Aenza SAA (AENZ) 2014 Q3 法說會逐字稿

Good morning. My name is Katie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Grupo Grana and Montero earnings conference call. (Operator Instructions)

Thank you for your attention.

I would now like to turn the call over to Rafael Borja of i-advize. Sir, please begin.

Thank you, Katie, and good afternoon, everyone. I'm very pleased to welcome you to Grupo Grana y Montero's third quarter 2014 conference call on this the 31st of October, 2014.

This afternoon, the senior management team of Grupo Grana y Montero will discuss the Company's third 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. Presenting on behalf of Grupo Grana y Montero are Mr. Mario Alvarado Pflucker, Chief Executive Officer; Mrs. Monica Miloslavich Hart, Chief Financial Officer; Mr. Luis Diaz, Chief Executive Officer of Infrastructure Area; and Mr. Dennis Gray Febres, Corporate Finance and Investor Relations Officer.

During this call, management's 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, Rafael. Good morning and thank you for attending today's quarterly results conference call.

I will start by providing a general overview of the highlights of the third quarter of 2014. During this quarter, although analysts estimated slightly improving macro figures, expectations for year-end have been adjusted downwards. Peruvian Central Bank has recently adjusted its GDP growth estimate for 2014 to 3.1%, and analyst average is 2.9%.

In terms of private investment, Central Bank estimates a 4.4% increase, while public investment is expected to post 0% growth this year.

In October, the municipal and regional elections were conducted with mixed results. It is clear that, in the northern zone of the country, mining development will be limited in the near term, while in other provinces, [procedural] authorities are either [no-growth] or pro-mining deals]. The impact of this political landscape is yet to be dimensioned once the new authorities take place.

Finally, during the last three months, nuevo sol rate has depreciated between 3% and 4%, in line with the currency depreciation of several Latin currencies.

The Group's backlog plus our recurrent business posted a 6.7% decrease from $4.3 billion at the end of 2013 to $4 billion in this quarter. Moreover, the backlog to revenue ratio is equivalent to 1.6 times the last 12-month revenues. Monica will review in more detail the backlog figures for this quarter.

In terms of the most relevant developments within the Group, it is important to mention that we successfully bid for a concession of the collection unit of Lima's integrated transport system through a partnership already (inaudible) GMD. We will collect electronic tickets and provide the management system for the buses fleet that form the Lima integrated transportation system. The concession is for a period of 16 years. And our estimated investment will reach $100 million.

Recently, at the same time, the regional government of [Toheo] approved our initiative to concession for 20 years their electronic transportation collection system.

We submitted a binding offer to The Maple Companies Limited to purchase 100% of its oil refining assets together with Alcogroup and a minority participation of the ethanol business. This offer is subject to Maple shareholder approval and Grana y Montero's Board.

Pursuant to the existing window for private initiatives before September 30, we presented 14 initiatives for an average aggregate investment amount of approximately $3 billion. These initiatives are comprised in transportation, water, data, and (inaudible).

Regarding the Javier Prado project, we were informed last week by the municipality of Lima that, after their review of the concession contract and the supporting information attached, the Ministry of Finance has issued its observations and requested additional studies in order to issue a favorable opinion to the contract. We are currently working on a new environmental study and coordinating closely with the municipality to [absolve] this observational review.

Now, I'll bring to Monica.

Please, let's go to page 6 on the presentation. Our revenue growth is explained mainly by the increase in revenues in the E&C segment, particularly in contract mining services and our subsidiary in Chile Vial y Vives DSD.

In addition, Line 1 of Lima's Metro reported more revenues due to the start of operations of the second phase of the line, more production of barrels per day, and more gas production in the gas plants. On the contrary, the real estate segment reported less revenues due to less units delivered.

The decrease in gross profit is mainly explained by the impact of the cancellation of one of the maintenance contracts with the Regional Government of Cuzco in the technical service segment, lower margins in the units delivered in the real estate segment, and lower results in two projects currently under construction in the E&C segment.

