Aenza SAA (AENZ) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to the Grupo Graña y Montero Third Quarter 2017 Conference Call. Good afternoon. The senior management team of Grupo Graña y Montero will discuss the company's third quarter 2017 consolidated results for their press release distributed on October 30, 2017. For a copy of the earnings release and more information available of the company, we ask that you visit the company's website at www.granaymontero.com.pe in the Investor Relations section for the results and 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 Graña y Montero are Mr. Luis Diaz Olivero, 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 these matters.

It's now my pleasure to introduce Mr. Luis Díaz Olivero, Chief Executive Officer of Grupo Graña y Montero, for his presentation. Mr. Diaz, please go ahead, sir.

Thank you. Good afternoon to all of you. Thank you for attending this conference call. Today's presentation will be as follows. First, I would like to address in detail some relevant issues that we will have informed to the market in the recent weeks to explain them more precisely in the search to make more transparent the progress of the company in the matters promoted by the Board of Directors. Then, Monica Miloslavich, CFO of the group, will discuss the results achieved in the third quarter. Finally, we will a -- we will finally hold a Q&A session.

As we already informed in our manifesto, Graña y Montero, on its own initiative, launched an independent forensic investigation to know in depth the performance of the company and of the people that were part of it in the projects in which it was associated with Odebrecht. The forensic investigation was carried out upon the initiative of the Board of Directors of Graña y Montero from January 9, 2017 and was conducted by the Risk, Compliance and Sustainability Committee, with a firm intention of seeking the truth in the projects in which there was a consortium with Odebrecht, to determine legal actions, if any. The investigation has been completed, and the report will be presented to the board -- to the shareholders meeting and to the Board of Directors on November 2 and communicated at the extraordinary general shareholders meeting that same day. As we have stated on several locations, and it was our commitment, once the extraordinary shareholder meeting is over, their report will of public knowledge and can be accessed through the website of the Graña y Montero Group. As we anticipated in the relevant information communication published on October 3, the report that we will be submitting to the board's Risk, Compliance and Sustainability Committee has not identified any evidence that leads to the conclusion that any of the directors, present and past, executives or employees of the company had knowledge, had approved or participated in any act of corruption or payment of bribes to public officials in the aforementioned projects.

On the change of auditor for fiscal year 2016, we would like to inform you that as we -- as you all well know on October 4, the company announced the termination of the contract with the auditing company, PWC, for the audit of 2016 financial statements. The reason for this for this cessation of work with the mentioned company was due to the fact that both the company and PWC reached the conclusion that PWC did not have independence in the audit process of 2016. This situation, which was revealed by the company through a relevant information communication, was due, as indicated in said documents, to the provision of services other than the financial audit by PWC during the fourth quarter of 2016 and the first quarter of 2017, which are related to the test of internal controls in accordance with the U.S. regulation of SOX, to which the company is subject. As a result of the above, on October 4, both companies decided by common agreement to terminate their contractual relationship based on the principles of good governance and transparency that govern both organizations. It was also decided, as indicated in the corresponding relevant information communication, to call a general shareholders meeting to request ratification of such conclusion of relationship, in view of the fact that it was originated by the express mandate of the shareholder meeting dated March 29, 2016.

Regarding the current situation of the process of termination of the concession, we wish to state that on October 11, the agreement was signed for the delivery of the assets of the GSP concession between the concessionary and the Ministry of Energy and Mines of Peru. By virtue of these acts, GSP began the process of delivering the asset in possession to the administration -- administrator designated by the Ministry of Energy and Mines for its custody and conservation. The assets include all works, equipment and facilities provided for the execution of the project as well as the engineering studies that were prepared by the concessionary company.

As we indicated in the relevant information communication published on October 25, the legal opinion of the advisers of GSP and our lawyers is that Clause 20 of the contract establish the rules that apply to all cases of termination of concession, including the termination of the contract as a consequence of the failure to achieve the financial closing of the project applied on January 24, 2017. However, the government has stated that according to its understanding, Clause 20 does not apply to this case of termination of the concession.

