Aenza SAA (AENZ) 2016 Q2 法說會逐字稿

Good afternoon, and welcome to Grupo Grana y Montero's Second Quarter 2016 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions. (Operator Instructions)

This afternoon, the senior management team of Grupo Grana y Montero will discuss the Company's second quarter 2016 consolidated results for the press release distributed on Monday, July 25. 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; and Ms. Monica Miloslavich Hart, Chief Financial 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 those 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.

Good afternoon, everyone and welcome to Grupo Grana y Montero's second quarter 2016 conference call. Thanks for joining us, for your interest in the Company. I will start mentioning the most important remarks of the first semester of the year.

First, the political environment. As you know Pedro Pablo Kuczynski was elected President on June 5 of this year, and the business community believe that this is -- this will be a pro-market government, which will boost private and public investment starting in 2017. Even though they will have initial opposition from the Congress, but since both are market-oriented, they will come to terms shortly.

In June, GyM agreed with GyM Ferrovias on a contract to expand the infrastructure of Line 1; and on July 11, GyM Ferrovias subscribed the addendum to Line 1 construction contract in order to purchase a total of 20 trains and 39 railcars for $410 million. The first train will arrive by the end of 2017.

The Southern Gas Pipeline, we have to mention that we have signed a non-disclosure agreement for the sale of the total participation of Odebrecht in Gasoducto Sur Peruano and in the EPC contract. However, we can comment on some facts that have been published by the press. Odebrecht received three offers and we are discussing the terms of the shareholders' agreement that we will have, with the new potential owners of GSP, when requested. In parallel, we are doing the same with the new potential partners of the EPC contract.

On July, the government approved the reduction of the guarantee bonds of the construction to 72.5% due to the (inaudible) of the project, as well as an extension for the financial closing from September 2016 to January 2017.

About the backlog, even though it was supposed to be acquired, no decisions were made due to the uncertainty that any elections create. We have been able to add new contracts for a total amount of $563 million. It is important to understand that in this quarter, revenues were $480 million, that's the backlog -- that's recurring business grew to $4.648 billion, which is the highest we have ever had in our history. Due to the increase in the last 12 months' revenues plus the increase in backlog, the last 12 months' revenues to backlog ratio reached 2.37 times, which is again the highest that we have ever reached.

And now I will turn it to Monica, that will explain the financial results.

Thank you, Mario. Please turn to page 3 in the presentation. The revenue decreased in 25.6% in consolidated revenues from the first semester of 2016 to [2Q 2015] is explained mainly by lower revenues in the Engineering and Construction area due to the fact that there were fewer projects under execution in GyM, Vial y Vives-DSD and Morelco.

On the other hand, revenues also decreased in the Infrastructure area due to lower revenues in GMP. Even though the level of daily barrels per day produced has increased, the oil price was lower than in the second quarter of 2015, impacting the amount of revenues. Also, the maintenance work in [Norvial] this year have been less than in 2015, which is partially offset by an increase in revenues in Norvial and Metro Line 1. On the other hand, revenues in the real estate area increased due to the sale of a piece of land of Almonte in Lurin and more units delivered than in the second quarter of 2015. Finally, the Technical Services area registered an increase of 6.2%.

Gross profit decreased due to the reduction of revenues, but margin increased from 9.4% to 11%. This is mainly explained by the profit generated in the sale of land of Almonte, positive results in GyM as opposed of negative results in the second quarter of 2015, even though Vial y Vives-DSD and Morelco reported lower results, which is partially offset by lower margins in GMP due to the decline in oil price.

Even though our plan to reduce general expenses throughout the Group is in place, achieving a reduction of general expenses from PEN200 million to PEN187 million. As a percentage of revenues, it has increased from 5.5% to 6.6% due to the lower levels of revenues in the E&C area.

Other operational expenses line reflects the profit from the sale of machinery and equipment higher than in the second quarter of 2015, as well as an extraordinary income in Morelco. As explained in the first quarter, the profit from the sale of investments in subsidiaries reflects the profit from the sale of our 1.64% stake in Transportadora de Gas del Peru, which also has an impact in the income tax due to the reversal of the deferred income tax. Therefore, the operating income increased from PEN163 million to [PEN166] million, taking the margin from 4.1% to 5.8%.

The increase in financial expenses is mainly explained by the increase in the debt assumed to finance our capital contribution in Southern Gas Pipeline project. The participation in associates account registered the profit generated in projects where our subsidiaries have a minority stake and are not consolidated. This number includes mainly the Southern Gas Pipeline stake and the Guyana Project, as well as other minority investments, such as COGA, Chavimochic and Adexus.

