Aenza SAA (AENZ) 2017 Q2 法說會逐字稿

Good day, and welcome to the Graña y Montero conference call and webcast. (Operator Instructions) I would now like to turn the conference over to Luis Diaz, CEO. Please go ahead.

Thank you. Good afternoon to all of you, and thank you for attending this conference call. The conference today will go as follows: first, I would like to point out some of the most important figures of our first semester and subsequently the actions that we have implemented to improve the group's financial strength and good corporate governance practices. Later, Monica Miloslavich, our CFO, will explain the group's results in detail. Finally, we will hold a Q&A session.

Regarding our main results, during the first semester, we have reached a net profit of PEN 148.7 million, which represents an increase of 41.7% compared to the second quarter of last year. As of June 2017, revenues reached PEN 2,847 million, representing an increase of 1.7% over the first semester of 2016 while the backlog plus recurring businesses reached PEN 3,197 million. The decrease in backlog is partly due to the $110 million deducted as a consequence of the sale of our IT business and also to the decline in the sector dynamism. Moreover, the group totals consolidated debt at the end of the first semester 2017 was $875 million, representing a reduction of 19% compared to the end of 2016. Likewise, consistent with what we have already announced in the last month. So far, the sale of assets has reached $192.7 million.

We have sold Cuartel San Martin project, our stake in PRINSUR, Red Eagle Mining Corporation in COGA and our IT subsidiaries in Perú. It is important to note that all these assets have been sold at market value, generating a significant profit for the business. We would also like to inform that on June 27, 2017, the group closed all the agreements with its financial creditors and established payment terms until 2020 and the debt generated by the completion of Gasoducto Sur Peruano. We have signed a medium-term loan agreement with a group of 4 international banks for USD 78.7 million in order to meet the outstanding balance of the initial $129 million corporate guarantee that we assumed in January 2017. Also, we signed an addendum to the medium-term syndicated loan disbursed in December 2015 with Credit Suisse for $150 million, which balance today is $104 million. In that sense, the 2 final agreements due within 3 years with a mandatory payment of 40% at the end of the first year and an additional 30% at the end of the second year.

As we said before, the debt generated by the termination of Gasoducto Sur Peruano reached $331 million and today, the balance is of $204 million, which represents a reduction of 38%. That being said, we have concluded the process of refinancing the obligations generated by the termination of this project and thereby the company's commitment to comply with its obligations have been reaffirmed. Regarding the credit lines of UIM, our construction company, I would like to announce that before the Peruvian holidays, we will sign a syndicated line agreement with our main bank, which will assure the working capital of $162 million and future $100 million needed to execute the backlog and continue constructing in the future.

In reference to the issuance of the 2016 audited financial statements, we estimate that the audit will be completed by August 14, 2017, within the terms agreed with both, the SMD and the SEC. Furthermore, as announced in the board's manifesto, parallel to the normal development of the business, the company continues to enforce -- reinforcing of practices of good corporate governance and compliance. Among these measures, it should be noted that the internal investigation is still ongoing. It has been thorough and more than 250,000 documents have been already analyzed. As of today, there is no evidence to conclude that we were aware of or participated in these illicit payments in the projects with Odebrecht. If at some point of time the investigation concluded the contrary, the board will take the necessary legal actions. On the other hand, the board is currently working on the design of the new advisory council, which will be composed of prestigious experts in the best practices of corporate governance. In addition, since July 1, Fernando Dyer has been appointed as the new corporate officer of the risk and compliance area who will report to the risk compliance and sustainability committee of our board. His main function will be to oversee the corporate compliance program, particularly, ethics, conduct and anticorruption policies.

We have signed an agreement with International Anticorruption Academy, the IACA, created by the United Nations to train group executives in the prevention, detection and mitigation of fraud and corruption. In this sense, we have started the training of our employees with emphasis on the directors and officers regarding anticorruption programs. We are reviewing our policies in all kinds of partnerships with other companies, reinforcing our controls in the process of public contracting with the government and putting in place a new policy of relationship with suppliers, customers and citizens. Regarding the 2 CB lawsuits filed in the first quarter of 2017 in the United States Federal Courts, we would like to mention that this collective actions were consolidated into one, and we are waiting for the lead plaintiff approval.

