Aenza SAA (AENZ) 2014 Q2 法說會逐字稿

Good afternoon and welcome to Grupo Grana y Montero second quarter 2014 conference call. All lines have been placed on mute to prevent any background noise.

After the presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question.

It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

Thank you and good afternoon, everyone. I'm very pleased to welcome you to Grupo Grana y Montero second quarter 2014 conference call on this the 25th of July, 2014.

This afternoon, the senior management team of Grupo Grana y Montero will discuss the Company's second quarter 2014 consolidated results per the press release distributed yesterday. For a copy of the earnings release and more information available on the Company, we ask that you visit the Company's website at www.granaymontero.com.pe in the investor relations section where there is also a webcast presentation to accompany the discussion during this call.

This call is for investors and analysts only. Therefore, questions from the media will not be taken.

I will now introduce our speakers and joining us from Lima, Peru are Mr. Mario Alvarado Pflucker, chief executive officer; Mrs. Monica Miloslavich Hart, chief financial officer; Mr. Juan Manuel Lambarri, chief executive officer of engineering and construction area; Mr. Luis Diaz, chief executive officer of infrastructure area; and Mr. Dennis Gray Febres, corporate finance and investor relations officer.

During this call, management comments may include forward-looking statements which are subject to various conditions that may differ materially. We ask that you refer to the disclaimer as guidance on these matters.

It is now my pleasure to introduce Mr. Mario Alvarado, chief executive officer of Grupo Grana y Montero, for his presentation. Mr. Alvarado, please go ahead.

Thank you. Good morning and thank you for attending today's quarterly results conference call.

I will start as we did last time by providing a general overview of the highlights for the second quarter of 2014. During this year, the Peruvian economy growth has increased compared to previous years.

[Industry] figures of May reported 1.8% growth while the Ministry of Finance, Central Bank and [many] banks have adjusted their prediction for GDP growth in 2014 to 4% on average.

In terms of private investment performance, figures show a moderate growth approximately 2% as of May. The growth in 2013 was also [reported] in 2012 and in 2011 figures. On the other hand, [better] sector [contained] index in the [second] (inaudible) although strongly recovered to positive areas in August 2013 has continually deteriorated since January 2014.

In this context, the government has announced a series of measures aiming to promote [necessary] investments. These measures [include] tax, [add risk to this] communication for permits and license plus environmental and labor facilitations. We consider a set of positive measures in the long-term, but we are cautious on the short-term impacts.

Finally, [when Brazil] has complied with its concession agenda for 2014 in addition to the projects awarded in the first quarter 2014 in June, the southern gas pipeline project was adjudicated. And on Wednesday, they signed the concession contracts.

We believe these are positive measures to private investors and estimate these [couriers] will develop opportunities in a new market related to natural gas including power generation, transportation, and industry.

The goods backlog that's our recurring business remains stable at the total of $4.3 billion. Moreover, the backlog revenue ratio is equivalent to 1.7 times the last [segment] revenues. Monica will review in more detail the backlog figures of this quarter.

In terms of the [mobile], given developments within the Group, it is important to mention that we successfully bid for the PetroPeru terminal project. As you may recall, our Company through GMP operated the north and south terminal of the Peruvian coastline. This contract grew along with this year.

[It's a] Peru auction, the north, center and south terminals. And we won in the two bids we presented as we did not bid for south terminals, we did not receive any bids. In addition, we recently won] 20 year contracts for the north and center terminals. PetroPeru will extend our contract with the south terminal for one year while they compare the new business office.

In addition, as announced last year after [administrative and] [social diet] process, we will purchase an additional [30.5]% stake in [southern UIM] from our minority partners for an amount of $[75] million. This is in line with our strategy in the mining service market.

Our infrastructure team has been actively developing private initiatives to sectors such as transportation, water, energy, power and [that's it]. As you know, the real estate position was the successful outcome of a private initiative; in this case, for their limited development.

As an example, we are currently focused in our proposal to develop water and sewer treatment systems in poorer regions, benefitting the Titicaca Lake among other initiatives.

[In 2004], the government established some newer relations; this year, 2014, the government established some new relations on this process, [giving the most relief] that the Minister of Finance must provide the pool]. And starting 2015, all [initiatives must give a solution for a pool] within the first 45 days of this year.

