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

Welcome to OHL's conference call. The management of the company will run you through the presentation, which will be followed by a question-and-answer session. [Operator Instructions] I will now hand over the call to the OHL management team. Thank you.

Good morning, ladies and gentlemen. My name is Jose Antonio Fernández Gallar. I am the CEO of OHL Group. Together with me in the room are Mr. Jose María Sagardoy, CFO; and Mr. Pedro Arellano, Head of Investor Relation. I hope you all and your families are healthy and managing as well as possible in this 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 9 months of the year. Before going through the operational results of this quarter in detail, I would like to share some points regarding to the group's performance during such a complex year with extraordinary events. First is that the group's strength, such as the diversification by geography, size and project typology, have allowed OHL to mitigate the negative impact of the pandemic. Second, even so, the pandemic has had a direct impact in the Construction & Property Development business as well as the deterioration of financial assets with related companies. Third, moreover, measures adopted in the last year that we considered key drivers for the management, such as cash control, overhead reduction, close control on the tender process, are delivering positive results, reflected in the operating profitability. Fourth, in the positive side is the grand opening of Proyecto Canalejas in September. The asset consists of 7 historic buildings, most of which are over 100 years old and have been cataloged. 2 of them as an asset of cultural interest. Fifth is, it should be noted that the attributable net income has been materially affected by the negative effect of the pandemic. This effects both the Construction and the Development business as well as the impairment of financial assets with related companies. This will be explained more in detail later on. Now I leave the floor to the CFO of the company, who is going to explain deeply this set of results.

Thank you, Jose Antonio, and good morning, everyone. I will first review the main magnitudes of the group and will then deep dive into the different activities during this period. During the first 9 months of the year, sales amounted to 2.070 million -- EUR 2,070 million, minus 2.3% compared to the same period of the previous year. Spain and Latin America are the geographies that have been most highly impacted by the pandemic, although this decline in activity has been offset by the positive performance of our business in North America. EBITDA of the group reached EUR 53.5 million, improving the margin over sales up to 2.6%, well above the EUR 40.1 million generated in the same period in 2019. We continue with our overheads reduction target. And during this period, we have been able to reduce this in circa EUR 10 million. In relation to the EBITDA, I would also like to underline that we have estimated that COVID-19 has had an impact of almost EUR 30 million on EBITDA due to the effect of direct and indirect costs related to the activity in the countries affected by the pandemic. We still have a positive EBIT of EUR 0.3 million, similar to the amount in the same period of year 2019. Regarding earnings before taxes, the amount of minus EUR 99.6 million is mainly explained by 3 different impacts. One relates to the value of the Grupo Villar Mir debt that has been provisioned in EUR 35.8 million as the best estimate on its recoverable value. Another one amounting EUR 15.6 million is related to the Canalejas participation, since cost overruns related to the delay in the complex opening have been capitalized but provisioned. Main reason for those extra cost is, again, the COVID situation. Finally, EUR 10.8 million have been adjusted on the advanced collection of the last amount to be received from the Mayakoba City sale. The company decided to accept this reduction due to the real estate negative evolution derived from COVID in Mexico and the currency devaluation risk associated to a possible delay in the collection of the debt. Regarding liquidity, as of September 13, 2020, OHL stands with a total liquidity position of EUR 511 million, having redeemed the bond issue in 2012, which had an outstanding balance of EUR 73 million. Cash generation at project levels is still one of the cornerstones for the company. In the first 9 months of the year, the cash consumption of the activity amounted to EUR 274 million, EUR 45.9 million below the same period of 2019. At this respect, it is important to note the seasonality effect on the cash generation since the last quarter is typically cash accretive and reduces the cumulative cash consumption for the full year. Out of those EUR 274 million, EUR 58.9 million correspond to legacy projects, where there are no negative deviation versus the guidance provided back in February -- in the result presentation in February 2019 related to the expected cash -- total cash consumption. In relation to the order book, it amounts to EUR 5,020 million. Despite COVID is heavily impacting new construction awards in both Spain and Latin America, it is important to highlight the good performance in the United States. OHL has been awarded by more than EUR 1 billion in this region, 53% of the EUR 2 billion of total awards to date, 0.97x book-to-bill ratio. On the new awards, approximately 85.4% are works that have been awarded solely to OHL, and more than 90% are from public sector clients. Let's go now through the operational results for the first 9 months of 2020. And let's start with the Construction business unit. Sales of the Construction division added up to EUR 1.7 billion, close to the figure reported in the same period of the previous year. Once again, the geographical diversification has allowed the company to mitigate the decrease in certain geographies, mainly derived from COVID. Construction EBITDA reached EUR 48.9 million, with similar margins with regard to the 9 months 2019. Construction order book totaled EUR 4 billion as of September 2020, representing 20.2 months of sales. It is worth mentioning that the company is not exposed to any large risk in project, thanks to the geographical variety of the order book, where 98% of the work is balanced within our 3 strategic regions as well as variety in both the size and typology of the projects. During the first 9 months of the year, OHL added EUR 1.7 billion in new Construction awards, mainly in U.S.A. business, which represents a 63.3% of new awards out of the total. Related to the Industrial and Services unit. Industrial division has registered sales of EUR 135.8 million, a decrease of 6.3%, mainly due to some EPC projects and lower activity in the operation and maintenance projects and firefighting. Our Services unit sales amounted to EUR 219 million, representing a 7.4% increase over the same period of the previous year, boosted by cleaning, urban services and maintenance. All together, the EBITDA in both divisions reached EUR 20.1 million, with a 5.7% EBITDA margin in each division, improving the margins of the same period of 2019. After several years of weak performance, Industrial and Service divisions nowadays are performing in line with our expectations. Well, those are the main topics around the financial statements during the first 9 months. Now Mr. Gallar will make the final conclusions for this set of results. And after, we will be able to provide any additional explanation needed in the Q&A session.