We believe that we will have solid defense against the lawsuits filed and will defend ourselves vigorously. Now I would like to give the floor to Monica Miloslavich, who will explain the results of the group in the first semester of this year.

Thank you, Luis. Please turn the page to Page 7 of the presentation. The total amount of revenue for the second quarter of 2017 increased 1.7%, mainly explained by higher revenues in technical service area, due to the consolidation of Adexus and also to -- due to an increase in the real estate area explained by the sale of Cuartel San Martin in the first quarter of 2017 as well as the higher number of units delivered during this semester. On the other hand, the lower revenues registered in the Engineering & Construction area are explained by the fewer works under execution with GYM, the (inaudible) in Chile and Morelco, Columbia as well as lower sales in (inaudible) GYM. Also in the construction area, revenues reduced in Norvial, due to lower levels of work under execution compared to the previous year and due to completion of some projects during the second quarter of 2016. This is partially offset by an increase in revenues in GMP, due to the increase in price, oil and production.

Gross profit increased 17.4%, and the gross margin increased from 11% to 12.6%. The results are explained by better results in the Engineering & Construction area, reflecting more stable margins in this area and an increase of margins in the Infrastructure area due to increase in the oil price. In addition, in the real estate area, the sale of Cuartel San Martin contributed to the improvement of the consolidated gross margin. Administrative expenses for the second quarter of 2017 increased by 2.9% compared to the second quarter of 2016, explained by the incorporation of Adexus as of August 2016, which was partially offset by the reduction of general expenses in the Engineering & Construction area.

The profit from the sale of investments and subsidiaries as of the second quarter of 2017 includes the sale of Red Eagle Mining Corporation, PRINSUR, COGA and GMP. Conferred to the profit from the sale of our 1.64% stake in Transportadora de Gas del Perú in 2016. The increase in financial expenses is mainly explained by the increase in debt related to the obligations assumed by the company as a consequence of the termination of Southern Gas Pipeline project.

The participation in associates accounts registered a profit generated in projects where our subsidiaries have a minority stake and they are not consolidated. In the second quarter of 2017, this includes the participation in the minority investments in Chavimochic. And in the second quarter of 2016, the participation in Chavimochic, COGA, Adexus and the project Southern Gas Pipeline, which was offset as of December 2016, due to the termination of the project. As a consequence of the results explained above, the net profit of the year was higher than in the second quarter of 2016, increasing from PEN 104 million to PEN 148 million, generating an improvement of margins from 3.7% to 5.2%. The consolidated adjusted EBITDA increased from PEN 372 million to PEN 555 million, reaching a margin of 19.5%, in line with a better operating results explained above.

In the next page of the presentation, the consolidated backlog of $2.6 billion, plus our recurring businesses of $596 million, reached a total amount of $3.2 billion in the second quarter of 2017, which represents 1.63 years of revenues. Even though during the last month, there has been a slowdown in the economy in Peru, the company has been able to add some new orders and additional work. The main contracts awarded during the first 6 months of the year are: the Toca Pala project, (inaudible) (inaudible) mall, and the contract of maintenance of the airport and road (inaudible).

The backlog of the company is diversified in difference in-markets: 25% in the oil and gas sector, 23% in contract mining, and transportation, 26%. 77% of the backlog is located in Peru, and 74% of the backlog is not related to construction.

Consolidated financial debt for the second quarter of 2017 reached an amount of $853 million, plus the commercial debt associated to the execution of the performance bond of GSP project with CHUBB of $21.6 million, amounted $874 million of debt. From the total amount of debt, $344 million for response to working capital debt associated to clients' account receivables and leasing for the acquisition of machinery and equipment. $335 million corresponds to the debt of infrastructure project and $195 million corresponds to obligations assumed by the company as a consequence of the termination of GSP project.

The gross debt-to-EBITDA of the infrastructure area is 3.2x, of that is structured as project of finance debt with its own guarantees and cash. The gross debt-to-EBITDA of the working capital debt has reduced from 4.16 at the end of 2016 to 3.52 as of June 2017. As a consequence, the consolidated gross debt-to-EBITDA of the group is 3.63x at the end of the second quarter of 2017, maintaining a total amount of cash of $176 million. Thank you for your attention. We can start now with the Q&A session.

(Operator Instructions) Our first question comes from Jackie Espinoza from Profuturo.