Finally, for 2014, the wind as a percent of energy will be revealed on September 30. We are very focused on that.

Today, we have good news. At 6 AM we start two commercial operation of the Lima Metro Line 1 and the [technical contract]. We ran a partial operation of the system through [both trains running to the others last year] preparing to [receive the] second [trench] of the infrastructure. [It was done by UEM department].

Starting today, we will operate 24 trains running 34.6 kilometers, thus serving approximately 1 million inhabitants in Lima.

Finally, in terms of our [many phases] of the development, [we especially saw in] the [scale] and the [anticipation] has been already approved. And we are in the process of excavation of the [necessary rise of weight] while [the express rate bell] is currently pending approval for the Ministry of Finance.

[And products and marketing] is pending approval of the [environmental] impact study which we estimate will be complete within August and September in order to [start the concession realizing] process.

Now I will turn the presentation to Monica Miloslavich.

Good morning, everyone. Please go to page six on the presentation. The revenue growth is explained mainly by the increasing revenue [to net] segments, particularly in contract mining services and the revenues reported in the subsidiary DSD, our recent acquisition in Chile.

Also, the Line 1 of Lima Metro reported more revenues due to more trains under operation, more gas production in the gas plants, and more production of barrels per day.

On the other hand, the real estate segment reported less revenue during this semester, explained by lower units delivered during this period.

The decreasing gross profit is explained by lower results in two projects currently and the construction in the E&C segment, the delivery of less units in the real estate segment and the impact of the cancellation of one of the maintenance contracts with the Regional Government of Cuzco in the technical services segment.

Adding to the gross profit we saw, the operating income was affected by the increase in administrative expenses as compared to the same semester of 2013.

The exchange rate in Peru has maintained at the same level as December 2013 while the Chilean peso experienced added valuation during the semester. As a consequence of [minor laws due] to exchange rate difference it was registered, only the Group's operation in Chile was affected.

It is important to mention that the 17% gross margin obtained in the first semester of last year compared to the 13.9% of this semester was positively impacted by the valuation of the Nuevo Sol. As we have explained before, approximately 65% of the revenues of the Group are denominated in dollars and on the other hand, only 30% of the costs are in dollars.

This increases the margin that then is [reduced] at the net income level after the exchange rate difference is registered. This explains why even though the gross and operating margin are lower than previous years, the net income has increased 11% reaching a net margin of 4.4%, very similar to the first semester of 2013.

As a consequence of the results explained above and the less utilization of equipment during the first semester of 2014, the EBITDA was lower by 13.8%.

In terms of participation of each of the segments in revenues, the E&C segment represents 17% of the total revenues of the group. The EBITDA from the infrastructure segment has increased its participation from 23% to 34% as a result [of what resulted] in the semester in this segment.

Page 7, the total amount of backlog of $3.9 billion at the end of this semester remains strong with a backlog-to-revenue ratio of 1.7 times. Adding to the backlog the amount of recurrent businesses of $458 million, [this is] the total amount of backlog and recurrent businesses of $4.3 billion, same level of December 2013.

The new contracts added to the backlog in this semester are $305 million in the electric service business; $505 million in the E&C segment, most of them in the mining sector; and [developed] maintenance contract in the Pasco-Tingo Maria.

In the recurrent businesses, the increase is explained by the recent awarded concession of the north and center terminals and the extension of the contract concession for the south terminals for an additional year.

From the total amount of backlog by end market, the most [renewable] are 17% in mining projects and 31% in contract mining projects.

On page eight, the total [topics] of the first semester of 2014 amounted $118.5 million distributed in the real estate, infrastructure, and E&C segments.

In terms of indebtedness, the total amount of the debt of the first semester of 2014 is $407 million, a ratio of financial gross debt to EBITDA of 1.4 times and a ratio of net debt to EBITDA of 0.3 times.

The debt increase in this semester is mainly explained by the [$200] million bridge loan for the Metro Line 1 that will be cancelled with the proceeds of the project bond expected to be issued by September.

Now we can go to Q&A now.

Thank you. At this time, we will open the floor for questions. (Operator Instructions).

Our first question comes from Santiago Perez Teuffer with Credit Suisse.

Hi Mario, Monica, Dennis and thanks for your time. My question is regarding your exposure to mining projects. Have you seen already a relevant pick up in the leasing or the awarding of mining projects? Because as we recall, this industry has been a little bit weaker than expected. So, have you seen a recovery here or a sort of turnaround? Thanks.