Regarding the amount of investment that we estimate would be recovered, we firmly believe in the legal arguments that support the application of Clause 20 the termination of the concession, on which the company has made its projection, which were communicated in the relevant information communications on January 24 and 27 of 2017. However, it is foreseeable, based on the statements made by the government and in the context of a potential controversy, that the time of recovery of the investment and eventually the amount of recovery must be corrected, which could have an impact on the company's financial statements. The company has initiated a legal, financial and accounting analysis to determine, based on different positions, the best estimates within the multiple scenarios for solving this controversy. After finishing the complex analysis, which we estimate will be in the first 2 weeks of December of this year, the result will be communicated to the market by our relevant information communication.

Regarding the memorandum of understanding signed between the shareholders of GSP in September 2017, this anticipates that Odebrecht Group will have the right to collect in the capacity of GSP creditor, the amounts paid on behalf of GSP as of January 24, 2017, to the banks that granted the bridge loan to GSP and the Chubb Insurance company in the same opportunity as the other shareholders. To the extent that this amount constitutes GSP debt and therefore should be paid before returning the investment to its shareholders, the granting of this right has a neutral effect in the analysis of the recovery of the investment made by Graña y Montero in GSP. In conclusion, although the agreement allows Odebrecht to recover the payments made to the aforementioned creditors at the same time as the other shareholders, the agreement does not affect the analysis of the final recovery to which the relevant information communications of January 24 and 27 of 2017 refer to. On the other hand, as we have already indicated, the agreement does not alter the preferential recovery that the Graña y Montero Group will have with respect to the Odebrecht Group in relation to the equity investment in such project.

Finally, and focusing on our day-to-day business, we would like to highlight that the backlog plus recurring business reached $3.1 billion, a figure similar to the one registered in the previous quarter, which represents an equivalent of 1.6x our annual revenues. This important result shows a positive commercial advance of the business and trust from our customers.

Now I will turn to Monica to the explain the results of the group reaching the third quarter of 2017.

Thank you, Luis. Please turn to Page 5 of the presentation. As informed yesterday, and considering the time elapsed between the publication of the 2016 results and today, we wanted to inform the market of certain adjustments to the unaudited financial statements of the company as of December 31, 2016, which will be used as a starting point for the evaluation that the new auditors will begin. Bearing in mind that most of these adjustments are clearly accounting adjustments, they do not represent the material impairment in -- of the company's financial situation and are mainly due to circumstances that occurred during 2017, which, according to the interactions that were maintained with PWC before the termination of the audit contract, it was convenient to include them in the financial statements as of December 31, 2016.

The main adjustments to the net profit are the following:

Provision write-offs and several adjustments that -- this corresponds to the net amount of provision write-offs and several adjustments made within the framework of the interactions held with PWC as part of the external audit process that was being carried out with them.

The second one is the SUNAT audit for the year 2001. This amount corresponds to an audit process initiated by SUNAT in 2004 for the year 2001, which was resolved in September 2017 with an unfavorable result to the company.

The third amount corresponds to the goodwill impairment of Vial y Vives-DSD. The evaluation of the value of said company at the end of 2016 determined that there was no goodwill impairment. However, during the audit process, the commercial prospectus used in determining the company's value were reviewed, adjusting them to the reality of the Chilean market, and it was concluded that there was an impairment in the investment.

The next one corresponds to the remediation of the acquisition value of Adexus. After the interactions that were held with PWC, it was determined that the acquisition value of Adexus estimated at closing date of 2016 had to be adjusted, generating a negative impact of PEN 8.8 million.

The liquidation of the Gasoducto Sur Consortium, given that the termination of gas concession contract for Gasoducto Sur Peruano occurred in January 2017, the consortium should be registered as a company in process of liquidation. Said adjustment has generated a negative effect of PEN 15.1 million.

The discount of the accounts receivable for the termination of Gasoducto Sur Peruano concession contract, at the end of 2016, the discount of the accounts receivable was calculated considering the provisions of a concession contract. According to this contract, the recovery should occur within 1 year, which is why a 1-year discount was established at the corresponding interest rate for that period. However, having passed several months since the termination of the contract, without having initiated a return of the investment process, it has been estimated that the recovery of the same account will occur in a longer period. The discount period applied for now is 2 years, which has generated a greater discount.