During the first semester of 2016, the currency, the soles, appreciated against the US dollar generating a positive impact and a profit of PEN19 million. As a consequence of the results explained above, the net profit of the year was significantly higher than in the second quarter of 2015, going from PEN39 million to PEN104 million, taking the margin from 1.1% to 3.7%. The consolidated EBITDA also increased from PEN360 million to PEN372 million from which 30% is from the Infrastructure area, 24% from the E&C area, 23% from the holding company and the rest from Technical Services and the real estate area.

Turning to page 4. The consolidated backlog of $4.1 billion, plus the recurrent business of $493 million reached a total amount of $4.6 billion in the second quarter of 2016, which represents 2.37 [times] of revenues. The main contracts added during the year were registered in the Technical Services and E&C area. In the Technical Services area, the contracts were services of comprehensive operations for Edelnor for $48 million as well as an electric service contract for Electricaribe for $63 million and two contracts for the service and maintenance of roads in the highlands of Peru for $99 million.

Additionally, in the E&C area, the main contracts awarded were the contracts for the construction of schools in Colombia for $130 million and the expansion of the infrastructure of Metro Line 1 for $123 million. As you may see in the backlog by end market in page 5, the proportion of oil and gas has increased due to the contracts awarded for blocks 3 and 4 in April 2016 as well as to the Southern Gas Pipeline project.

On the other hand, mining projects have reduced from 7% to 1% due to a reduction in mining investment in Peru. It is worth mentioning that mining service contracts are still stable, representing 21% of our backlog.

In page 6, you can see that the total amount of CapEx for the first semester of 2016 has been $103 million. The most relevant investments of the first semester are the equity contribution to the Southern Gas Pipeline and the advance of works of expansion of Norvial's road.

In page 7, we have the composition of the indebtedness of the Group. Consolidated financial gross debt for second quarter of 2016 amounted $827 million, from the total debt $387 million correspond to working capital associated to the clients' accounts receivables and leasings for the acquisition of machinery and equipment. $323 million correspond to the debt of infrastructure projects and $116 million correspond to the financing of the equity contribution of the Southern Gas Pipeline.

The reduction in working capital debt from the first quarter to the second quarter of 2016 was $41 million, mainly from the collections in the E&C and real estate area. The amount of project that maintained the same levels of previous quarter, this is a structured non-recourse debt with guarantees and cash flows from the project. The gross debt to EBITDA ratio for the infrastructure area is 5.33 time, therefore the consolidated gross debt EBITDA ratio for the Group is 3.58 times at the end of second quarter, maintaining a total amount of cash of $171 million.

From the total amount of debt, 55% is denominated in soles and 36% in US dollars. The currency of the debt is related to the currency of the revenues of all the businesses or projects.

Thank you for your attention. We can start now with Q&A.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)

Froylan Mendez, JPMorgan.

Could you give us an update on -- or your longer-term view on the evolution of working capital needs and how can we see it evolving in the mid to longer-term?

And also, the surprise that you got on the backlog that you said increased despite uncertainty, what would you expect going forward? Would you think it would be the sector with more favorable dynamics so that we could see backlog increasingly in that specific sector? Thank you very much.

Would you please repeat the first part of your question regarding the working capital needs?

Yes. I just want to get a sense on what are the initiatives or your outlook for seeing working capital needs evolving going forward?

The main objective of the Company is to review the amount of working capital that of the Group and that will be achieved with a collection of accounts receivables that have been delayed during the last month. So we expect in the future to have a significant reduction in the debt and in the accounts receivables.

Is there like a target you have established or something?

Well, yes, but it's internal and I would prefer not to comment on that.

And about the backlog, yes, let me spend -- the first quarter recurrent, we had new contract for $448 million. Mainly it was service area, it was a strong part. In the second quarter, we get $563 million mainly in Engineering and Construction. And from those, $120 million were the expansion -- was part of the contract of the Line 1 because the construction company has to sign first with a concessionary $120 million contract and also the schools in Colombia. And we have not included total Line 1 because that's in July, but we have already announced the number, it was signed July 11. So the total amount of that contract is -- just for the part of the expansion, not (inaudible) is $410 million and in our backlog, up to today it was included $120 million, so there is an additional $280 million for that contract to be included in the next quarter, plus the remaining of the year.

What is -- as you know, we do not have projections, but I would like to -- if you would like to try to understand, if we have reached an inflection point, if you analyze each at the end of -- each year in the last -- since 2007, the backlog that we have for the next year and you will see there has been increasing that amount until the end of 2014. And from that amount, the total amount, it has been decreasing, the 2015 and 2016. With the numbers that we have today at the end of the year, it seems that it's going to be for the next year. I mean, total number we have plus that I mentioned, we already got in this month. So it seems that 2017 is going to be the inflection point, just using the number that we have up to today. That helps you?