This is Mario speaking. We have been speculating about this in the last almost two years and it was one of the main points when we went public in New York last year.

And since then, we have not seen any major variation in the amount of the total backlog that we have as a proportion with the backlog. That decreased a little bit, but it's not a big decrease. We have received many orders in this semester that has allowed us to maintain our backlog.

Or maybe as you are talking about the [situation] of the big projects?

Yes, it's more related to that, Mario, if you can elaborate on when would you expect a significant increase in project sizes?

Okay, what we are today hearing instead of -- as a difference over the past that we only hear about bad news about projects, we have started hearing good news about approvals of projects, especially the big ones.

Okay, thank you.

Thank you. (Operator Instructions).

Our next question comes from Paul Figueroa with Scotiabank.

Hi, good morning and thank you for the call. Could you please give us a little more color on gross margins? Especially could you explain us the lower margins in the E&C division? On the report, you mentioned higher (multiple speakers). Should we expect similar margins of future quarters in that division?

And my second question is related to the real estate division. Are you giving a [guidance] of housing units delivered for the next two quarters? We were a little surprised by the numbers started in this quarter. Thank you.

As I mentioned during the explanation, in the case of the E&C segment, we have today two projects under construction which have low margins. And that's most of the impact in the margin in the E&C segment today. As for the next two quarters, we expect the margin to maintain as it is today.

Then in the case of the real estate segment, we do not give guidance of how many units we are going to deliver in the next quarters. But what is a reality is that the pace of the sales has, in general in the country, has slowed down a little bit and that's the impact that you see today in our financials.

Okay, thank you.

Thank you. Our next question comes from Javier Martinez with Morgan Stanley.

Yes, Monica, I'm sorry, I joined a little bit late and I missed your explanation. Another one now, that the original one in E&C, so those two projects you mentioned, are those mining projects or what kind of projects? Is it civil engineer or (multiple speakers)

No.

Juan Manuel speaking. We have [brought] in two projects. One is on a [higher] electric and the other is a pipeline. It's not related with mining construction. It's in other sectors. And we have in that projects low margin and low margin impacted in general in the E&C area, no?

But correct me if I'm wrong with this assumption. So, it sounds like in the first quarter but also in the second quarter, what's driving the growth and the volume and the revenues in that division continues to be mining, no? Mining should be high margins, right?

So, it sounds like [people saying] and Monica told me now about keeping that margin stable, it sounds like a little bit low, no, for your standards, keeping in mind the mix you have in the portfolio?

Javier, Mario speaking.

Hello, Mario.

You mentioned [compared to] standards, not compared to the general market. They are still very high compared to the general market, no? (multiple speakers). The general market --

That's true. Those are projects that you signed in the past, no? So, the conditions were not actual competitiveness market condition, no?

Yes, I know. The [preview] that Juan mentioned [there] was also in the past, no? [The preview notes] (inaudible) you find difficult parts of the project and then you realize that the margins are lower than it is going to be. That was the case and that's very standard.

But your question is why we have such a big percentage of projects in mining -- why are decreasing? Mining is not decreasing. [But] (multiple speakers)

No, no, no, Mario. Mario, thank you, but no. My question was not really that.

So, my question is obviously the margin in engineering and construction is a mix of many things, no? And the big picture that I have in my mind is that you will make -- you and everybody else typically will make lower margins when you build apartments and then you make a little bit more when you build civil works and a little bit more when you build value-added things, no, like building a mine, or building a --

So my perception was, and correct me if I'm wrong, is that still today what's driving revenues in that division is value-added things, no? Things that typically you're going to have 14%, 15% EBITDA margin, no?

I know that is high when you compare it with your peers, no, and that's [some of the point]. So, but I intend to listen -- understanding your mix in the future if this 10% is going to be the new level or -- and that depends a little bit on competition, as you mentioned, but that depends also a bit on mix.

And also what you mentioned is it's not linear, no? So, you have some steps in the way, no? My perception is that 10% -- I think that is a good level compared with your peers; was a little bit below what the market was expecting for you, no? And is this kind of what we may see in the future or structurally is this linear thing? Or any guidance there would be appreciated, Mario.

No, what Monica said is that we believe that the remainder of the year is going to be the same, okay? That's what we believe in terms of the margins.