I have two questions. One, regarding what are you going to do with these reconstruction program? Are you going to be part of it? And how are you going to finance it? And then about your infrastructure priority have going on, how are you going to finance these given your customer chain?

Can you repeat me the second question, please? First one was for construction but which one is the second one?

The other was regarding the infrastructure projects you have now, like, the Line 1, the Metro Line 1. How you going to finance the subsequent investments you have made in order to make the expansions that the project requires?

Okay. Let me may be begin with the second question, okay? We have not announced it fully as of today. But we have already reached an agreement with one bank for closing the financing of the expansion of Line 1, okay? This probably will be confirmed within the next 30 days. We are finalizing all documents and a final warranty that will be included in that credit line. We have also take knowledge that there is a second bank which will be part of that credit facility that will be part of the syndication issued by the lead bank, okay? And we expect to close up financing within the next 30 days, okay? So that will, in general terms, secure all the money that we'll need to conclude the expansion of the Line 1 project, which is for total of $400 million.

In general terms, the other project that was in our pipeline -- the other 2 projects that we have in our pipeline to complete investment during this year was the conclusion of the expansion of -- excuse me, the second tranche of Norvial, which has been already been finalized, we have already issued bonds last year to complete the financing of that project. That project is currently delayed because of, essentially, expropriation and a minor portion of the project that needs to be concluded. But the financing has been already been secured, okay? And in the case of (inaudible), which is the extension of (inaudible), there has been a delay in the start of the expropriations and we expect to begin those expropriations early next year. For that time, we expect to have completed the reduction in our indebtedness as we have already planned for the year, and we will be able to complete the equity and the financing for that project.

In relationship with the reconstruction program, we have -- as we have said before, Graña y Montero will participate in all the projects where we feel that we are competitive and where we can add value to our customers. In that sense, if the projects under in the process of the reconstruction suits these criteria, we will participate in these criteria. Being construct, they should not require more than the regular working capital lines that needs for any construction contract that as I have mentioned during my speech. We have already secured credit line for construction that will help us in the event we participate in these projects.

Our next question come from Joseville Dia with Integra.

I have three questions. The first one is, do you have a date to release the audited financial statements? I mean, I don't know, if you have an actual date or an approximate date, it would be very useful for us to know it. The second one is, excluding the sale of assets, how much would be the debt-to-EBITDA ratio for this quarter? And finally, how do you see the outlook of your revenues for the rest of the year and the next year? Because if the current ratio backlog to revenue is comfortable for you or not?

Okay, give me one second. In terms of the publication of the financial audits of 2016 as I have said during the beginning of the call, we are confident that we will issue this financial statement no later than August 14 and this will be under the terms that we have agreed with SMV and the SEC, okay? That's the first question. In terms of the backlog, you are right, probably this is the smallest backlog to activity ratio that we have, okay? So we have to understand 2 things: we have sold our IT business, which comes with a reduction in the backlog that is a -- as I said, around $110 million. And also we have to understand that because of all the El Niño impact in Peru and all the situation linked to (inaudible), there is -- most of the projects have been already paralyzed and therefore there is a reduction in the dynamism of the sector. However, we are confident that with the current backlog that we have, we have work enough in order to have very good figures for the second semester and also to have an important backlog to begin our outlook of 2018. In terms of debt-to-EBITDA ratio, without the sales of assets, this ratio will go to 3.15x and this has been calculated.

The total amount -- the total debt during you will see there.

Yes, okay. What we have done is, we have deducted the GSP debt, okay? And we have deducted the EBITDA generated by the sale of the assets.

Okay, 3.1x, right?

3.1x. Correct.

Our next question comes from Adrian Huerta with JPMorgan.

My question has to do with the potential new backlog on the ENC business. What are the type of project that you are trying to get over the next 12, 18 months in terms of the type of contract margins and required financing? And within those parameters, how much new backlog you think you can get over the next 12 months?

As you know, we do not -- we are not able to disclose projections or we do not provide guidance in terms of contracting or revenues in general term. We only base our calls and questions only on the public information that we release as of today.

However, what I can tell you is that we have been providing quotations for private customers and our regular clients in the ENC business without any situations. Again, we feel that this is more a situation of the dynamism of the region, of the construction in the region, okay? However, I can also tell you that we have been actively participating not only in Peru but also in Chile, where we are starting to feel that the dynamics of the construction are improving earlier than it has been happening in Peru, okay? So we are confident that if we keep providing our quotations to our customers, I hope that within the next months, we can start delivering news regarding new contracts.