Thank you. Thank you, Jose Maria. Before starting the Q&A session, I want to outline 2 relevant issues regarding the very sensitive impacts over the group accounts. As mentioned in the past, GVM, Grupo Villar Mir and Pacadar loans were not an issue for the company during the last year. And as of September 2020, the total outstanding loan amounted to EUR 133.8 million. In the terms described in the Inside Information announcement dated 30 September 2020, the company continues in its negotiation with Grupo Villar Mir, GVM to agree a settlement of the existing debt owed to the company, and that may include a delivery by GVM of the shares comprising 100% of the issued shares capital of Pacadar. The company will make a public announcement with the outcome of such negotiation. Finally, stressing the company's balance sheet is one of the fundamental goals to be completed by the management team. The company continue in their conversations with bondholder's party to the commitment agreement referred to in the company's Inside Information announcement dated 7 August 2020 to seek strategic alternatives to reinforce the balance sheet of the company. The company will make a public announcement if any agreement is reached with the bondholders. To conclude, OHL's strategy of recovery, followed by the growth, continues in 2020, conditioned by the pandemic. The company's primary strength are a clean and diversified order book and business segment, which, in general terms, have maintained and even improved margins in relation to 2019. Thank you, all of you for your attention, and we can start now with the Q&A session.

[Operator Instructions] The first question comes from Beltran Palazuelo from Santalucia.

And congratulations for the solid results in difficult times. I have 2 questions. One, regarding the margins, they seem in the third quarter as very good. So my question is regarding fourth quarter, and, let's say, imagining our 2021 with less pandemic effect, do you think that these margins could keep or even improve? And then regarding the working capital, of course, you have mentioned that the fourth quarter is always a quarter that you expect inflows, but they seem that, let's say, that execution levels are very alike as last year. So my question is, there should not be a lot of working capital consumption this year. So do you firmly believe when say, this 45 days to go, that you can recover a great majority of the, let's say, working capital outflow that has been consumed in the 3 quarters?

Thank you, Beltran. Well, in relation to the first question, I would say that, yes, I mean, we should be maintaining margins in the future since those bad projects of the past are finishing little by little. So in relation to margins, yes, yes for the last quarter and yes for the following years. And in relation to the cash consumption, you know that we are not going -- we do not provide forecast for year-end. It is true that we will have a positive effect in the last part of the year. So I mean you've seen the performance of the company in previous years, in the last quarter, so I mean everyone has to do its own numbers. I mean we are positive about the quarter, but we will see.

Perfect. And maybe if I can drop in with another question. Regarding your -- the 2 big real estate assets, Canalejas and Old War Office. Now that it's a public statement, as you said, that you're negotiating to strengthen your, let's say, your balance sheet or your financial position. So the strategy going forward is not to sell under, let's say, under book value? What is the strategy going forward? You want to see -- when the pandemic goes out, to see exactly -- or is there conversations? Are we going to expect something about, let's say, Old War Office? Or what is your strategy going forward with these 2 assets about selling that?