And let's turn to the next page to explain the third quarter results of 2017. The total amount of revenues of the third quarter of 2017 increased 5.3%, mainly explained by higher revenues in the Technical Service area because in 2016, the revenues for Adexus are only considered from August 2016 onwards, which is when the business was consolidated. There is also an increasing revenues to the real estate area explained by the sale of Cuartel San Martin ín in the first quarter of 2017, as well as by the greater number of units in the third quarter of 2017.

On the other hand, the lower revenues registered in the Engineering and Construction area are explained by fewer works under execution in GyM, Vial y Vives and Morelco as well as lower sales in Stracon GyM.

In the infrastructure area, revenues reduced in Norvial due to lower levels of works in execution compared to previous year as well as La Chira's revenue reductions due to the completion of the construction of the treatment plant. This reduction is partially offset by higher revenues in GMP due to the increase in oil price and production, the construction works in the Line 1 of the Metro and major maintenance works in Survial.

Consolidated gross profit increased 16.7%, and the margin increases from 10.6% to 11.8% in the third quarter of 2017. These results are mainly explained by the higher margins in the Engineering and Construction area as well as by the sale of Cuartel San Martin in the real estate there.

Administrative expenses for the third quarter of 2017 was similar to the one reported in the third quarter of 2016. The main impacts are registered within the Engineering and Construction area with a reduction of 20.2% compared to the third quarter of 2016, while in the technical service area, the increase is due to the fact that 2016 only considered the administrative expenses of Adexus as of August 2016.

The other operational expenses/profits corresponds mainly to the sale of equipment in the Engineering and Construction area, while in -- in the third quarter of 2016, corresponded to the price adjustments for the prices of Morelco, the recovery of the claim in the Collahuasi project in Chile as well as the sale of equipment. Additionally, in the third quarter of 2017, the profit from the sale of investments includes the sale of the stake of Stracon GyM in Red Eagle, GSP and COGA, while in the third quarter of 2016, it includes the sale of our participation in GP.

Therefore, operating income increases from PEN 239 million in the third quarter of 2016 to PEN 525 million in the third quarter of 2017, with an improvement of margin of 6.6 -- 5.6% to 11.8%.

The increase in financial expenses is mainly explained by financial costs associated with the refinancing of a debt due to the commitment action as a consequence of the termination of the Gasoducto Sur Peruano contract as well as to the financial discount of long-term accounts receivable.

The participation in associates account register the profit generated in projects where our subsidiaries have a minority stake and are not consolidated. In the third quarter of 2017, this includes the participation in the minority investments in Chavimochic and COGA. And in the third 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 third quarter of 2016, increasing from PEN 138 million to PEN 239 million, generating an improvement of margins from 3.3% to 5.4%. The consolidated adjusted EBITDA increased from PEN 501 million to PEN 766 million, reaching a margin of 20.2%, in line with the better operating results explained above.

Please turn to the next page. The consolidated backlog of $2.6 billion, plus the recurrent businesses of $609 million, reached a total amount of $3.2 billion in the third quarter of 2017, which represents 1.6 years of revenues for the company. The main contracts awarded during the year have been: Toquepala mining project, Intursa Hotel, Puruchuco Mall, the construction of the alternative entrance of San Gabán, the extension of Minera La Zanja and the extension of Constancia Mine. In addition, Vial y Vives won a contract with ENAP, and another with Minera Spence, while Morelco was awarded a contract with Ecopetrol. Finally, the contract for the maintenance of Ayacucho airport road and the Cerro de Pasco road were awarded to Concar.

In relation to the debt, on September 2017, we closed the sale of our corporate offices located in Miraflores, and we have collected the last installment of the sale of GMV. Due to the date of these transactions, the last day of September, those net proceeds were applied to the reduction of the debt during October, which explains why the debt as of the second and third quarter of 2017 are almost the same.

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

(Operator Instructions) Our first question comes from Francisco Suarez with Scotiabank.

