Aenza SAA (AENZ) 2015 Q3 法說會逐字稿

Good afternoon and welcome to the Grupo Grana y Montero Third Quarter 2015 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 Katie and good afternoon everyone. I am very pleased to welcome you to Grupo Grana y Montero's third quarter 2015 earnings conference call. This afternoon, the senior management team of Grupo Grana y Montero will discuss the Company's third quarter 2015 consolidated results of the press release issued yesterday, Thursday, October 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 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; and Mr. Luis Diaz Olivero, Corporate Operations 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's 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 afternoon, everyone and welcome to Grupo Grana y Montero's Third Quarter 2015 Conference Call. Thanks for joining us and for your interest in the Company. In terms of the more relevant developments within the Group, it is important mentioning the following. (inaudible) deliberation within this area in E&C has not been performing well. And the impact on (inaudible) as well has a harder market conditions affect the other ongoing projects. Therefore reducing the operating profit. Moreover, there has been an increase in financial expenses due to the higher levels of working capital debt as a consequence of the delays in the collection from our clients. In addition to this, there has been important currency devaluations in Peru, Chile and Colombia and that has impacted this results. This will be further discussed in our action plan.

Regarding backlog additions for this quarter, the most important one has been the Southern Gas Pipeline project where GyM will participate with 29% in the construction consortium, representing an addition of $1 billion to our backlog. This will be executed in a period of [three] years. Additionally, the Stracon GyM was awarded the service contract for an amount of $155 million to develop and operate for a period of eight years the San Ramon Mine, located in Medellin, Colombia. CAM Chile, through its subsidiary Coasin, was awarded a contract for $69 million with VTR Banda Ancha for a period of 10 years.

In summary, including the projects mentioned above, together with others, as well as a reduction of $150 million from the [Nuble] Hydroelectric Plant contract announced on October 19 and the reduction of backlog by the effect of currency devaluation, the total amount of backlog that was recorded in this business is $4.61 billion, which is equivalent to 1.93 times last 12 months revenues.

In September, we announced that we signed an MoU with [IICD], a subsidiary of Odebrecht, a major shareholder of (inaudible) from Spain in order to participate with a 20% stake in the shareholder equity of the Concesionaria for approximately amount of $250 million. As of today, we have implemented the required documents for the closing.

In August, the acquisition of 44% of the leading IT Chilean corporate Adexus was finalized through a contribution of capital of $13.8 million. The idea is to merge this company with GMD in one year.

Finally, last quarter we announced, in July, Norvial, the toll road, with PEN365 million through a dual tranche bond in order to finance this [branching] of the toll road, which has been registered in the third quarter.

Now I will turn the call over to Monica Miloslavich, the CFO of Grupo Grana y Montero, who will review key financial highlights. Monica, please go ahead.

Thank you, Mario. Please turn to page 6 of the presentation. The revenue growth is explained mainly by the increase in revenues due to the revenues from Morelco, the company acquired in December 2014. Additionally, revenues increased in line one of the (inaudible) with an increase in maintenance awards and the accounting of the work in progress for the second phase of Norvial toll road, as well as [Laktida]. Additionally, even though the crude oil price in this period was lower than in the same period of previous year, revenues increased due to higher levels of daily barrels produced, because of the inclusion of blocks three and four this last April. And additionally, due to increase of production in the gas plant. Finally, the decrease in revenues in the real estate segment is explained by lower amount of units delivered in the period. This segment continues to be affected by the slowdown of the economy.

The decrease in gross profit in the E&C Segment is explained by lower margins in the different businesses of GyM, which is partially offset by the results generated by ongoing projects of Morelco and Stracon GyM. In the infrastructure segment, the decline in oil price and the accounting of advance works in the construction of Norvial second stage, as well as [Laktida] with lower margins impacted the segment's gross profit. On the other hand, the real estate segment reported higher margins due to the (inaudible).

Finally, in the technical service segment, the gross profit increased as a consequence of the recovery of (inaudible) impacted last year with the cancellation of a maintenance contract with a regional government. The general expenses reduced 3.5% compared to the same period of last year and is also lower in terms of percentage of revenues. Nevertheless, this is an area in which effort will continue in order to reduce expenses during the rest of the year. Adding to the gross profit results, the operating income was affected by the execution of the Letter of Credit to the consortium for EPCM in Minera Panama, consortium led by (inaudible) in which our participation was 16%.

The increase in financial expense, this is a consequence of the increase of working capital debt in the E&C segment, due to the delays in collecting from the clients and the longer October process, as well as an increase of debt in the infrastructure segment related to the Line 1 of the Metro [bond] and the construction of expansion of Norvial roads. And also the working capital debt from real estate segment.

The participation in associates includes the profits from the minority participation in Vial y Vives and [CAM holds] in several of its projects and the profit generated from the land sale in (inaudible). As of September 2015, there has been important currency devaluation in the three countries in which we operate, generating a greater impact on exchange rate differences in the period due to amount of net liability to the US dollar. As a consequence of the results explained above, the net profit of this period was 97% lower than similar period of last year and the EBITDA decreased 27%.

Turning to the next page, page 7, for the backlog and recurrent businesses. The consolidated backlog and recurrent businesses reached a total amount of $4.6 billion in the third quarter of 2015, which represents 1.9 years of revenue. The main contracts added during this period -- this period saw the contracts awarded to [CAM] for Telefonica and VTR of $68 million and $75 million respectively. The construction contract of the Open Plaza Shopping Center in Huancayo for $47 million and the 29% of the construction of the Southern Gas Pipeline, equivalent to $1 billion. Additionally, Stracon GyM was awarded a contract for the operation of San Ramon Gold Mine for $155 million, and the rest additions to the backlog are related to additional work in the contract under execution.