And what is the value of those projects that you have been bidding for these to waiting for an answer?

They are dependent on the sector. We have been providing quotations for energy, we have been providing quotations of mining projects, we have also been providing quotations for real estate and buildings, but amounts change depending on the project and on the client. They are in the size and in the terms that we have usually been tendering in the past.

But can you share with us the amount of the total of those projects that you have been bidding for or you're waiting for a response? I mean just to get a rough idea of the size of total projects you're targeting to get in terms of new backlog for the next 12 months?

I do not have it at this time a figure that I can reveal to you and I don't want to give you a number that is completely out of line in this moment. But in general terms, again, we have been -- we continue providing quotations for (inaudible) and the size of the projects are the projects that we are -- have been invited or the projects that are currently in the market. Most of the projects that we are tendering are projects that are in the sectors that I have revealed, okay? Public and well known.

Our next question come from Francisco Suarez with Scotiabank.

Can you walk me through the changes that I saw in the backlog -- in the structure of backlog that you're reporting for the first quarter of this year. Specifically, last quarter you reported roughly losing something like a $119 million in backlog on -- dilutions to the backlog on that quarter at the level of Klimt. But now this quarter you are reporting, actually, that the losses are lower, roughly at $84 million. So if you can drive me a little bit through, one, the changes on that specific line? And also going forward with additions that we are seeing in this backlog, if you can walk us to the type of contracts that you are adding to your backlog and if you can think that the overall recovery in gross margins that we saw at this division can actually be sustained going forward? And I still have a second question, if I may afterwards.

Okay, so first let's go to the backlog report. So you are comparing what we report at the new request in the first quarter to the second quarter, is that right?

Exactly. I mean, the basically you reported dilutions on backlog at the level of Klimt of roughly $119 million in the first quarter, but now in the second quarter, those dilutions are actually lower, it's roughly $84 million that catch my attention. There a lot of changes in that particular backlog.

Can you repeat the number, please?

Sure. It is in the first quarter of this year, you reported dilutions of roughly $119 million according to that press release and now in the dilutions that we are seeing for the first quarter at the level of Klimt in that appendix, you are posting dilutions of $84 million. So I wanted to understand the nature of the reversal of those losses and, of course, as we mentioned going forward, I would like to see what type of projects are booking now in the second quarter as part of your backlog and if you think that the recovery in gross margins that we have seen can actually be sustainable going forward?

Okay. There is action that we announced for the first quarter of 2017, where in the case of GYM, the exclusion of (inaudible) construction contracts, which is approximately $87 million of backlog and then in recurrent businesses, we deducted in Norvial approximately $97 million of contract that were not signed and should had not been reported as well. Maybe those are the 2 figures that you are mentioning. And then in the second quarter of 2017, where GYM has been able to add some additional work in existing contract and also in the second quarter of 2017, which is approximately $32 million of backlog. So the rest of what you see in GYM is mostly additional work of existing contracts.

In terms of the margins of the contracts, you have to understand that we have put a lot of effort in focusing our management and our people in the projects in executing the best way we can in order to make sure that our clients feel that we are not only able to fulfill, but we are doing our best effort in order to provide them with the quality of the projects. That has also bring some improvements in terms of productivity that are the improvements in margins that you are seeing with the current backlog that we are reporting. There's a reason why you see that in our ENC businesses, our margins are going up.

Great, thank you for that. And secondly, my last question relates with overall funding. It is great to hear that you will be getting these new credit lines for working capital that is very needed. But if I may ask, has the overall conditions of those working capital lines would be deeper in compared to the past in the sense that you might be -- perhaps, the banks may be asking for you to put more equity than before and if you can walk us on through, one, what the overall bearing you may get on the new credit lines for working capital? And secondly, an expectation in overall costs, because for the obvious reasons in connection to the scandals that you have been involved with?