Well, the question relates with your subsidiary [GyM]. And the question that I have relates with -- it's nice to see that -- the overall rebound in activity. That's encouraging. Of course, the improvements in gross margin, that's also encouraging. Nevertheless, the overall book-to-sales ratio remains very low. I mean, the amount of backlog that you have added in this quarter is substantially -- I mean, well, clearly below potential. So the question that I have is twofold. One, what is the current pipeline that you see for the next 12 months on which you can actually expect a recovery in your backlog on this core subsidiary of yours? And secondly, to what extent the overall recent agreement with your -- with this syndicate of banks might actually help to -- you to get more projects at this subsidiary?

Okay. If I have understand -- if I understand properly your question, your concern regarding the amount of backlog at the GyM level, okay, and the impact on a -- on the syndicated loan on GyM. You are right that against the size of the company, GyM, the backlog that currently that subsidiary has is not quite substantial. But we have to understand that this is not only a concern of the company, but also a problem of the size of the market in Peru, okay? We have a country which is -- I mean, this is a company which backlog depends essentially on private investment, okay, rather than public investment. Both indicators in the economy of Peru are substantially low. In the case of private investment, we have 4 years in a row with a contraction. And essentially, our principal market, which is related to the construction of new mines, have not been improving. We have no new mines in the horizon that we -- where we are tendering. However, as we have seen the other subsidiaries of GyM, which are our construction company in Chile and also our construction company in Colombia, are starting to gain contracts based on the recovery of those markets. In the case of GyM in Peru, we are currently tendering for several projects, okay? I might not be able to reveal. But for instance, ones which we are tendering will be the continuous expansion of the Talara refinery, okay, where will we be part of the list of subcontractors that we will employ. And those -- the size of those contracts go close to $1 billion. So just we need to be part of one of the, let's say, small contracts in order to substantially increase the backlog of the company, okay? In general terms, the syndicated loan does not have the purpose of -- improve our financial situation. The reason for the syndicated loan was to provide securities and to provide proper guarantees to make our projects that we currently have able to be executed. And of course, if we will tender into new projects, we will get the possibility of issuing bank securities and also working capital for those projects. In that sense, that syndicated loan is working, means it's currently operating and is helping in that operation. But that won't change the current situation of the market regarding the investment and the new projects coming into the pipeline.

(Operator Instructions) The next question comes from Francisco Suarez with Scotiabank.

I just thought that there were more questions in the roster so I was not willing to make more questions. But the questions that I have relates also with your overall -- the willingness of you to improve overall corporate governance that this seems that it's going on the right direction. I mean, you -- your initiative to do this, this external independently run committee to foster your overall corporate governance, that's a very great thing that you are doing now. I mean, it is very much needed, in my view. But the question that I have here is also on overall disclosure on your financials. I mean, relatively, I think that you are a little bit aggressive on your financial accounting. I mean, you have been -- in the way that you have disclosed the asset sales. And actually, I thank you for throwing a little bit more disclosure on those. At the end of the day, you overstate the EBITDA figures that we have on the financials. So the question here is that if you think that your overall financial accounting might be changing because of these initiatives that you are currently engaging. And on a related subject, by when you might be able to issue a 20-F with your -- with the proper updated figures for 2016?

Okay. I'll -- Francisco, I'll try to understand the first part of your question because it wasn't clear to me. I am going to -- I'm trying to understand that by aggressive, you're trying to say that we are more transparent on the matter and how we disclosed the issue of the assets. For now...

Yes. Sorry if I -- sorry for the misunderstanding. What I meant with this is that, yes, every time that you conduct an asset sale, that impacts favorably to your overall EBITDA figures. So for instance, in the -- if I remember correctly, by this -- by the first half of this year, out of the PEN 455 million that you were disclosing on soles by the first half of EBITDA, PEN 204 million were impacted positively by the asset sales. So my question here is the -- if this practice is going to be followed after or you are thinking to do another type of accounting going forward. And of course, in a related subject, by when we might get those audited financials of last year.

