Aenza SAA (AENZ) 2014 Q4 法說會逐字稿

Good afternoon and welcome to Grupo Grana y Montero's fourth-quarter and full-year 2014 conference call. (Operator Instructions)

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's fourth-quarter and full-year 2014 conference call on this, February 2, 2015.

This afternoon the senior management team of Grupo Grana y Montero will discuss the Company's fourth-quarter and full-year 2014 consolidated results for the press release issued on Thursday, January 29. 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. I would like to remind you that 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 very much. Good morning and thank you for attending today's yearly results conference call. I will start by providing a general overview of the highlights for 2014.

In terms of GDP growth, according to the Central Bank, Peru grew 2.4% in 2014 and should grow 4.8% in 2015. In terms of private investment, it decreased 1.5% in 2014. This and the performance in macroeconomic figures was not anticipated at the beginning of the year and, more importantly, the pace at which economic estimates were adjusted as the year passed.

This situation evidently generates caution among the private sector, our clients: clients postponing investments and generating cost cuts, seeking for efficiency, which affected the generation of new contracts. In addition, public investment was impacted by a series of corruption scandals in the regions.

In October, new municipal and regional authorities were elected. We have initiated discussions with the new authorities, where our [investment plays] are [embedded].

Finally, last year the Peruvian, Colombian, and Chilean currencies experienced depreciations against the dollar in line with emerging markets.

The Group's backlog plus our recurrent business reached $4.3 billion in 2014, an amount similar to the figure achieved in 2013. Although the total amount has not changed year-on-year, it is important to mention that the mix has changed, especially with an increase in the international companies and a larger participation of the oil and gas business.

In addition, the backlog-to-revenue ratio is equivalent to 1.7 times; and when including backlog plus recurrent business, the ratio increased to 1.8 times (sic - slide 4, "1.9x"). Monica will review in more detail the backlog figures for this quarter, so this is relevant.

In terms of the [moderate] relevant developments within the Group, we continued with the strategy defined in 2012. We anticipated the commodity cycle would not last permanently, and we prepared ourselves to be ready to develop additional growth engines in infrastructure, development, and gas. Today the Group's efforts are racing to that goal, and we have taken important steps to shift this.

We acquired Morelco, a Colombian engineering and construction company that has specialized in the oil and gas industry. This acquisition is within our strategy to enter the Colombian market. We paid 4 times EBITDA for this company with a backlog of $300.9 million, which represents 1.5 times its last 12 months' revenues.

We also completed the acquisition of a 51% interest in COGA, the operator of the Camisea gas pipeline. Our partners in this are CPPIB of Canada and Enagas from Spain. Enagas is one of the participants of the southern gas pipeline concession that (inaudible).

During the last quarter of 2014, we successfully bid for the concession of the collection unit of Lima's integrated transport system. When recently we did not hear from them, Lima municipality indicated that the Minister of Finance was cancelling the work process. We are evaluating the options we have to develop this initiative.

On the last week of 2014, the Lima municipality appointed a legal framework necessary to develop the Cuartel San Martin project. As you know, during the last year we found or did a traffic impact (inaudible) which is a condition to receive the construction license. Next steps are to start the remaining license projects aiming to start construction at the beginning of 2016.

Regarding Javier Prado, we are continuing on the regional study required by the Minister of Finance to approve this project. Of the 14 private initiatives (inaudible) amount of (inaudible) percentage fall (inaudible) [clear] of relevance.

We have in the last week received some comments about Blocks III and IV, that we have a gas [creep]. Luis Diaz will explain after Monica in some details this business, which leads to a continuous grow, the incorporation of new business.

And to ensure we achieve the results we have established in our strategic plans, we have announced an organizational change. The main change is the appointment of Luis Diaz as our Chief Operational Officer.

Now I will leave you with Monica to explain the results.

Good morning to everyone. Let's turn to page 7.

Our revenue growth is explained mainly by the increasing revenues in E&C segment, particularly (inaudible) from the (inaudible) works and contract mining services, plus the increase in revenues of the 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 plant. On the contrary, the real estate segment reported less revenue due to less units delivered.

The gross profits. The increase in the gross profit is mainly explained by the impact of the cancellation of one of the maintenance contracts with the regional government of Cusco in the technical service segment, lower margins in the units delivered in (technical difficulty)

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Thank you, everyone, for your patience. We now have our speakers reconnected. Speakers, you may begin.

Okay. Adding to the gross profit results, the operating income was affected by the increase in administrative expenses and lower resulting operational expense. Although there has been a 7% devaluation of the Nuevo sol, the impact of the exchange difference has been lower than in previous years because of the conversion of US dollar debt to Nuevo soles.

As a consequence of the results explained above, the EBITDA was lower by 11%.

In terms of the 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 operations and more gas and oil production during the year. On the other hand, technical services has moved its participation due to the impact of the cancellation of the contract with the regional government.

In the next page, the total amount of backlog at the end of the year is $3.7 billion. From that $1.8 billion is going to be executed in 2015, $1.2 billion in 2016, and the rest in the future years.

Adding to the backlog, the total amount of recurrent businesses for the next three years is $580 million, from which $179 million is going to be executed during 2015, $200 million during 2016, and the rest in the next years.

The ratio of revenues to backlog is 1.7; and when including the recurrent businesses, it is 1.9.

The most important contracts awarded in the year were in the technical service segment, mainly in the electric service business. In the E&C segment, the most relevant contracts were the construction of the Nuble Hydroelectric Plant and Kelar Thermoelectric Plant in Chile, the contract service for the life-of-mine Shahuindo, and the backlog added with the acquisition of Morelco in Colombia.

