Aenza SAA (AENZ) 2016 Q3 法說會逐字稿

Good afternoon, and welcome to Grupo Grana y Montero's third quarter 2016 conference call. This afternoon, the senior management team of Grupo Grana y Montero will discuss the Company's third quarter 2016 consolidated results for the press release distributed on October 25, 2016.

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 would now like to 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 vary -- may differ materially. We ask that you refer to the disclaimer as a guidance to these matters.

It's now my pleasure to introduce Mr. Mario Alvarado, Chief Executive Officer of Grupo Grana y Montero, for this presentation. Mr. Alvarado, please go ahead, sir.

Thank you, and good afternoon, everyone, and welcome to Grupo Grana y Montero's third quarter 2016 conference call. Thanks for joining us, and for your interest in the Company.

I will start by mentioning the most important remarks on the third quarter of the year. Regarding the new government, and the fact that they have no majority in the congress, I would like to mention that for the first time in many years we have a congress who is actually doing its role professionally, and this has been acknowledged by many political analysts through several press articles. We hope this will continue.

Regarding our results, this quarter we have added a total of $500 million in new contracts, being the most relevant -- Linea Amarilla contract for $136 million; execution of a transmission line in Colombia for $149 million; as well as the addition of $81 million due to the consolidation of Adexus, among others.

Even though there is a government willingness to speed up the approval process of projects, at the end, it's hard to do it. So, we are not foreseeing an increase in private and public investment in the short term.

As Monica will explain shortly, our revenues have decreased by 25% compared to the third quarter of 2015; but as we have also mentioned in the past conference calls, we have worked very hard to recover our profitability, reaching an operating margin of 5.6% and an EBITDA margin of 13.9%. However, what is -- it is even more important is that we have been able to achieve a backlog that record revenues of $4.7 billion at the end of this quarter, which is the highest in our history. All this give us a very positive expectations of 2017.

In the past conference call, we mentioned that there were three offers to purchase (inaudible) participation in Gasoducto Sur Peruano, in the EPC contract. As of today, the negotiations are advancing with one of them. However, we cannot provide more details due to our non-disclosure agreement.

Now, I will turn the call to Monica for financial results.

Thank you, Mario. The decrease of 25% in consolidated revenues from the third quarter of 2015 to the third quarter of 2016 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 have maintained similar levels, the oil price was lower than in the third quarter of 2015, impacting the amount of revenues. Also, the maintenance works in Survial 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 third quarter of 2015.

Finally, the technical service area registered an increase of 18%, mainly explained by the subsidiary CAM and the consolidation of Adexus since August 2016.

Gross profit decreased due to the reduction of revenues, but margin increased from 8.3% to 10.6%. This is mainly explained by the profit generated in the sales of land of Almonte, better result in GyM, 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. In addition, the technical service area reported better results during the period.

Even though a plan to reduce general expenses throughout the Group is in place, achieving a reduction of general expenses from PEN296 million to PEN289 million, as a percentage of revenues it has increased from 5.3% to 6.8%, due to the lower levels of revenues in the E&C area. Other operational expenses line reflects the profit from the sale of machinery equipment higher than in the third quarter of 2015, as well as an adjustment in the acquisition price of Morelco and reversion of provisions; and also, the extraordinary income from the agreement reached in [COGA] (inaudible) project.

As explained in the first quarter, the first -- the profit from 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 PEN181 million to PEN239 million, which -- with margins improving from 3.2% to 5.6%.

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 associate accounts register the profit generated in projects where our subsidiaries have a minority stake and are not consolidated. This number includes mainly the South Gas Pipeline stake and the Guyana Project as well as other minority investments such as COGA or Chavimochic.

During the year, the sol has maintained relatively stable. Therefore, the exchange difference for the period was PEN4 million.

As a consequence of the results explained above, the net profit of the year was significantly higher than in the third quarter of 2015, going from PEN7 million to PEN137 million, improving margins from almost 0% to 3.3%. The consolidated EBITDA increased from PEN481 million to PEN587 million, reaching a margin of 13.9%, better than previous quarters, in line with the better results explained above.