Gabriela Benjamin, Newfoundland Capital.

So I see that you have a lot of debt maturing in the short-term. I was wondering if you guys are in the process of rolling that out for longer maturity or if you plan to pay that down?

And also on the Gasoducto del Sur, how that's going to be financed in terms of equity to debt ratio, and if you think you have to put in additional equity, as well as how much of that debt is now being consolidated here on the balance sheet that you expect to have to account for?

Hi, Gabriela, this is Monica. Regarding the first part of your question, the short-term debt is related to -- the debt, revolving debt, it doesn't mean that all of that debt, that $300 million something debt are due in the first -- in the next 12 months, it needs to be paid, it's revolving, I don't know if I made myself clear with this explanation.

Yes, that's clear. How much, maybe how much is revolving, how much is maturity, that would help.

Well, depending on how much we are able to collect from the accounts receivables, we will be able to pay part of that and the rest will be renewed.

And then on the Gasoducto, the debt to equity ratio and how that's looking?

Gasoducto, almost all of the equity that we have to put we have it already in the place or in our cash, in our -- we have $171 million cash in our Company. So the remaining part is recurrent, because we don't know because it depends on the new partner because what we already -- what we agree at the beginning is already in the -- we already put all the money there. And since we have only 20%, we do not consolidate that debt.

Now, the total amount of the debt of that project is going to be almost $4.2 billion and that is what -- we call that the financial closing, that is in the standby until Odebrecht sells the whole -- not only their shares, but the EPC part and that's where we are today. In the last week, we have a very important meeting with some of the new [portfolio] owners and the banks and the banks provided very good indications of their willingness to finance the deal as soon as this process of selling is finished. But we will never -- going to consolidate that debt.

But will you co-guarantee the debt or is this just going to be in the project level?

No, it will be at the project level. (multiple speakers).

And you won't give any guarantees?

We will provide guarantees until completion, but then it will be a project finance debt.

(Operator Instructions) Javier Martinez, Morgan Stanley.

I know you don't like to give guidance on margins, but I wonder if you could elaborate a little bit on the E&C business on the portfolio you have in the backlog, how is the mix of that E&C business that you're going to be accounting in the next couple of years? So does the mix change (inaudible) would you have been accounting in the last year, is that mix change an indication of potential evolution of margin? So is there anything new, let's say, in terms of mix in E&C or we should expect something similar to what we saw in terms of mix last one year or two years? Thank you.

No, the mix has changed. The backlog is the best indicator of the mix. And there are in page -- in the presentation, in page 5, you can see on the top left, there is a backlog by end market. And the inside circle is for the last year, the second quarter, and the outside circle is the backlog at this quarter. Now the big change there is in E&C, and in the project [territories] because of the new fields of oil and gas and because of the projects of the Gasoducto del Sur.

Now, what may change is besides the infrastructure project is that the amount may change, the amount of work that we may able to take from Gasoducto Sur to the fact that the EPC is going to change. But we cannot tell you today how much that is because it depends on the new owners.

And also, talking about the commercial part, what is important and we are waiting for the new government to decide is how fast they are going to be able to approve the projects that we have been for a long time waiting to be approved. And that's the key part, and we are really expecting that to be an important boost in revenues for the next years.

Mario, thank you for the answer, but correct me if I'm wrong, that chart you mentioned is the consolidated backlog, no? I was specifically worried or concerned or looking at Engineering and Construction margins, and I'm trying to see if the evolution of E&C, not the consolidated, but only the E&C backlog can give us any suggestion of the mix of that backlog, the evolution of the mix of that backlog can give us a suggestion of where might -- so my question is, if you would have to spend in a simple way, the E&C backlog, the evolution of that backlog coming from the last year, moving into the next year, it's more civil work, it's more real estate, it's more of mining project, so this kind of -- so what is -- how would you characterize that evolution coming from the back and moving into future? Because, yes, that may give an indication of how that mix may impact margins, correct?

You're right. Talking only about E&C, there are two things about E&C. One is that I mentioned a few minutes ago in the previous answer, that the amount of contracts are turning again in the amount -- in E&C are increasing, the amount of contract since 2014, that was the peak, okay? Now, we have seen it for the first time that is increasing for the next year.

The second part of the question is how risky is this type of contract? Besides the risk of GSP, the Gasoducto del Sur, that is a very special one not because of construction but because of delays, because of the new owners coming into the project, that's the risk. We believe it's a lot less riskier than in the past.

