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

Welcome to OHL's First Half 2020 Results presentation. The management of the company will review 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 Alvarez. I am the General Manager of the OHL Group. Together with me in the room are Mr. Jose Maria Sagardoy, the CFO; and Mr. Pedro Villanueva, Investor Relations Manager. I hope you all and your families are healthy and managing as well as possible in the current situation we are all facing because of the pandemic. I especially thank you for your attention and interest in the performance of OHL over the first half of the year. Before going through the operational results of the first 6 months of the year in detail, I would like to summarize the main points of the group's performance during this period. OHL is a key operator in those activities classified as essential during the pandemic. The group has been in permanent contact with clients and health authorities to assure safety and efficiency, which are so critical in the current situation. A 3-month temporary layoff measure has been implemented under an agreement with the workers legal representatives, mainly in the construction business in Spain, which affected over 1,300 workers. No significant impact on sales, thanks to the construction business geographical diversification, maintaining revenues in line with the first half of 2019. EBITDA on similar levels to the first half of 2019, despite the negative effect of the pandemic, estimated at EUR 25 million. The total order book has been reduced by approximately 9%, if we compare it with the same period of 2019. The signs of recovery, we are already experiencing in the second half of 2020 and expected to reverse the [ slowdown ] of tender processes in the first half of the year. In March, at maturity OHL redeemed at EUR 73 million bond issued in 2012. The group's liquidity was reinforced by obtaining a syndicated loan of EUR 140 million on the 38th of April, guaranteed by the Spanish government to offset the effects of the pandemic in the planned corporate transactions. OHL continues to focus its attention on controlling the cash generated by projects in the first half of the year, if we compare it with the same period of 2019, the cash consumption has been reduced by EUR 98.8 million in the regular construction activity. In fact, the regular construction activity has had a positive contribution in terms of cash in the second quarter of 2020. Lastly, in May, Mr. Luis Mauricio Amodio jointly acquired a 15% stake in OHL, becoming the reference shareholders and were appointed as Chairman and Board member of the group, respectively. Let's go now through the operational first half 2020 results in detail, providing more explanations on the performance of the group. The main figures for the period are as follows: sales reached EUR 1.4 billion, which are 0.8% lower than in the same period of 2019, caused partially by COVID-19 and offset by growth in the U.S. Even so, OHL has achieved a positive EBITDA of EUR 20.1 million, similar to the EUR 22.7 million in the same period of 2019, a decrease caused by the costs derived from COVID-19. At operating profit level, the EBIT figure totaled minus EUR 7.3 million, in the group's total order book, as of 2020, stood at EUR 5 billion 98% related to the 3 core regions of the group, with newly awarded projects and inspection in the period of EUR 1.1 billion as a whole company. Of the new awards, approximately 82% are works that have been awarded solely to OHL, and more than 86% are from public sector clients. The first half 2020 results are challenged by the effect of COVID-19, which are estimated to have had an impact in this period, mainly due to the decline in construction activity. The decline in activity has been offset by the positive performance in the U.S., enabling the group's total business activity to remain at similar levels to the first half of 2019. OHL is working hard to keep all areas of the company functioning as efficiently as possible. Although the effect of direct and indirect costs derived from the pandemic has a negative impact of around EUR 20 million EBITDA level, the group ended with an EBITDA of EUR 20.1 million, similar to the EUR 22.7 million in the same period of 2019. Now let's go -- let's continuing division by division, starting with the Construction business unit. Sales of the Construction division totaled EUR 1.1 billion, broadly in line with the first half of 2019. The geographical diversification has allowed the company to mitigate the decrease in sales. Construction EBITDA reached EUR 15.2 million with a 1.4% margin in the period, derived from the recognition of costs already mentioned. Construction order book totaled EUR 3.9 billion as of June 2020, representing 19.2 months of sales. It is worth mentioning the healthy geographical variety of the order book, where 90% of the work is located in our 3 main regions, as well as the variety in both the size and typology of the projects. During the first half of the year, OHL added EUR 865.4 million in new construction awards, mainly in the U.S.A. business. The signs of recovery, we are already experiencing in the second half of 2020 is expected to reverse the slowdown of tender processes in the first half of the year. The main conclusion is that the pandemic has mainly affected the construction business with Spain, Chile, Peru and Colombia being the worst hit areas. This effect has been offset by the positive performance in the U.S.A., enabling the group's business activity to remain at similar levels to the first half of 2019. Related to the Industrial and Services units, the Industrial division has registered sales of EUR 93.6 million, a 2.3% decrease due mainly to some EPC projects, the lower activity in the operation and maintenance projects, as well as the productivity levels being affected by the mining and cement unit. Our Services unit sales amounted to EUR 141.4 million, representing a 4.3% increase over the same period the previous year, bolstered by cleaning, urban services and maintenance. Altogether, the EBITDA figure in both divisions totaled EUR 14.8 million with 7.8% and 5.3% EBITDA margins, respectively. Regarding the Property Development division, the state of alarm postponed the grand opening of Canalejas in Madrid, and it is now expected to take place in mid-September 2020. It is important to highlight that the current strategy of geographical and business diversification that OHL have implemented in the group is what has made it possible to mitigate the effect of COVID-19. We are still in the group in the right direction, and OHL will continue to focus on cash flow and in our 3 core regions. The company has initiated conversation with the bondholders to explore strategic alternatives to strengthen its balance sheet. With the support from our bondholders, banks, and Luis and Mauricio Amodio our referenced shareholders, we expect to strengthen the company's financial structure to be able to guarantee richer success in the long term. Thanking you all for your attention, and we can just now start with the Q&A session.