Turning to the next page, the consolidated backlog of $4.2 billion, plus the recurring businesses of $529 million, reached a total amount of $4.7 billion in the third quarter of 2016, which represents 2.65 [years] of revenues.

The main contracts added during the year were registered in the technical services and in the E&C area. In the technical service area, the contracts were services for Edelnor for $48 million, as well as an electric service contract for Electricaribe for $63 million; two contracts for the service and maintenance of roads in the highlands of Peru for $99 million; and $81 million of backlog from Adexus.

Additionally, in the E&C area, the main contracts awarded were the contract for the construction of schools in Colombia for $130 million and the expansion of the infrastructure of Metro Line 1 for $123 million, the construction of a transmission line in Colombia, and the construction of the remaining of the Linea Amarilla, a northern road in Lima.

In the backlog by end market, the oil and gas sector represents 36%, which includes the contracts for blocks 3 and 4 as well as the Southern Gas Pipeline project. On the other hand, mining projects represent only 1% of the total amount of backlog, due to a reduction in mining investment in Peru.

Turning to the next page in the presentation, the total amount of CapEx as of September 2016 was $170 million. The most relevant investments of this period are the equity contributions to the Southern Gas Pipeline and the advance of work of the expansion of Norvial road.

Consolidated financial gross debt for the third quarter of 2016 amounted $880 million. From the total debt, $396 million corresponds to working capital associated to the clients' accounts receivable, and leasings for the acquisition of machinery and equipment. $337 million corresponds to the debt of infrastructure projects, and $146 million corresponds to the financing of the equity contribution of the Southern Gas Pipeline.

The reduction in working capital from the first quarter to the third quarter of 2016 was $25 million, mainly from collections in the E&C and real estate areas, which was partially offset by the consolidation of the debt of Adexus.

The amount of project debt has maintained the same levels as previous quarter. This is a structured non-recourse debt with guarantees and cash flows from the project. The gross debt/EBITDA ratio for the infrastructure area is 5.88 times. Therefore, the consolidated gross debt/EBITDA ratio for the Group is 3.5 times at the end of the third quarter, maintaining a total amount of cash of $204 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 the businesses or projects.

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

(Operator Instructions) Cesar Perez-Novoa from BTG Pactual.

Congratulations for the results. My question refers to Mario's initial statement, where you wouldn't see any significant push in terms of projects for -- from -- on behalf of the government in the short term; but when would you think that you'll see a visible push, and hopefully reflected within the financial statements of Grana y Montero? Thank you.

So, it's important to understand, analyzing our backlog, that it seems, using any ratio, that 2017 already is going to be a very strong year, independently of the new projects that the government are going to put in place. Our comment is in general terms of the whole economy, not in our projects, because our projects are going okay.

The government is doing some reorganization of project (inaudible). They already have defined who is going to run that. And that -- the reorganization is going to take a little bit of time. So, the process for those projects are going to take some months. That is very logical. To -- [in any changes], if you change your organization, it's going to take time for that.

Now, our expectation is that in [fact we'll] start seeing an increase in private and public investments in the first quarter of [last] year. (inaudible) Colombia as a whole, not the specific projects. That's what our Board thinks that is going to happen. We have some economists in our Boards that -- there are speculations that that's going to be the case.

All right, Mario. Thank you. Understood. And if I may, are you seeing any anecdotic evidence of a pickup in mining investment, considering that the large expansions have already been made, and some companies in Peru are starting to talk about doing greenfield and brownfield projects? Perhaps not in the extensure or the size of, let's say, Cerro Verde; but are you seeing some discussion? Are you seeing -- feeling that news flow coming on your side?

Yes. Especially all the projects that has a relation within gold. When they have some gold in -- or an important part, or as a percentage of the production, those are the ones that are already start talking, doing some (inaudible) budgeting (inaudible). And they are not, as you mentioned, the big ones, but the middle-size mining.

All right. Thank you very much, gentlemen. Thank you.