Adding to the gross profit results, the operating income was affected by the increase in administrative expenses and lower results in the operational expense. Even though there has been a 3% devaluation of the nuevo sol, the impact of the exchange difference has been lower than in the previous year because of the conversion of US dollar debt to nuevo sol.

In addition, it's important to mention that the 16.6% gross margin obtained in the third trimester of last year compared to the 14% of this trimester was positively impacted by the devaluation of the nuevo sol.

Due to the proportion of revenues denominated in US dollar, 65%, and the proportion of costs in US dollars, 30%, the gross margin increases, but then it reduced at the net income level after the exchange rate difference is registered.

This explains why, even though the growth in operating margins are lower than previous years, the net income has increased 15.4%, reaching a net margin of 4.8%, the same as in the first trimester of 2013.

As a consequence of the result explained above and the less utilization of equipment during the first semester of -- the third quarter of 2014, the EBITDA was lower by 10.4%.

In terms of participation of each of the segments in revenues, the E&C segment represents 69% 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 more trains under operation and more gas and oil production during the year.

On the other hand, technical services has reduced its participation due to the impact of the cancellation of the contract with the regional government.

In page 7, the total amount of backlog at the end of this trimester is $3.6 billion with a ratio revenue to backlog of 1.6. From the total amount of backlog, $605 million is going to be executed in 2014, $1.6 billion in 2015, and the rest for future years.

Adding to the backlog, the total amount of recurring businesses for the next three years is $454 million, from which $44 million is going to be executed during 2014.

Most of the new contracts awarded during the year are in the technical service segment. Therefore, the participation of technical services in the backlog has increased from 15% at the end of 2013 to 21%.

The main contracts awarded are in the electric service business, one new road maintenance contract in the technical service segment, and a hydroelectric in Chile of $186 million in the E&C segment.

In the case of recurrent revenues, it includes the recently awarded concession of the north and central terminals and the extension of the contract concessions for the south terminal for an additional year.

From the total amount of backlog by end market, the most relevant are 18% in mining projects, 30% contract mining projects, and 22% in the electric sector, which has increased from 17% at the end of last year due to the new contracts awarded in the electric service business.

As previously reported, the private sector remains our main client, 84%. And the foreign backlog today represents 24% of the total backlog, percentage that has increased due to the contracts awarded in Chile.

In page 8, the total amount of investments of the third quarter amounted $198 million. In infrastructure, it's related to investments in the oil and gas business to increase production of oil and gas and the construction of the second phase of Norvial toll road. In E&C, it's related to the purchase and renewal of machinery and equipment, and in the case of real estate, the land purchases for future developments in Lima.

In page 9, the total amount of debt as of the third quarter of 2014 is $530 million, a ratio of financial gross debt to EBITDA of 1.7, or 0.7 net debt to EBITDA.

The debt increase during this period is mainly explained by the $400 million bridge loan for the Metro Line 1 that will be cancelled with the proceeds of the project bond expected to be issued by November. In addition, the E&C segment increased the working capital debt during the year.

Now, I'll go back to -- we can go to Q&A.

(Operator Instructions). Dario Valdizan, Onix.

Good morning. Thank you very much for the opportunity and for the call. I had two quick questions. There's -- if I look at the cost of sales and SG&A year on year, specific to the line third-party services, I see an increase of 49% on the cost of sales and 33% increase on the SG&A for this line, third-party services. If you could give us a little more color on that line and what have drove this increase, I'll appreciate it.

And then I had a question regarding the -- your view on how contracts are being generated for construction, how you're seeing things in Peru. What we have seen in results of other companies is a strong acceleration from the construction sector. We wanted to see what your feelings were towards the next year and the last quarter of this year in terms of maybe a turning point improving, of things staying the same, if you could give us some color on that, I appreciate it. That'll be it. Thank you.