[Operator Instructions] The first question comes from [ Julian Perry from Sierra ].

The first question that I'll have is, if you could explain what is the position of the banks in the restructuring process. You mentioned that they are supportive. Is the release of the EUR 140 million collateral of the performance guarantee, something that they will consider going forward.

Yes. In relation to the availability of the EUR 140 million, we made available the first EUR 70 million. And in order to make available the second EUR 70 million, we need the waiver authorization from the bondholders. We had the first meeting this week. We didn't -- we couldn't reach the percentage needed to approve -- to obtain the consent. So we are quite comfortable that we will be obtaining that consent in the second meeting for the 4th of September.

So, I think that maybe you misunderstood my question. I was asking about the cash collateral that the banks against your performance --

And what was the question in relation to that cash collateral, sorry?

Yes, the [indiscernible] the performance guarantees.

I mean we haven't talked -- we haven't negotiated anything in relation to those EUR 140 million with the banks. Up to now, this is a collateral they have in their syndicated facility, and that's going to be there up to the maturity of this facility.

Another question I have is, if you could basically estimate what is the impact of the COVID and also associated temporary measures from government support and cost-cutting on the operating expenses and also on working capital.

Now the impact that the COVID had in the company is already [ down ] in our P&L balance sheet. So the help that we get from the government, it came with a EUR 140 million loan that we obtained and with the guarantee of our governments. And that's all. So all the interest costs -- direct costs that we currently have in the project, we are in our -- we book them, but we also are going to claim to our clients in case that our contracts allow us to claim these interest and direct costs. This is the only way we are thinking -- or we expect to offset with the COVID-19.

So just to confirm, you did not have any kind of deferral taxes or also any --

No. There isn't any kind of a measure in that regard, no, no.

The next question comes from Beltran Palazuelo from Santalucia AM.

First of all, I would like to thank all the employees for each -- for the hard work in these difficult times and the management team for the positive results in difficult times. Then I will go to the next questions. You said you see a recovery in the second half. So, is it possible that the revenue and EBITDA is higher than in the second half than in the first half? Then regarding working capital, of course, in the construction business, you consume working capital in the 3 quarters and then you have an inflow in the last quarter. What kind of investment do you expect to have around the whole year, if you could give us some range? And then the 2 last questions regarding Old War Office, you commented that your partner was willing to buy your stake. What is the conversations, how are the conversations going? And then maybe another question, not so easy question. If you could give us more color on the loan that the Grupo Villar Mir [indiscernible]? And exactly in what year did that loan occur? And the -- did all Board Members sign it and who gave the authorization for that money to go out of OHL.

