Aenza SAA (AENZ) 2015 Q4 法說會逐字稿

Good afternoon and welcome to Grupo Grana y Montero's fourth-quarter 2015 conference call. (Operator Instructions)

This afternoon, the senior management team of Grupo Grana y Montero will discuss the Company's fourth-quarter 2015 consolidated results per the press release distributed on Thursday, January 28. 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; Mr. Luis Diaz Olivero, Chief Operating Officer; Ms. Monica Miloslavich Hart, Chief Financial Officer; 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 this 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, sir.

Thank you very much. Good afternoon, everyone, and welcome to Grupo Grana y Montero fourth-quarter 2015 conference call. Thanks for joining us and for your interest in the Company.

I will start by mentioning the most important remarks of the year. We have to highlight that this has been a difficult year due to a slowdown of our main markets, a decline in private and public investments, the currency devaluations in Peru, Chile, and Colombia, and to the working capital pressures generated by the delay in the [clans] change of payments.

Additionally, we have to emphasize the decline in this year results as a consequence of the whole in oil price as well as a lower margins of engineering and construction periods and the losses from Inmaculada Project. After the first quarter's results, we implemented an action plan who results has been referred to in the fourth quarter of 2015 and which I will explain.

In the fourth quarter, we reached revenues for PEN2.215 billion and EBITDA of PEN300 million, which is 2.3 times the one of the previous quarter, and reduced general expenses to 5.1% of sales. While the loss of PEN33 million will register in the third quarter turn into a net profit of PEN82 million in the fourth quarter. Also, we achieve a reduction of PEN353 million in the working capital debt.

It is important to mention that as 2015, we'll reach a backlog of $4.486 billion, in spite of the reduction that it has had due to the currency devaluation of the countries where we operate. The results aforementioned show a new positive tendency that we will do our best efforts in order to maintain the discipline and rigor in the US operations.

It is worth mentioning that during this year, we achieve our participation of 20% in the Southern Gas Pipeline project, with PEN250 million [enabled] investment, with a very good perspective of value generation. Without taking in account the fact that we have complete the largest construction contract in the history of Grana y Montero for $1 billion.

The Southern Gas Pipeline project is being executed at a good pace. And regarding the financial closing, we can mention that the approvals from several banks have already started. From the $250 million we have required to contribute with, we have an approve of $200 million credit line with Credit Suisse. And as today, we have contributed with $120 million without using this facility.

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

Thank you, Mario. Let's go to page 3. The revenue growth is explained mainly by the increasing E&C revenue due to the addition of revenues from Morelco, a Colombian company acquired at the end of 2014. Revenues increased in the infrastructure segment is due mainly to increasing the revenues of Norvial, Line 1 of the Lima Metro, and an increase in the level of daily borrows per day produced.

Finally, revenues in the real estate segment decreased, even though the delivered housing units were the same as last year. This is explained by the fact that in 2015, 45% of these units are from a program called [Petro Pro PO] and these housing units have lower price.

The decreasing gross profit in the E&C segment is explained by lower results as a consequence of the loss reported in the Inmaculada project throughout the first three quarters of 2015. However, a recovery can be seen in the fourth quarter of 2015.

In the infrastructure area, the gross profit has a suffered the impact of the decrease in the oil price. Finally, in the technical service area, there is a recovery in gross profit compared to the previous year due to the recovery and the result of Concar after the cancellation of a maintenance contract with the regional government of Cusco in 2014.

General expenses reduced 2.5% compared to last year, going from 6% to 5.2% of revenues. This reflects the effort deployed through all companies during the year. Other operational expenses account the update of the option of Morelco's acquisition as well as the liabilities reversal for the pressures of CAM, the dividends received from TGP, and the sale of machinery and equipment.

Financial expenses -- the increase in financial expenses is a consequence of the increase in the working capital debt in the engineering and construction area throughout the year. The participation in associates accounts, the profits generated in projects were Vial y Vives - DSD, Viva GyM, and CAM have minority participations and are not consolidated, as well as the Southern Gas Pipeline participation.