Dario, would you please repeat your first question?

Yes. If you look at the breakdown for SG&A and for cost of sales, there's a line called (spoken in Spanish). That line have grown [in 1H] and for the cost of sales 49% year on year comparing first nine months of 2013 towards nine months of 2014.

And the same thing, if you look at the breakdown for your SG&A for that third-party services, again, there's a strong growth. So, I was wondering what is going on with that line.

Dario, while I look at the numbers that you are mentioning, Mario is going to answer your second question.

Sure. Thank you.

Okay. Hello, Dario.

Hi, Mario.

Dario, we -- if I understand correctly, your question is, how -- the question is the type of contract that we are seeing, if they have changed, or the amount of contracts or [report] that we are seeing?

Right.

Which one, or both?

Right. Let me rephrase it. If I look at the cement companies and I look at the construction sector in Peru results from other companies, there's a significant slowdown, something that really concerns me in terms of volumes. Consider that is a prime material for infrastructure, cement, I wanted to know what your view was on the slowdown that we have seen in Peru, if you think it's something is a matter of cyclicality, external problems that have generated that, or are we seeing a new normal in which Peru is actually going to a slowdown, and we need to have -- be more conservative when it comes to 2015, and how that reflects on your contracts, not only on volume, but value as well. Thank you.

Okay.

Helps.

Okay. Yes. As you know, the construction is very -- is mentioned with -- has a relation with cement and steel. That's one part. And yes, they are reducing the (inaudible). We are -- if we have to choose one, we are more related to investment than using a gas -- a cement and steel.

Anyhow, the thing that is happening with investment has been reduced, and it's not growing. At the same time, in the meeting we have some economists, they believe that 2015 is going to be better than 2014 but not a strong recovery, a modest recovery. That's my comment from yesterday Board meeting they had, no, that consensus there was that the recovery of 2015 is not going to be strong.

Now, that's in terms of general construction or general [GDP]. Now, in terms of our businesses, the key part here is how good we are going to do in the investments of infrastructure projects. And that, as you know, is something that we have been working very hard. And of course, at the same time, we have had very (inaudible) integrated approach.

We already have presented 14 initiatives in this window that ends in September. And now, we were the company that presented the most. And we don't know when the process of approval is -- and how the process of approval is going to be judged, how they are going to select from all of them.

(inaudible) we get it from $3 billion. Next window is going to be in January. It will be a [35]-day window and we will present another very important package of initiatives. And that's our main focus, no, investment.

Now, the problem is or the question is, from those initiatives, how fast they become income for -- or revenues for the Company. It depends on the projects. Okay? There are some projects have shorter term, others longer. The bigger the infrastructure, the longer the term that it produce revenues for the Company.

We are now -- we have to be very careful on that. At the same time, according to what we'll say the relevant type of business is, there are two important markets here that we have to be very -- work very close.

One is the jobs are going to be produced in the Metro de Lima Line 2. They are going to start calling. We already contact them. And they will start calling for quotes in the next month because they need many companies for that. That's going to have a very important impact.

This is already a little bit delay. They should have start two weeks ago. But, I believe they are working on that.

The second line that is going to have a very big impact, and it's going to start impact after March when the rains stop, is the Expresa Sur. That's another area that really is going to have a very big impact in amount of work that is going to be bid in the near future.

Besides that, we are bidding in the two refineries. You know that both has to be upgrade. Now, we are in the last moments. We are waiting for refinery [at the lata] for the five they call outsource part of the refinery. They already obtained the prequalifications. We were the only company that we were prequalified for five of them, for all of them, with different partners, depending on the [utilization].

And also, we are bidding for the refinery of [Repsol] that is in Lima. So, that's another group of area that, because of the size, are going to have an important impact.

In nearer terms, the construction seems that -- besides taking out infrastructure, seems that it's going to be slower, 2015. It's not going to be a strong year and also the big impact of those (inaudible) or the ones that we presented are going to be in 2016.