So regarding the forecast for the second half of the year. And we think that -- we expect the second half of the year with optimism. Even though the tender processes in most of the countries, we are working on, they've been delayed, but we see USA business, very strong pipeline. We have had a different tender processes that are now close to be awarded, and we are optimistic in some of the outcome of those projects. So, in term of the revenues, we will be in the range that we announced at the beginning of the year to [ 20.5 or EUR 3 billion ]. We also expect a positive EBITDA even slightly better than the one we have in 2019. And maybe the most difficult and challenging is to hit -- to meet the target in new work awarded to OHL. But in any case, even in Europe, we are also optimistic. Maybe we don't -- we didn't meet -- or we don't meet the target of new works awarded, but we expected to recover part of the decline of the 9% in our order book that we had in this first half of the year. Regarding the Old War Office, the Old War Office is still in negotiation. Our partner is still interested in buying our share in the Old War Office, and we are in conversation with him to close the deal as soon as possible. And we expect that this close will be finished before of finishing this year. I don't know if regarding the --

In relation to the working -- to the evolution of working capital, you will see in the information that we've provided that the performance of the company, if you compare the first 6 months against the first 6 months of last year has been very good. Last year, we had a consumption in the first 6 months. And you know that there is always a cyclical effect of EUR 191 million. And this year, this consumption has been reduced to EUR 92 million. This is a good figure since it's nearly 100% less consumption just in the first 6 months of the year. You could also analyze, if you want the evolution between the first quarter and the second quarter. And at this respect, you will see that there has been a reduction, I mean, that we have been generating positive cash flow in that second period, if you analyze the ordinary activity of the company. So I would say that good performance in relation to the cash consumption during the first 6 months of the year. The last question you asked was a question in relation to Pacadar. In relation to Pacadar, I would say that the Villar Mir group has informed the company that their economy has also been seriously impacted by the pandemic and that the maturity date of the debt is nearing, we have started to study debt repayment mechanics that could offer a permanent solution to the matter. And have begun to update the valuation of the guarantees provided by the Villar Mir group. In relation to that decision, I mean, that decision was taken in the past. It was approved, of course, by the Board of Directors and nothing more to add.

And if you could inform me what are -- what exactly the guarantees? And for example, if this loan is not repaid does the Board Members that approved that do they have personal liability?

No, there's a corporate -- yes, there is a corporate guarantee of Grupo Villar Mir. In relation, I mean, one debt, there are 2 debts here. One is a debt assumed by Pacadar in the past, and that debt has the guarantee, the corporate guarantee of Grupo Villar Mir. And the other date was directly assumed in the past by Grupo Villar Mir. In relation to both debts, apart from the corporate guarantee of Grupo Villar Mir, we have pledged the shares of the company, Pacadar. And apart from that, there is also a pledge of an amount of around EUR 12 million that could -- should come to the company once the [ Ferrovial ] deal is closed, and the monies is from that deal.

So the current management of OHL is working hard to get 100% of the loan. And if 100% of the loan is not repaid, all legal actions will be taken.

Yes. I mean that decision will have to take place at the maturity up to now, this debt didn't mature. So we will wait until the maturity date. And at that time, the Board of Directors of OHL will take the decision -- the adequate decisions. Also, on behalf of the workers for OHL, I thank you and your comments because it wasn't easy for all of us. You know that we were in the layoff of the company. And even for them and for us, as managers, it wasn’t easy to make that measures in place. So thank you. Thank you for your comments.

We have no more questions by audio in the queue. So we are now open for your questions from your webcast platform.

Hello, this is Pedro Villanueva. As there is no more questions by phone, I will start with the questions that we received via e-mail and in the chat of the presentation. Here, I see some questions regarding the loan from Grupo Villar Mir that I think it's already answered by Jose Maria and Manuel. There is another question regarding Canalejas, if we expect to open it, it's when? And if will be at full capacity in -- at the opening date?

We are working hard to get it done. Everybody, Four Season, our team, the development division also. We are all working with the target, clear target of opening the Canalejas project, mid-September. So if anything happen, with related to the COVID-19, that is really the only thing that we don't have under control, we'll be opening the Canalejas project at that time.

Yes. But in relation to Canalejas, the idea is not to open 100% of the hotel by that day. We will be doing this little by little, yes.

Yes.

Will that be at full capacity? But will be at half or more than that? Yes. And will be the --

That's what we are talking with Four Seasons with the specialists of Four Seasons and the other shareholder.