During 2015, the sol depreciated 14% against the US dollar, generating a greater impact on accounting exchange rate differences due to net liabilities in US dollars, including debt. It should be noted that that currency will always be related to the currency of the revenues. As a consequence of the results explained before, the net profit of the year was 70% lower than last year and the EBITDA decreased 14%.

Let's go to next page to explain the backlog. The consolidated backlog and recurrent businesses reached a total amount of $4.486 billion in 2015, which represents 1.95 years of revenues. The main contracts added during the year were the construction of the Southern Gas Pipeline, the contract mining in Colombia for Red Eagle, and in the clinical service segment, two new contracts in the telecommunications sector.

As you may see in the backlog by end market -- let's turn to next page. The proportion of oil and gas has increased due to a contract awarded for block III and IV, the acquisition of Morelco with most of its contracts in oil and gas sector, and finally, the Southern Gas Pipeline.

On the other hand, there is only 1% of mining projects due to a reduction in mining investments in the country. Still, the majority of the backlog is private and located in Peru.

Let's go to the investment. The total amount of CapEx for the year was $277 million. The most relevant investments were the expansion of Norvial toll road, the equity contribution 2000 gas pipeline for $117 million, and as well as the acquisition of Adexus.

Let's go to the next page where I can explain the debt composition. Consolidated financial debt for 2015 amounted $754 million. From that total debt, $421 million correspond to working capital debt associated to the clients' account receivables and leasings for the acquisition of machinery and equipment. $302 million correspond to the debt of infrastructure projects and $30 million correspond to the financing of the contribution of equity of the Southern Gas Pipeline.

As you will see in the chart, the working capital debt increased until the third quarter of 2015, achieving a reduction in the fourth quarter of 2015 of $103 million, reducing the debt to EBITDA ratio from 3.96 to 2.97. On the other hand, the project debt related to infrastructure businesses increased during the year, mainly due to the bonds issuance for the Line 1 of the Lima Metro and Norvial. This type of debt is nonrecourse with guarantees and cash flows from the projects themselves.

It's important to mention that this type of debt will continue growing in line with the investments in the infrastructure segment. For the total amount of debt, 57% is denominated in soles in the next page, please, and 32% in US dollars. The currency of the debt is related to the currency of the businesses -- the revenue of the businesses or projects.

Thank you for your attention. Now we can start with Q&A.

(Operator Instructions) [Badio Waldesin], Onyx.

Just quick question regarding E&C. We -- could you give us a little bit more -- a little more color regarding the projects and how things are looking now, now that we are passed Inmaculada. Is what we saw in the fourth quarter something more sustainable going forward? And what are your views regarding future contracts with this [electro] year?

I'm surprised that you have not asked me any questions about the stock price. (laughter)

It was two of you. (laughter)

About the context. Now you have to remember that we are in E&C pipe between companies. So it's difficult to summarize in each one. Let's take apart what these operations -- mining operation. This can be very stable, the same kind of contract that we have had. And even the -- it's getting a little bit more difficult to negotiate with the clients because of course they have a lot more pressure. From that, you would take like 30% of the contracts.

Then you have Chile, with low volume, and Morelco, also with lower volume because they are reducing expenses because of the oil price. Now, based on our main market, Peru, important part in Peru is -- very important part -- is (inaudible). This is going very well, we are advancing at a very good pace, and it looks that we are doing okay on that.

Debt is very heavy in terms of the dollar amount of the year. Now, if I got the market, it has -- I cannot explain you why since December it has start moving a little bit faster in Peru that in Chile and Colombia. And we got some new contracts on that.

It is strange because elections are coming, but how to say some having more -- asking for more calls. So it seems it is moving in the market. That is public sector. Private is a little bit slower yet. Okay?