(Operator Instructions) [Lucia Perez], Credicorp.

I was wondering what is missing for -- in the project of Gasoducto Sur Peruano for the transaction with Sempra to close. And after that, how long does it take, approximately, to get the financial closing done, to have a little view on the timing?

And another -- my other question is, how is the real estate going in Viva GyM?

About the first question, I really cannot answer that. If you have read in the papers, there are many comments about that, and always are quoting the comment regarding somebody that is knowing this because of that financing, or something like that. We have not talked about that place, and we are not going to do that. We have a very strong non-disclosure agreement. And so, we -- I would like you to accept that. No? That I cannot comment on that. But there are a lot of information in the press that you can (inaudible).

And other -- about the real estate, we have seen -- let me explain a little bit. We register the sales when we deliver. Meaning, by packages. Okay? The actual way to see that is, how many do we sell by month, that was registered in the financial, because we cannot, until we deliver the --

The units.

The units. What we are seeing is that it is becoming an increase month by month in the amount of units actually sold. At the beginning, I believe we comment that in the first quarter, that we -- with the information that we have, we couldn't say that it was a tendency. Today, we believe that, with the information we have as to this quarter, that there is a tendency that the real estate is start to move. There is an increase in the amount of units actually sold every month, that continues for the last -- in the whole year.

Andrea Padilla, Andino Asset Management.

This is Carlos Rojas for you. I have three small questions. First, I know you cannot talk about the Gasoducto. I have only one question with that. And it's, if we go until year end and there is no closing, are you going to start provisioning some of your investments there? That is my first question.

The second one is, you can have an update about the hotel in Larcomar, Javier Prado, Cuartel de San Martin -- you can give us a little bit of sense of where you're standing in those?

And the last one is about the receivables. Do you have any politics about provisioning some of those?

Okay. Let -- would you repeat me the first question?

Yes. If we -- and --

(inaudible)

Okay. No. We are not going to -- let me explain how it works, about the contract. If you multiply the amount that, if the contract is cancelled, and you deduct the debt, and then multiply the amount that the government has to pay to (inaudible) that is 72.5% of the value -- the accounting value. Then it's enough to pay us the whole equity that we have put. So, in those -- if that's the scenario, we only will have a problem of the timing of collecting the amount.

Okay.

Of course, that is going against -- that loss is going against the one that has generate the problem, that is -- that's the one that is selling today. No?

Okay.

So, that's -- so we don't need to do that, in that scenario.

Second, the hotel -- we are going -- we already did the first part, that is (inaudible) the highway that -- in front, we have already move it. So, we have more space for the construction to begin, and we'll start it very soon. We are trying to close the financing before starting. And then, when this finish the hotel, we'll move back the highway that is in front. Okay? And --

Okay.

And what other (inaudible) -- the other that is coming -- the [provisioning] is Via Expresa Sur, that we have to start paying the (inaudible)?

Appropriations.

The appropriations. And we already have, already, the credit lines, and we are closing with a partner, and for a percentage that will come with us.

Okay.

We believe that will start before the end of the year. Okay? The Javier Prado is going to be a little bit with some delay, because the -- as we mentioned (inaudible) the last call, the study that has decided where the Metro Line number 4 is going to go has decided to go through the higher (inaudible).

So, we have -- we are -- because that's part of the contract, we are coordinating with them the solution for them to do that. Then we have to go to the board of the (inaudible) finance. Okay? So, the [Javier Prado] is again the project that is always -- they're late. Okay?

And about the receivables, and Monica will --

Cuartel de San Martin?

The receivables -- Monica is going to comment that.

In the case of the receivables, yes, we have a policy. And what we do is review it periodically, and if we see if there is going to be a possible write-off of -- or, problems with any of those accounts, we will then register a provision. No?

Thank you.

Adrian Huerta, JPMorgan.

Thank you for the call. My question has to do with the E&C business. We've seen a sharp deceleration on revenues while the value hasn't really changed much on this segment. It has remained around $3 billion in the last 3 quarters, but generating around PEN800 million, PEN850 million, each of the last 2 quarters.