In Page 8, as you may see, in the backlog by end market, the proportion of oil and gas have increased due to the contracts awarded for blocks 3 and 4 Morelco with this long service contract in the oil and gas sector and the Southern Gas Pipeline. On the other hand, there is only a 3% backlog on mining projects due to a reduction in mining investment [in new countries]. The total amount [established] at the end of this period amounted to PEN464 million. From that 42% is in infrastructure segment and corresponds to investments in Norvial Road and the oil and gas business.

Let's turn to page 9 -- no 10. Looking at the third part at the right-hand side of the page, you can see the composition of the Company's debt. 42% project financing with its own cash flows and guarantees, 12% leasings to finance equipment and machinery for the operations and 46% working capital debt associated to the accounts receivable. The project financing and leasing finance, the investments and the operation of the Company will continue increasing as large new investments takes place.

Now I will turn over to Luis Diaz to comment on an update of the action plan.

Thank you, Monica. We will give you now the results of the action plan outlined in the first quarter. As you may recall, the action plan has two main objectives. Improve the profitability of the business areas and strengthen the financial position of the Group. Regarding projects with high operational risk within the core area, the action plan launched reviews most of the potential adverse results, identify and even improve some results in a [few months]. This is a continuous process that we will continue in the next quarters. Despite these efforts, (inaudible) project fully included at the end of this quarter impacted the results.

The commercial efforts deployed allow us to increase our backlog after several quarters of continued reduction. While the dynamics of the land market during this quarter will continue to improve, the amount sourced by the third quarter remained low. We have a list of potential clients (inaudible) that are under negotiation.

Regarding overhead, the efforts deployed throughout the company result in lower SG&A percentages, as our current 5.3% reflects. We intend to keep reducing this SG&A percentage in the next quarter. Despite the effort employed in accelerating collection, our working capital has not improved, but has not deteriorated any further. We have intensified our efforts to improve this situation in the next quarters. But we need to recognize that market conditions and our client financials will difficult this task. Due to the capital expenditures required by our incorporation in the Southern Gas Pipeline, we expect to keep optimizing the CapEx to be invested in all the projects in the Group. On the other hand, total investments will increase, while we refine and implement our new financial strategy that will allow us to adjust the capital required.

Now I will turn back to Mario Alvarado for the final remarks.

Thank you, Luis. As final remarks, we want to acknowledge that this has been a very difficult year for all three countries where we have a permanent presence. The backlog for last several quarters has been decreasing and the result of the [Brazil currency] has also been affected. However, with the awarding of the Southern Gas Pipeline contract, we have increased our visibility for the following years. This is very important, this is a fact that we are approaching elections in Peru, which is our main market. And we will continue working hard [reducing waste] and improving operations. Thank you very much.

(Operator instruction) Lorenzo Mendez, JP Morgan.

Couple of questions here. Could you go over on more detail on the Inmaculada project and give us a sense on how much is the loss associated to the specific project? And also have you seen or are you considering possibility of making [peanut] of some of your businesses, the ones that are trading on healthy margins? Thank you.

Last time, -- last quarter there was -- we comment that we couldn't comment on the results of -- specific results of any project, because those [projects] are in the market. So we commented (inaudible) about that. But we can comment (inaudible) has been very, very strong loss in this period due to many factors and maybe the most important that we ever have. And Inmaculada we have acknowledged the losses this third quarter, even the period has not finished, because as part of the negotiation we have to finish the [dam] that is going to be finished at the -- in [December 8]. So even though the project will continue, we already acknowledged that the whole loss on the third quarter. Now, we are always (inaudible) we're are always about this and we are open to hear about that -- about the spin-off, but always taking in account and have to make a balance between stable cash flows and our other business. That is what provides that portfolio -- provides the stability for the Group. Since, now we are getting into a more aggressive investment stage, we will have to be more open to the auctions in the next month. But we are not actively looking for any specific sale. Now, naturally as part of our strategy, one, we have a mature concession, then we may look to sell part of that concession if the other part requires less capital cost than we require, because we are designed to take a bigger risk than, let's say, pension plans or any plan that is using the risk through a big portfolio in a [global equation]. So, the answer to your second question is that yes, we may consider that, but we have not put that in our action plan of this year yet to actively work on that. Thanks.

(Operator Instructions) Jasmine Helme, Credicorp Capital.

With regards to the working capital, since there haven't been any reduction in the level year-to-date, have you moved -- you mentioned previously that your target was $90 million by the end of this year. Has the target moved now to the end of this year and looking ahead for next year?

No. We expect to be able to reduce that amount during the last quarter. Most of those collections, the client collections have been postponed for the last quarter of the year. That's the reason why we haven't been able reduce it as of today.

(Operator Instructions) At this time, I'm showing no further questions in the queue. I'd now like to turn the call back over to Mr. Alvarado for closing remarks.

Thank you very much for attending this call. And we are looking forward for next year. We believe we'll have a positive frame (inaudible). The three countries have different perspectives, but in our own markets have been very fixed, because of this commodity prices, but it looks like with this new concept that we are getting, it looks that the waves will return and start turning to our direction. Thank you. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.