Did I explain myself, Dario?

Yes, perfect. Thank you very much for that.

Now, I'll answer your first question. That increase is related to the type of projects that we are involved today, the type of construction. What I don't have here is the detailed information of that. But, I can go back to you later.

Perfect. No problem. Thank you very much.

If you want more detailed information.

Yes, no problem. I will shoot you an e-mail. And we can discuss that later. Last --

Okay.

-- just a quick last question. I don't want to take some -- I already take a lot of time. But, on the news regarding the Javier Prado, we got your press release, but if you could give us a little more color on what happened and what you think is the next steps.

First, we are trying to find color. It's a bit difficult to understand what is happening. Let me try to explain what is happening in the [mill] and in our [purchase]. We do not communicate with the (inaudible) municipality that talks to them. We talk to the municipality. Okay?

Okay.

So, we present what the information the municipality required from us to the municipality because that's our counterpart. Okay?

Right.

We have [counterparties], and other companies also, with the municipality coming. One of them was the Expresa Sur, and the other was Javier Prado. We signed first Via Expresa Sur without having to pass this new step that is going again to the Ministry of Economy.

In between Via Expresa Sur that we signed and Javier Prado we were to sign appeared this new ruling that all of the [permits] had to be, before signing, they required a new approval from the Ministry of Economy.

Now, in this new ruling, they didn't specify exactly what they wanted. Actually, we still believe that they don't know exactly. Okay?

Anyhow, they publicly -- in the public discussion, the military -- the municipality forced the Ministry of Economy and Finance to send them a letter saying what do they want.

They received the letter. In the letter, there were like 10 points. And according to the municipality, they only need to put two areas. It's market risk and economic model. And the other eight points was out of the ruling, no, it was in excess (inaudible).

But, the municipality, what they did was presented those two parts and saying this is of course previous our interpretation of the rule. And these other eight I will send you anyhow. But, let me tell you that it's out of the rule.

The MEF answered at the end of the last week to the municipality that they cannot approve because they require traffic (inaudible) traffic study, a new traffic study because the previous one -- because of these delays, has to be updated.

So, we already have the new study. And we're going to do that. But, that doesn't mean the municipality agrees with the MEF. They are discussing on that.

So, we don't know exactly what the answer is going to be here. Okay? But, we will -- we are doing anyhow these new studies. Okay?

And as soon as we have it, and it will take, like, five months to do, okay, then we'll present it because the rules are we have to -- you cannot do it faster because you have a period of time that you have to measure the traffic. Remember that it's already clear that the news are talking about that because it's very difficult to set that the [higher] (inaudible) and a study of the amount of traffic, no?

But, anyhow, we are doing that. But, what we cannot [conceive] if the municipality and the MEF agrees something before and says about it, the approval, without this new study or updated study. That's why we are not sure how long it will take. We are surprised [throughout this] (inaudible).

Perfect. Okay. Well, thank you very much, again, for your time. Appreciate it.

Maher Saba, Compass.

Yes, three questions, please. The first one is, could you give us a number for total debt of Maple Companies after the sale of the oil and gas assets to GMP?

Okay. The remaining balance of debt that will be in the balance of the ethanol business after [this peak] will be $180 million.

$108 million?

That debt will not -- $180 million. That debt will not be consolidated in our balance sheet since we have a minority interest in that project.

But, I understand. It's just to get an idea of the enterprise value of the whole business.

If you want the details of the enterprise value, it's very similar to whatever is stated in the stock market today. It's -- .

Yes, but we don't know exactly the -- total debt is not a public figure as of today. It's -- and I'm also after the sale of the oil and gas assets. But, that's why I was asking.

Okay.

My next question --

That's the -- okay.