When are we going to start seeing a pickup on revenues on the E&C, and where do you think, given the budget that you have, what could be the level of revenues for -- versus this year, for next year, on this division? Thanks.

Okay. As we -- the best way to do it is look at the report, at the backlog on that area -- engineering and construction -- and the amount that is already contracted for the next year. That is $1.1 billion. That is already bigger than the number that we are having this year. Yes?

Now, from that, our feeling is that Peru is going to become stronger than Colombia and Chile. Second place in Colombia and Chile is kind of late on the project. Even though we have assigned a couple of projects there, it is still very -- the amount of work there is very small, compared what it used to be. Now, next year is going to be a strong year for engineering and construction. That's our feeling.

Thank you, Mario.

(Operator Instructions) Francisco Suarez, Scotiabank.

Thank you for the call. The questions that I have are twofold. On one hand, what are your views on funding currently? How do you think that things have worked much more favorable in terms of potential availability for you and your projects in funding in general, after the election?

And secondly, and on the follow-up question on Adrian's -- and it relates more with the profitability on the E&C business -- can you discuss a little bit of what are your expectations in gross margins on the E&C business, on the new set of backlog for next year? Thank you very much.

Yes. Now, the funding -- what we are seeing is that it's not a problem. Just to put an example, we ask a few -- one or two month ago, to finance the expansion of the line -- the Metro de Lima Line 1 -- and it was a complex financing, because it has many different ways to finance is done by (inaudible) credit; working capital; many different activities.

And we called five banks. And actually, 23 banks called us to do proposals. They wanted to bid for the project (inaudible). We were really impressed by the amount of banks, internationally -- banks, and local banks, that were interested in that -- in -- to finance.

And that's what we are seeing in the project -- that the funding is not going to be a real issue. Not only in terms of debt, but also in terms of equity if we [require] by project. We are receiving a lot of people that are interested to invest, especially in infrastructure, where it will require a lot of capital.

And about the profitability, as you know, we never make any projections. But let me try to put it this way. We have analyzed, from our backlog for the next year and the level of risk of the projects that we have already on hand -- E&C, project by project -- to try to understand in what level of risk we are, and if we feel confident that we are going to be in a more comfortable situation with those projects.

So, we already passed the process -- the big situation of risk projects with a lot of contingencies. And now, our view is going to -- is that the market is -- not the market; our position in the market is better than in the past. Okay? So, we feel comfortable about the profitability of the backlog that we have today on E&C area.

Interesting. So, is it fair to state that you are going to be -- because of your position, you are going to be a little bit more selective on the projects that you may be engaging with?

We already have been a lot more selective of those projects.

Interesting. Good to hear.

Yes. And of course, there are a lot of things in the table, in order to be able to do that. No?

Yes.

And we already have reduced the size of that area very strongly, and to be able to selective. Okay? And so, we decided that, and we implement it, and we have reporting, and that's why the results today are what we have. No? And we don't have any big pressure today to take a project. And that's -- provides us a lot of the freedom to be selective.

Very interesting. And just returning very quickly to the funding question, you mentioned something very interesting -- that, if I understood correctly, it seems that from the banks' perspective, not only they are more willing to lend you, and be willing to be adding exposure to your projects, but it seems that the relationship between debt and equity in general -- because we cannot speak on every single project about that, but in general -- it seems that that is more favorable, I guess. Is that correct?

Yes. It is correct. Our feeling is that that cost of debt and the amount of debt -- they are competitive, [of] that market, is going to be very strong.

Very clear. Thank you so much.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mario Alvarado for any closing remarks.

Thank you very much. I will repeat what we said in the last conference call; and that is that, even though revenues have decreased, we have been able to stabilize margins of the Group as a whole, having yet to improve in some areas. We will continue on the operational improvements and the reduction of the working capital debt, as we have mentioned. And our backlog plus current business has increased, even as an indication that we may be reaching an inflexion point in 2017. Thank you very much.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.