Yes. The strategy hasn't changed. I mean when we've been talking about the strategy in relation to those assets, the idea of the company is to rotate the assets. The company will find the best moment to do the transactions. If we talk about Old War Office, I would say that we are still interested in selling our participation, and we are still having talks with the other shareholder. And Canalejas has recently been opened. We will wait for the ramp-up, and then we will see.

The next question comes from Maxime Kogge from ODDO BHF.

Just 2 questions. So first, on the valuation of the Grupo Villar Mir loan. I understand now that the valuation that you have booked for this asset is more or less the value of Pacadar because you're -- I mean, presumably going to get GVM's stake in Pacadar. So am I right thinking that? And can you provide an estimate of the EBITDA made by Pacadar? So this is something that will impact your account going forward? Regarding Canalejas, can you disclose which was -- who was the buyer of the subordinated debts that you sold? And finally, I mean regarding COVID, can you make an update on your projects across the world? And are they all up and running now despite the second wave? And what's the situation, in particular in Latin America? Are your jobs now up and running all across the region?

You made many questions. Could you repeat the last one in relation to the up and running?

Yes. The fact that, I mean, despite the second wave and despite the continuing first wave in LatAm, what's the situation on your various projects? Are they up and running? Or do you still see some interruptions or some lower productivity on some sites?

Okay. I mean, in relation to your first question, related to the loan of Grupo Villar Mir, I mean, you're right. You know that we haven't finished the negotiation with Group, but the difference is more or less the value that we assigned to the -- mainly to the security, which are the shares of Pacadar. You were also asking the EBITDA. As we haven't closed yet the negotiation, I mean, we cannot provide this figure, but it is true that, in the future, we will be incorporating Pacadar to the balance sheet of the company to the consolidated figures. So we will be incorporating their sales and their EBITDA, of course. In relation to Canalejas. I didn't understand very well the question because the subordinated debt is a debt provided by OHL. At the end of the day, it's like equity. It's -- I mean when we talk about the participation of OHL in Canalejas, the participation is the direct participation through the shares, plus this subordinated debt. And this -- the total amount is around those EUR 200 million that we've been always talking. So I don't know if you are...

Okay. I thought that you have sold the subordinated debt? No. It's not the case.

Okay, okay. And the last question, I mean, you are true. I mean, we are in the second wave of the COVID. This is affecting -- this is still affecting the LatAm geographies. And I would say that also Spain, so it is true. I mean, up to now, we could manage the situation. We are incorporating backlog to the company. But it is true that depending on the evolution of the COVID, we will have more effect in the future. Now we do not forecast anything additional to those EUR 30 million, but we will see in the future.

Okay. And those EUR 30 million, they're for -- they relate to the full year, not only to 9 months 2020?

No, no. Well, yes, I mean, yes, yes, that's correct. I mean, this is with the current information in relate to the full year.

I mean the COVID is still impacting. So basically, it's the best estimate that we have by this moment. So basically, nothing.

Yes. But it's for the full year. I mean, we didn't have any additional effect that would be the final result.

Okay, okay. And finally, if I may. In the last call, you said that you targeted the sale of Old War Office by the end of the year. So that's no longer the case, I understand?

So I mean we still maintain negotiations with the other shareholder. He's still interested in buying our participation. Perhaps the current situation will delay a little bit the transaction, but we're still thinking selling to the same person.

The next question comes from Juliano Torres from [indiscernible].

Is it -- anything else that you can update on this stage of the negotiation that you have with your creditors? And then related to that as well, do you have any update from the new controlling shareholder, the Amodio's, on what they think of the potential strategic plan for OHL, how are they getting involved into this reformulation? And also for the third question, would the Amodio's accept remaining a minority shareholder of OHL following the restructuring of the capital structure?

Okay. Well, in relation to the first question, I would say, like Jose Antonio explained in the final conclusions that we continue in our conversations with the bondholders. And at this respect, we cannot provide any additional information. I mean, the company will make a public announcement if any agreement is reached with the bondholders. If we talk about the Amodio, I mean I would say that they are involved in the daily management. Mr. Risa Amodio is the Chairman, and Mr. Mauricio is also member of the Board of Directors. And they actively participate in the different Board of Directors commissions. If we talk about the strategy of the company, I would say that, up to now, there is no change in the strategy of the company, neither in the activities of the company or in the strategic regions where the company is doing the business, okay?

Okay. If I -- maybe I can just give a follow-up on this. Are the Amodio's happy with remaining a minority shareholder for OHL? Do they express anything regarding that?