Okay. And regarding what we have seen in terms now -- let's go to the quick for the oil. How serious is this discussion about the suspension of royalties to help the current situation? I have seen some in the press saying it is a possibility. And have you taken that into consideration what will the impact will that be for you guys if that happens?

No -- that is -- they are discussing most of the contract. We are already in the same discussions. But in our case a little bit different because our -- how do you say that? Our royalty, it changes according to the prices. So our impact is lower.

Anyhow, what is very important for us is that for this price, even we still -- our -- can maintain a profitable operation, we are not going to be profitable if we invest in new wells. So that is the key part that we have to focus, to make sure that the other side -- excuse me?

That was where I was going with my question. Because if I remember correctly, your breakeven with royalties is about $40 a barrel. Right? So being below $40 a barrel --

That's including an amount of CapEx and not taking the OpEx that we are doing. When we are publishing this on making sure that our commitment instead of the royalties as everybody is discussing is delayed. We have in a contract some elements than allowed up. Okay?

[Badio], if I may complement what Mario was saying. 2009, some $40, but that was when we have an oil price very close to $45. You have to remember what Mario says, that our royalty keeps declining if oil prices lower down.

So really you have to differentiate two things. If we want to operate without any drillings, then our OpEx plus royalties I would say is still positive in terms of cash with the lowest price that we have today. The problem, as Mario says, is if we enter into drilling and that's why the Company focus and in using the contractor methods in order to defer the investments.

Okay. And you see that that shouldn't be an issue for you guys in initiations in terms of the [warmen] saying to you there is a commitment for drilling and you need to fulfill it, despite the prices.

That is the risk.

No, I understand. I just wonder if they were accommodating in terms of reallocating the drilling campaigns.

We are waiting. We are already relaying. We have several contractor process that allow us to relay and we are using them.

Okay, perfect. Got it. Thank you.

(Operator Instructions) Jasmine Helme, Credicorp Capital.

Would you mind telling us a little more about how you managed to bring down the working capital quarter on quarter?

Yes. Let me -- we -- actually, as we anticipated, we have some -- all the clients, because they have a cash flow, they actually pushing down the line their working capital needs. Plus was ready to go to do that because our suppliers are already smaller and we can put them in a very high risk.

So that we took the hit until 2013. Third quarter of this -- sorry -- of 2015. And we start talking and discussing with each one and we'll make a complete list and all the managers of the Group have -- who divided the list and talk to the clients. And we will really improve that by just doing what we have to do: collect our accounts receivable. It was a big effort and we will continue doing the same this year.

So do you have a target for working capital for 2016?

Yes, we have a target and each one of our managers have a specific target. And its bonus is related to that target, but as we always mention, we cannot give any forecasts or targets.

Okay.

Paul Figueroa, Scotiabank.

Could you please give us a little more color on the real estate division? We were surprised by the positive results of this quarter and we want to know what we should expect for the next quarter. Thank you.

You have to be careful with the numbers always of the real estate division because we account when deliver. So it's difficult to use this number to foresee other quarters, but it is very important to see when we deliver.

Now, we were positive about the margins and let me explain to you what happened. This year, we start delivering a project that has been delayed. And since we have our numbers in the real estate, especially the value of the land as a historic number and up, we will raise the number -- the cost.

That project has been delayed for awhile. It is start with good sales and the project is -- Comas is appraised. It's a big project of almost 10,000 units and if we start delivering and the margins for that reason are greater. That's the main reason.

Okay, thank you.

(Operator instructions) There appears to be no further questions at this time. I'd like to turn the floor back over to Mr. Mario Alvarado for any closing remarks.

Thank you. As a final remark, we want to emphasize that it has been a challenging year for all three countries where we have a permanent presence. And as a consequence, the result of the operations has been affected.

However, the recovery in results for this first quarters show a positive tendency for which we will continue to work hard, reduce risk, and improving operations. Thank you very much.

This concludes today's conference call. You may now disconnect. Thank you.