Okay. Probably, what you are needing is a more clear disclose of what is coming from my operations and what is coming from the asset sale. We can try to improve that for the next quarter so you can get a proper sense of what is coming out of it. Even though we believe that because of the figures that we are revealing and where we are placing these asset sales in our accounting, it should be clear enough. But if this is not, I will take this suggestion and I will try to improve that or disclose it in the next quarter report. Regarding the next 20th, as you know, on Thursday, we are having our shareholders' meeting, extraordinary shareholders' meeting, where we intend to appoint or at least receive a proper mandate from the shareholders for the board to assign a new auditor of the firm. We have been reviewing the proposals that we have received as a company that we will discuss with the board. And so far, it is our understanding and our desire that the 20-F regarding the financial statements for 2016 should be issued by March 2018. And we expect also to issue the financial statements of 2017 a month after, meaning by the end of April. So we expect to have the proper financial -- audited financial information of the company on track again by the end of April of next year.

The next question comes from Raul Jacob with CrediCorp Capital.

I just have a question. You have a sale of investments for just 3Q '17 of PEN 150 million at the holding level. What is that sale?

Give me one second, please. What we have at the third quarter, as a consolidated basis, is PEN 274 million recorded as profit from sale of investments. In that case, we are talking about...

COGA.

COGA. GMV, our IT business.

[It is not public.]

Those 2 are the results of those sales at the holding level. Okay? Then you will probably have some -- the sales of the other assets that come, which is PRINSUR and Cuartel San Martin, that come from our real estate company, in Viva.

Our next question comes from Carlos Rojas with Andino.

I have a couple of questions. The first one is if you can give us a look on where are we standing right now on GSP. We know that the government already accepted to have the assets. Can you give us a little light on that if -- where are we going to know the valuation of those assets? And what are the next steps moving forward? Meaning, that on January, the government or the state was supposed to do the first auction, at least. So can you give us a little bit light on that, please?

Sure, Carlos. I tried to make a certain clarification on this matter during the explanation, but I will try to be a little bit more clear. As we said, we have signed -- well, GSP had signed an agreement, okay, where we have entered and initiated the delivery of the goods of the concession plus the engineering and everything related to the project. Okay? In that same agreement signed with the government, there is established in there that there is a dispute in the understanding of how or what clauses should be used to relaunch the project. As we have already said in several times and in different information to the market, we -- the GSP position, as well as the position of our legal advisers of Graña y Montero, says that the Clause 20, which is the one that you know that goes with the valuation, which goes with the auction of the assets and with the relaunch of a contract within the next 12 months after the termination of the contract, should be used. However, right now, as I have informed previously in the relevant information that we disclosed, the government is not considering the same situation. Because of that, the company, right now, it's assessing all legal accounting, financing and different scenarios that we will have in terms -- to understand when we will recover this investment and how we will recover this investment. So far, it looks like if there is no consensus between the way we have terminated the contract, we may end it up in an international arbitration, which will, of course, delay the recovery of such investment. Since this is a very relevant amount of money for the company, we have already hired a proper and professional analysis that will -- comprehends all these matters, legal, accounting and finance, in order to disclose the proper analysis and the proper impact to our financial statements during the fourth quarter. I don't know if that's clear enough for you, Carlos.

Yes, yes. Is there any deadline where you can start the arbitrage? Or we can wait like 1 or 2 more years? Or there's like a, if you don't present the deadline by the end of January, that is something that we can't do later.

First, this is not a situation that Graña y Montero, as a shareholder of GSP, can decide on its own. We need the consensus of the 3 parties in order to open an arbitrage for this situation. Okay? Second, there is no deadline. Okay? That will depend on how the progress of the project evolves. If, by any means, the government starts taking actions that will defer from the understanding of the shareholders in relation to our possibility of receiving our investment back, I will anticipate that we will probably try to go faster to an arbitrage. If by -- if there is a different situation and we feel that whatever is happening with the government is something that will make a little bit different in the contract but, in general terms, will be acceptable in terms of the recovery of our investment, then we will try to find a different solution. I cannot anticipate at this time when and how we will start that process.

(Operator Instructions) This concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Luis Díaz for any closing remarks. Please go ahead, sir.

Thank you very much for attending this conference call. We are very pleased to help you to understand better the figures of Graña y Montero. And our investor relationship department will be ready to attend any additional questions that you may have. Thank you very much.

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