In the case of recurrent businesses, the new contracts were the concession of the North and Central terminals, and the extension of the contract concession for the South terminal for an additional year, and also the recently awarded concession for the operation of Blocks III and IV in Talara.

Let's go to the next page, page 9, to explain the figures including the recurrent businesses, which reflect better the strategy of the Company. The two pies on the left only are related to backlog; and the two pies on the right are related to backlog less recurrent business.

So the total amount of backlog and recurrent businesses by end markets, mining projects is 10% compared to 17% at the end of last year, 2013. 28% in contract mining projects, very similar to previous years; this reflects the reduction of the mining investments in the country. In addition, the oil and gas backlog has increased from 9% to 21%.

The private sector remains our main client. If you go to the next page, page 10, you can see that sum total amount of backlog plus the train businesses. 28% of the total is foreign. The percentage has increased from 18% at the end of 2013 due to the contract awarded in Chile and the acquisition of Morelco in Colombia. This composition of the backlog and recurrent businesses confirm the Group's regional diversification strategy and diversification in other sectors like gas and infrastructure.

In page 11, the total amount of CapEx for the year was $385 million. From that, in the E&C segment the total amount of investment was $162 million. That includes the acquisition of 70% of Morelco and an additional stake of 13.5% in STRACON GyM.

In the infrastructure segment, $42 million of investments in the oil and gas business to increase production, and $26 million that was for the construction of the second phase of Norvial toll road.

In the real estate segment, we invested $40 million in land for future development in the city of Lima. And also we have acquired (technical difficulty)

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Excuse me, everyone. We now have our speakers again with us in conference. Speakers, you may begin.

On page 12, the total amount of debt at the end of 2014 was $585 million, a ratio of financial debt to EBITDA of 1.9, or 0.3 net debt to EBITDA. The debt increase during the year is mainly explained by the bridge loan for the Line 1 of the Metro that will be replaced, with the proceeds of the private bonds expected to be issued this week. In addition we have the [segment] increase the working capital debt during the year.

Now it is time for the Q&A. I'm sorry; [Muto] will explain the investments in the Blocks III and IV.

Thank you, Monica. On page 14, we have prepared some highlights of the new recently awarded contracts of Block III and Block 4. As you may recall, these contracts were awarded in December; we will sign the contract by the end of February; and we expect to start operations in April of this year with an initial production of 1,600 barrels per day.

First we would like to point out that this is essentially the same business as we have been doing since 1993 in GMP in the Blocks I and V. Therefore we would like to highlight also that there is no exploration risk attached to these contracts. These contracts are essentially based on the extraction of proven reserves -- P1 reserves, if you refer to oil industry (technical difficulty).

The production system is based on a continuous drilling and low lifting cost. For reference, the estimated OpEx or lifting cost of these contracts is $18 per barrel. Therefore efficiency will be a key driver of success in these contracts.

Historically this business has represented 10% of the CapEx of the Group. We will maintain this 10%, since Block I and V will cease drilling in December 2015, and Block III and Block IV will start drilling in April 2016, according to our committed mandatory investments.

The final point is that we have a royalty fee adjustment based on oil price especially when it decreases from $80. We have included a chart where we show the net revenues that we will receive after deducting the royalties. For reference, today we have an oil price between $50 and $45, and therefore the net revenue that we will receive is between $32 and $30 per barrel, which is $12 on top of our lifting cost.

We would also like to highlight that we have done an estimate of how this contract will behave in the next 10 years, where we have $430 million of investment to commit, a $43 million CapEx per year. If we maintain the $45 per barrel, we will have a net present value equal of zero at the end of the 10 years. Therefore we will have 20 additional years to improve profitability if we assume that the oil price will not change from $45 from now on.

Now I think this is -- we can go to Q&A.

(Operator Instructions) Paul Figueroa, Scotiabank.

Good morning and thank you for the call. In relation to Morelco's backlog, when you announced your intention to acquire this company, you mentioned that Morelco had a backlog approximately of $500 million. Right now we are seeing the amount closer to $350 million.

Is this effect to a written down, or some contracts being canceled? Could you please give us a little more color on that?

My second question, please, in relation to E&C, to the operational margins at the E&C division. You've mentioned in the last two reports that you're having trouble with two contracts. Could you please also give us a little more color on these two contracts? Thank you very much.

Thank you, Paul. Let me answer the first question and then I will turn it to Juan Manuel Lambarri, the Chief Operating -- the Chief Sales Officer of Engineering & Construction.

The backlog that we referred at that time was the backlog at the half of the year, if I do recall. Besides that, they have some contracts -- they have a big devaluation at the end of the year. They had the backlog in pesos, and that devaluation I believe reduces the value [within] 24% or something like that.

So the total amount is the amount at the last day of the year divided by the new exchange rate that was like 2,300 or 2,400 pesos per dollar. So that has been the big impact on the backlog.

In the future we'll [deploy] the margin reduction is due to two projects. One of them is [Logalyinga] and the other one is Immaculada. We obtained lower results than we expected; however we are putting our maximum attentions in order to reduce this impact and avoid even having to adjust in the future. Fortunately the results for this project have been compensated with older projects with -- but good results.

Okay, thank you very much.

(Operator Instructions) At this time we have no questions waiting to be answered in the queue. Do we have any closing remarks?

Yes. I would like to thank you, everybody, for this conference call. This has been a very difficult year. Even in that situation we have been able to achieve an increase or maintain the value of the revenues. It has been very positive compared what has happened in the region.

We are very [compromised] to achieve the investment priorities during this year, to be able to execute especially during 2016. That is our focus, and we're going to do our best to achieve that. Thank you very much.

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