My next question is about -- my next two questions are about the backlog. In page 13 of your consolidated results report of September, you show your -- the evolution of the backlog. And I was wondering if you could do a split of -- first, I have seen that was the proportion of cost plus fee contracts in the backlog has gone down significantly from somewhere around 53% I think to 46%.

And my question was if you could do a split of (inaudible) in the evolution of the backlog. How much of that is attributed to execution of backlog and how much to new requests that are coming more on cost plus fee contracts?

Okay. Let me try to summarize because the line was difficult to hear. But, you have two questions. The one is that the percentage of cost plus fee in terms of the backlog has reduced 2%.

The other question is what we are seeing. We are seeing that, in the future, it will continue to be reduced. But, that's something according to the amount of requests that we are reviewing from the clients.

Now, there is a tendency the -- for that. We have seen it especially in the last six months. Okay?

Then we couldn't understand what you mentioned about the backlog. Would you repeat that?

No, it's just -- it's exactly what you said. What I wanted to know is, when you go from -- when you're reducing the proportion of cost plus fee contracts in the backlog, how much of that is attributed to executing backlog that is cost plus fee, that way reducing the proportion of cost plus fee contracts in the accounts of backlog? And how much of that could be attributed to new contracts coming up in the cost plus fee scheme instead of other type of contract?

The new contracts that we have received are at cost -- are not cost plus fee. In other words, that reduction is because we are consuming the cost plus fee contracts. That --

And the new ones are not coming in the cost plus fee form, right?

No, no, no. Let me correct that. The majority of the -- what I'm saying is the majority that -- the requests that we are receiving today are not cost plus fee, but some are. So, if we are -- if we win the ones that are cost plus fee, we'll change positively. But, as a general trend, we see that it's decreasing, the proportion of the cost plus fee.

Okay. So, from those, with about $670 million of new requests of backlog for engineering and construction for the last three quarters, how much of that would you say -- gross number, a percentage -- how much of that it's not cost plus fee?

I don't have that. You mean for the fourth quarter, how much is not cost plus fee?

Yes, for the last three quarters. I see that you have new requests in total in those last three quarters of $677 million. So, from there --

Okay. We'll --

-- From that --

I understand now. I understand now. I will send you a mail because we don't have the calculations here. We'll have to run that calculation. So we'll send you -- .

Okay. And the last question is I see that the projected backlog for 2014, 2015, and 2016 -- looks like, in 2014, you have a much lower backlog than the rest of the year of [$443 million] in engineering and construction. And my question is, assuming you have an important deceleration on activity and value in particular, would you be able -- how much -- or how much would you be able to reduce the general expenses and around your whole structure?

I guess it's structured in a way to serve a much stronger amount of activity. How much would you be able to de-escalate your structure in order not to have too strong of costs in -- I don't know -- general and administrative costs or any other costs that are indirect to activities of the Company?

Now, that's [a speculation]. You are assuming for that that we are going to have less sales this year. That's what you're saying, no? If that's the case, we have --

Yes, yes, assuming that.

You're assuming --

Although you can see from the backlog that you have already had a diminished backlog for 2014, right?

Yes. Besides that, let's not assume yet that will happen. Let's wait a little bit. Okay.

But, let's assume that you're right. Okay? Our structure is very flexible. And we're always working and doing a fine-tune about having the right size of the organization.

So, we are monitoring very closely the general expenses. So, if required, we can reduce the amount [by day] that we have the flexibility if -- our structure is very flexible. And we have proved that many times. Okay? It's not going to be the first time that, if required, we have to reduce the expenses.

Okay. Thank you very much.

(Operator Instructions). I am showing no further questions. I'd now like to turn the call back over to Mr. Alvarado for closing remarks.

Well, I would like to thank you, everyone. The next six months we believe are going to be, like, very interesting due to what is happening in the market. We'll have to close -- we'll have to watch very close the development, especially in the political arena. And we are working very hard to develop projects where we can invest in infrastructure that is our main focus.

Well, thank you very much to all of you. Bye.

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