that situation. And in U.S.A., it's been not material, at the least. We will see with the activity-by-activity analysis. We are underway now. We will have more color in the next 3 months. But in -- we think that we are going to be in the same situation that with our competitors. We are not going to have either more or less, more or less in the same.

Okay. And regarding the order intake. Do you think that COVID-19 will impact your order intake this year? Because you planned around EUR 3 billion of new orders this year so far?

The order book, are you saying?

Yes. Do you think it will impact the new orders? COVID-19?

Yes. Yes. Yes, I think these last 3 months, some of our clients, they delayed the tender process. We've seen in this last month an increase in tender, and a speed up for most of our main clients in order to recover this last 3 months that we've lost. In these 3 years -- 3 months of -- and this first quarter of the year, the company, the performance of the company regarding the new awards was very similar. And even better than the one we have in 2019, and we expect that in the second half of the year because it is in the best interest of our stakeholders, we will be able to recover the capacity of new awards according with the new awards -- the new projects that are now currently in the tender process. And even we also see in some of our regions, especially the one in U.S.A., the projection and the pipeline of infrastructure projects in the future is going to be very significant. So hopefully, that regions where we are very focused on is going to be one that is going to maybe offset some of the bad behavior in other regions. We are moderated optimistic, yes, and moderated optimistic regarding that, quite a bit.

The next question comes from Niraj Patel from Beach Point.

I had a quick question about the EUR 140 million syndicated loan. Can you give us some context for how you arrived at the EUR 140 million figure versus EUR 100 million or EUR 50 million or EUR 200 million, say? And you have EUR 550 million of liquidity at Q1. Trying to understand why you need that much incremental liquidity?

Okay. If you remember, when we did the results presentation in the month of February, we were talking at that time that the company was analyzing: one, selling the participation in Old War Office; and also doing some kind of transaction in relation to the equity of Canalejas. Why? Because the company wants to preserve the liquidity. Part of this liquidity is linked to the needs of the businesses, okay? And since the company still has to consume cash in relation to those bad projects or legacy projects of the past, the company needs to compensate for that consumption. At that time, in February, the company was analyzing those transactions. Since the COVID came to the world, as I was explaining just before, there will be a delay in those transactions. And in order to compensate for that delay and for the needs that we were analyzing in these transactions, that was the reason why we asked our relationship banks the transaction of EUR 140 million. EUR 140 million was more or less the amount we were going to raise through those transactions.

There are no further questions over the phone, the speakers who can switch now to the written questions. Thank you.

Good afternoon, all. This is Pedro Arellano. We have some questions via web from -- first of all is the crediting side, if we can disclose the level of cash between central headquarters and the cap that we have in the...

No. That was a decision that we did in the past. I mean we have seen that our competitors are not providing this kind of information. So we decided to provide the same information as our competitors, the total liquidity of the company.

Okay. Next question comes from [ Marathon ]. And it's 2 questions. One is related to Old War Office, is one. I think that this is already answered. And the other one is the rationale of having liquidity, when we have to sign this new financing contract. It's already also asked -- sorry...

Answered.

On the question perhaps in relation to the first question, what we said is that it is true that we still -- I mean, the other shareholders still is interested in acquiring the participation of OHL in relation to the timing. We expect to close this transaction during year -- during this year, 2020.

Yes.

Next question comes from [ Ever Capital ]. And it's assuming that we will want a refinancing of the bonds, the current bond, it's 2 questions. First of all is that, which kind of refinancing or restructuring of the company we want to pay, want to phase and why -- and to qualify if we hired some advisers?

Yes. I mean, we recently provided the Hecho Relevante. According to which, the company understands that now it is -- it's the right moment to tackle the improvement of the capital structure, and we are just in a preliminary phase of the analysis with our advisers, exploring different alternatives.

Okay. Next question comes from Imperial Capital. And if we can explain more in depth, it's another a question, in what consists the mandate of the advisers that we...

I mean they are helping the company to analyze, as I was saying, the different alternatives we should implement.

Okay. There's another question from [indiscernible], which is the same, that's what is the idea that we want to have to -- one of the idea of the company, this refinancing of this strategy with the bondholders.

I would say that if you remember, I mean, let's say, the -- what is called the new management team came to this company just 2 years ago. At that time, we were asked when was the company going to analyze the capital structure and take decisions. We said at that time, it was very early. Because we needed to understand the dynamics of the company and take some decisions. We took those decisions in year 2018. Remember, the reduction of the structural cost and all the other measures. During year 2019, it was very important to see if there were no surprises, any new legacy projects, the company being predictable, the company building a positive EBITDA, and that's what we had in year 2019. And that's also what we have had in the first quarter of year 2020. And this is the reason why now even though the bonds mature in year '22 and '23, now we think it's the right moment to do this analysis, and that's the reason we're analyzing. That we have time, we have good advisers and we will be presenting the alternatives once we have a clear idea on the best solution for the company.

Okay. There is 3 questions that comes from another investor that says, what is the cost of the [ eco line ]?

[ Eco line ], it has a good cost for the company. It's between 3.5% and 5.5% margin.

Okay. Next question, it's also from [ Cartesio ]. If there is any plan or there is any idea in the company to refinance the existing bonds with another tender with another bond?

I mean, the company, as I was explaining, we are in a preliminary phases. The company has not a clear idea. We are analyzing different alternatives at this respect.

Okay. Next question is if we can be more precise in how much cost has been reduced with the measures like the ERTE?

No, we don't have an estimation of this cost. The ERTE is progressing. It's something that is moving constantly because we [ re-incur ] for people to the company once our job's ongoing and they are starting to work. Also in our offices here, we put a lot of people in ERTE during a period of time now that the tender process is starting again. And even if it's speeding up the process, we are also recovering those teams to work in those tenders. So it's very mobile. So we don't have a precise analysis. We have a first estimation, but we don't want to give any figures that is not going to be the right one at the end of the process. But it's something that the company has to do and had to do.

Okay. The last question is of this package is -- if there is any update on the litigation issues that the company has?

Well, the only one that we have is the one that we had in March this year when we have the sentence regarding Sidra. Every time there is a sentence -- a partial sentence in the arbitration process that is underway, we make an assessment and we have our legal adviser and also with our assessor. According with their determination and assessment, we made the provision accordingly. That's what we did this year.

Okay. The last question from Internet. And when will this -- first one is, if we could explain more in-depth the mandate from our advisers? Is we already have answered that. There is another question that it's literally do you expect to fully honor the current legal terms of the '22 and '23 bonds? If not, could you please tell us what options would you consider? Capital increase, a sale of the U.S. construction business, conversion of the equity?

We have answered this question. I mean, we are in the primary analysis of the situation. We will be providing the information as soon as we have a clear idea of the proposal we will bring to the market.

All right. I have no more questions. I have another question related with the factoring. I only want to say that the factoring at end of the first quarter is EUR 60 million, more or less. It's [ year-to-year ], EUR 62.4 million at the end of March. It's factoring without recourse. We have no more questions. Okay.

Thank you very much for your attention, and we -- that's all from our side.

Whatever is pending, please call directly the IR team, and we are pleased to attend you. Thank you so much for your attention.

Thank you.