Now, we have a lot less -- a less concentration beside the GSP in the backlog. It is a very, I would say, well spread backlog. The big problem is if you are looking for problems and not the potential, but the problem is Chile. Chile is very low in activities today, in all the companies, Chile is with very low activity. Peru, we feel in Peru that is coming very strong and Colombia is also, we're feeling -- commercially speaking, some (inaudible) Chile is not the case, is a lot lower. Now, to summarize, in general terms we see 2017 -- because of the backlog in the projects increasing and we risk here -- it's more risk (inaudible) in general terms in E&C.

[Andrea Padilla], Andino Asset Management.

Hi, this is Carlos Rojas. You almost answered part of my questions, but I still have couple. One related to Gasoducto is in the press have been a lot of news, a lot of rumors and also was it that almost 30% of the Gasoducto has already been constructed, and now everything is stalled. In the worst case scenario, imagine this takes between three and six months, how much money we should be expecting as expenses for Grana y Montero balance sheet, if everything takes time to finish? That is my first question.

And the other one is about Javier Prado, if you already give up on that project or still on the future projects for the Company?

Carlos, Mario speaking. I was smiling on -- about Javier Prado, no we're not going to give up. No, of course we have to wait a new Minister of Economy to come and we believe this project is going to be -- now we are very positive with this project more than ever, okay? Maybe we are (inaudible) I don't know, maybe we are too positive, but today has very strong possibilities of that project to be (inaudible) possibility. We have done everything, but we have to wait for a new (technical difficulty) we were involved (inaudible) was awarded and also because the bank suggests us to be a part of the old (inaudible) and partners -- to bring new partners. The problems there, now that (inaudible) that we have been doing it, the bank, slowly, step by step and that made it slower because at the beginning, they only had to sell a small percentage that they sold to us, then they have to sell a bigger -- then they have to sell a large percentage of the EPC, and then at the end they have to sell everything. So that scenario made it longer.

What was good about that is that they received six indication of six different groups indicating interest, they received non-binding of six and then they received -- they make a short list and then received three groups that are very strong, and we are working with some of them, now again still Odebrecht running the book, so we have to maintain their pace, no? They are the ones that are running the base, but the banks of the bridge has also something to do and they have some chronogram. So we believe, and we have also received indications from New York last week that the banks of the bigger loan wants to do a fast track process. So we believe it's not going to be that long, but anyhow, for the project, our plan is to have it financed before the end of the year, let's say, October.

Alejandro Guinassi, Habitat.

I had two quick questions, the first one is regarding the financing, and how do you -- the cash flow from the transfer (inaudible) company, when is the down payment? I know the trains and the [balance] arrive between 18 months to 24 months in Peru. So how are you supposed to be able to pay them?

And second one, if you could please give us an update on Cuartel San Martin project, what's the status on that project is? Thank you.

The financing for Line 1 is already underway, the government is going to pay an advanced payment that may come tomorrow and next they will pay the -- with the same money to the (inaudible) and then we will have (inaudible) related to the total amount, a small financing that is due -- it's already in the process, it's not the money that affect us, because that contract is designed in a way that it's not much of our financing, in a way they are paying to us according to the advance of the project and the payment that we have to do to the trains.

So that Line 1 is not going to be a burden in our case, even though some [months] will have a financial debt increase, it will be (inaudible) the contract in a way that we do not have to assume a financial risk. Cuartel San Martin is one of those projects that -- not to (inaudible) but is amazing. Now it's -- every month I ask the same question to the general manager of the area, how is Cuartel San Martin doing the final approval and he says to me, in the next two weeks they have promised us that they will approve the final review. It is already almost more than five years in approval. It is something that has to change and thus it is -- it's not the government, it's the municipality.

The last problem that we have -- the last two problems that we have is that they changed the (inaudible) area twice. So they have to [paint] the whole thing again for that. And again, I'm going to tell you the same answer that Rolando told me in my Board meeting that was four days ago, in two weeks we'll have it. So you may laugh, but that's the case, okay? I cannot -- when it's going to be approved by the municipality of Lima, okay? Unfortunately.

(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 very much. Even though revenues has decreased, we have been able to stabilize margins of the Group as a whole, having get to improve in some areas. We'll continue on the operational improvement and the reduction of the working capital debt. As we have mentioned, our backlog, the recurrent business has increased, giving us an indication that we may be reaching an inflection point in 2017.

And I would like to thank you everybody for attending this conference, and all the Peruvians that may be on holidays have a nice 28 of July. Thank you very much.

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.