Okay. In general terms, the credit lines that we're working for our ENC business are backed up with assets, okay? Therefore, we are not being requested to put any additional equity in the ENC projects. We have never put equity in ENC in general terms, we put equity, usually, when we go into infrastructure projects or we are investing in real estate, okay? But banks are comfortable with the assets that we are using as security in order to secure the working capital lines and the warrants. Of course, as the situation in the Peruvian market in relationship with construction has tightened because this is not only a situation of that but it's also a situation of the sector, interest rates are going slightly up, okay? And the cost of warranties will be also increasing a little bit. However, this has already been done during the second quarter and the results that we are reporting as of the second quarter include those increases in rates and costs.

Okay, thank you for that. Can you remind me when you might be expected to sign those credit lines?

This week.

Our next question comes from Joseville Dia with Integra.

I have one more question. If we expect more asset sales the rest of the year or for now (inaudible) would be the next year?

No, we have a process where -- as we announce it, we expect to reduce our indebtedness as early as possible. In that sense, we keep our process of selling assets at a faster speed that we can, okay? You should expect some asset sales during the third and fourth quarter. I cannot tell you that by the end of the fourth quarter it will be completed but our expectation is to conclude this process the sooner the better, despite the fact that we have signed refinancing agreements that allow us a longer term. In general terms, as we have said before, we consider 2017 a year where we intend to regain our financial strength and part of regaining that financial strength is completing the process of reducing our indebtedness, especially, linked to the debt that we assume because of the cancellation of the Gasoducto Sur Peruano.

(Operator Instructions) Our next question comes from Carlos (inaudible) with Andino.

I have three questions. The first one goes regarding what Jose said about your sale program. When and if you sell more assets, is that amount of money going directly to pay some debt? Is that something you agreed with the banks? Or you can keep it to have more cash in your hand for new projects? That's my first question. The second one goes into the oil and gas business. When you acquired those fields, there was a significant amount of CapEx to develop in the years to come, I don't know, if you have an update on that, if you were able to negotiate or just something you're starting. And the third question goes on the Gasoducto, supposedly, on January 20 or something ends the first year when the government took over the Gasoducto and that means that according to the contract by that time you should be receiving your $420 million. I don't know if you can have as an update on that. The government already acknowledged how much money they are owing you and where we're standing in that front?

Okay. Regarding the proceeds of the sale of the assets, we can say that our commitment with the banks is that we will be using 100% of the proceeds of the sale of the assets in order to repay the debts first. Once we finalize all the repayment of the debts type linked to Gasoducto Sur Peruano, we are free to use our money the best where we want.

Second, in terms of our oil and gas business, as you correctly mentioned, there's a large investment commitment in Blocks III and IV contracts. I'm pleased to announce that the commitment for year 1 in Block IV has already been completed, satisfactorily, for the government, okay? We are starting the process of investing in the second year of that commitment, okay? The funds coming from the -- for financing that investment program have come from the generation of the oil and gas business, okay? In the case of Block III, because the block was very close to where the El Niño phenomenon impact the region, there was an extension of 12 months linked to that situation, so the investment program will start in October, okay? And we are working with the credit lines and with the situation in order to make sure that we will complete the investment program for the second year and the third year in the case of Block III, satisfactorily, as we have done during this year despite of the financial situation.

In relationship with Gasoducto Sur Peruano, you are correct, the contract says that by January 20, 2018, the contract should have been awarded again for a new concessionary, okay? In general terms, you have to -- I have to revisit something that we said when the cancellation of the contract was done is that our expectation despite that the legal situation of having 1 year in order to collect, what to recover that money later in 2018 or earlier 2019 and that's how it has been disclosed previously in the previous quarter. However, the government is doing a lot of efforts right now in order to start the process of auctioning the new contract, okay? The news that we have right now is that they have appointed an administrator in order to receive the assets that have -- we have executed in the previous concession that was canceled, okay? And now they are finalizing the decision on who will calculate the next accounting value, okay? Which is the reference value that will be used for the auction of the assets in the new contract, okay? We have seen the Ministry of Energy mentioned in the last month that the auction probably will be completed by the end of the first semester of 2018 and I would say that if this happens under those terms, we should be collecting our money as we originally expected to do.

This concludes our questions-and-answer session. I would now like to turn the conference back to Luis Diaz, CEO of Graña y Montero Group for any closing comments.

Thank you very much. I would like to thank everybody for attending this second quarter conference call. I appreciate your time and your interest in our business, and as we have done during this last month, we will keep you posted with the proper relevant information that accompanies the development of the nature of our business. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.