Now, as you mentioned, there's a combination of things. Many, many projects we have -- so many projects here. And now what Juan Manuel mentioned are the most important ones that have impact, no?

But in general, it is not a matter -- the competition has always been the same. The competition is very tough. It continues to be very difficult. That has not changed.

[What I feel] is that in [this track] of GYM, now the mining services company in other two contracts, we have less depreciation because the mining companies put the equipment instead that use our equipment. This is not impacting our margins but impacting our EBITDA margin, no?

If you can see the margin EBITDA decrease [12]% -- instead, if you compare with the margin EBITDA last year. But in the case of the profit, we increased the profit in 3%. This disruption between the EBITDA and the profit is because the use of equipment of the mine instead of our equipment -- it is [impacted] a little bit in this situation, no?

And you mentioned that those were in Chile or that -- the use of equipment -- or was it in Peru?

It's in Peru. It's in Peru. It's in [contract]. The main contract of mining is in Constancia. And during this year, the opening of the mine put more equipment than our equipment.

And this situation is not to be continued next year because we are going to buy some equipment to put in this mine next year.

But during this period, the impact of that depreciation is very important in the Company's [strategy] GYM and in construction projects.

So, putting together that -- thank you -- that information with what Mario mentioned, so, would you say it's not linear? We may see a little bit lower margins in engineering and construction until you have the new machine? Is that a good summary of the --

No (multiple speakers). I realize that you also [mean one part] of that comment that Monica made at the beginning; [I understand you]. A percentage of our income is related to the [product stems].

So, last year, when we compared to last year [in the preview], with [the valuation], our margin increases a little bit and also we have to compensate that, exchange --

[Yes, the] exchange rate.

Exchange rate effect on the results. So, what you [insinuate] has less impact in the gross margin because of that and less impact in the exchange rate because of that. So, the net income of that area varies less than the gross. Did I explain myself?

Yes. [It was good]. Thank you.

So, it's a combination of many, many things.

Yes, okay. Understood. Thank you very much, Mario.

Thank you. (Operator Instructions).

We have no further questions at this time. I would like to turn the call back over to Mr. Alvarado for closing remarks.

Okay, thank you very much for the questions.

I would like to make a comment that I found very interesting. We had a board meeting yesterday and we have some economists in our board meeting. And I asked Hugo Santa Maria from Apoyo what has happened in the first semester and what does he think is going to happen.

And he explained to me in a very simple way what he believes has happened. What happened is that we have had at the same time what he calls four shocks.

The first one he called that corruption -- the original corruption shock. That what really happened is that today we have [four president originals] in jail because of corruption. So, there has always stopped a lot of that investment in the country, no?

The second is that informal mining shock. What has happened is in the south of Peru, the government has been very strong since the end of last year and they have almost stopped the informal mining.

And you will see that many companies that actually sell to that area has been hurt in sales in the south of Peru because of that. The government has been very successful fighting informal mining. But that also hurts economy.

Then we had the [intermediate effect]. [What happened in intermediate] stock for maintenance and at the same time, when they have to start production, they have to start production in an area with a low [law of millions]. So, production is going to be low for a while because of that.

And the fourth effect he calls the [pesce] or the fishing industry because of the [mine] effect.

So, has been [the found] many of these [factors] affect the economy in the first semester. And he says that they have been saying so since last year. And at the same time, he's saying that he is more [optimistic] than he [was before] because employment has really started growing; in Lima, has grown 5%. Also has gone in the center of Peru and the south but not in the north yet. The north is where they have more problems related to corruption and many things, okay?

So, that's also another point of view. And about private investment, he told me that it is, in a way, [top falling]. So, [it hasn't stopped the rise] and he will not believe that we are going to have yet a strong July. But after that, he's positive in the remaining part of the year.

And that is important, not because it's direct effect to us, but because the [conflict] of the general public and investor [change] and that helped develop the projects.

So, because of this, we believe that it's going to start improving economy the remaining of the year and also in the next year. If the government continues doing and trying to support the projects.

Well, that's it.

A final notice to investors, please consider that this coming Monday and Tuesday are national holidays in Peru. So, we will be able to answer to any questions via e-mail. If you want to have calls or conversations, you should consider these two days for that.

Okay, thank you very much for everybody who attended this call and we'll talk in a few months.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.