Yes. There is another question regarding the factoring of this -- the nonrecourse factoring with no option of recourse to the company. I will mention that this value we stated that we released it on Page 13 of the results report that we just released. The figure -- the first half of the year, it's EUR 49.8 million versus EUR 64.9 million at the end of 2019, okay? There is another question regarding Old War Office, I think that you just mentioned, but only to reflect again that the conversion -- the conversation with Old War Office continue, and we expect to close the deal prior to year-end. There is another question comes from another investor, saying that if the current activity, nowadays, it's back to normal in U.S., Europe and Latin America.

Well, it's back to normal here in Spain. It's clear that in Spain the tender process has been delayed, and we expect some recoveries, but it's going to be flat in Spain. The Chile, Peru and Colombia, they are still affected by the COVID-19. And we don't see any kind of impact in the business in U.S.A., so far. So that's more or less the situation, currently, in our 3 regions. In Europe, we are working in normal. In Norway, and also in Czech Republic, we don't have any kind of impact in our business.

Okay. Let me check again. If there is any other -- yes, just another one saying that, if there is any update regarding the Sidra Hospital claim or conflict. I have to tell you that there is no update. And any update that we have, we just published under the figures or the interim annual accounts that we just released on the CNMV. And you have there all the details on the part of the litigations under that part. And yes, there is the last one that if we still think that we can receive this year, any amount for the total amount of the Mayakoba City?

In relation to the Mayakoba City, we were expected to receive at least part of the amount, which is still pending to be received. I mean, we are not sure this would happen by the end of the year, and we are not sure that if we will be receiving the full amount or just a part of it.

Yes. There is no more questions. I think that there is another question via phone. So there is no more questions on the Internet. So let's go through the phone call.

The next question comes from [ Julian Perry from Sierra ].

Just coming back to some of the follow-up questions I have. If you could maybe give us a view of your long-term vision for the company? Why do you think that this company can reach over the, let's say, 2 years of horizon in terms of revenues, EBITDA, according to what you guys have seen so far in the company? And the second question that I'll have is, I understand you probably cannot say much of your discussions of the bond on the bondholders regarding the restructuring of the capital structure. But any disclosure that you could give us that would be great as well.

Yes. Well, I'll start with the second one, and then I'll go through the -- to the first one. In relation to the second one, you know that the company has initiated conversations with the bondholders to explore strategic alternatives to strengthen the balance sheet, our balance sheet. And at this respect, the objectives of the company are very clear. I mean, we want to strengthen our networks. We want to reduce the indebtedness of the company in absolute terms. And the third objective is to increase the maturity of the current bonds. So those are the 3 objectives that the company has, and we are involved in the negotiation in relation to those aspects. In relation to the first question, you were asking, I would say that now that we have some restrictions in relation to the bonding capacity the -- this is a company, which is providing more or less EUR 3 billion volume of sales, with an EBITDA margin between 2.5% and 3%. In the future, once we have a better capital structure, this company should be able to reach amounts of, let's say, EUR 3.5 billion; in range between EUR 3.5 billion, even EUR 4 billion. This is not going to happen in the short term, but this is what should happen, I would say, in 2 years’ time, EUR 3.5 billion, EUR 4 billion. And in relation to the EBITDA margin around, let's say, 3%, more or less. That's our objective.

You say 3% of the EBITDA margin?

Yes, 3%, at least 3%.

Now, that's at least. Okay. It's just that some of your competitors tend to have significantly higher margins I would say --

But when you compare with our competitors, I mean, what happens normally is that you are not comparing exactly the same businesses. If you are incorporating other business like the concessionary business, then this percentage is higher. So, you need to compare just construction versus construction. And this is the reason why in the future, we also want to increase our presence in the concessionary business.

But we need also to diversify the business.

Yes.

Because the bigger margins coming from other activities of the company. In our case, concession is going to be instrumental for the company in the future. The development division also is going to be instrumental in order to increase both divisions and diluted a little more the construction division that maybe is harder to hit these margins that you are speaking about, and you see in our competitors. So a step but -- but we don't rule out better margin EBITDAs in the future, of course.

Thank you very much. There are no more questions. We will now hand over the call to the management of OHL. Thank you.

Okay. Thank you all for your attention. In case you have summer holidays. Please enjoy it and keep safe. Any other questions, feel free really to call me and enjoy the summer.