Aenza SAA (AENZ) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to Grupo Graña y Montero's Fourth Quarter 2017 Conference Call. This afternoon, the senior management team of Grupo Graña y Montero will discuss the company's fourth quarter's 2017 consolidated results per the press release instigated on January 31, 2018. For a copy of the earnings release and more information available on the company, we ask you to 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 will 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 Díaz Olivero, Chief Executive Officer; and Miss 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. Please note, this event is being recorded.

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

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Thank you very much. Good afternoon everyone, and thank you for attending this conference call. Today's presentation will be as follows: first, I would like to address some relevant issues corresponding to the fiscal year 2017 as well as to provide an update on the current issues that may impact the company's situation. Then, Monica, our CFO of the group, will explain the results achieved in the fourth quarter. Afterwards, we will be attending a Q&A session as we usually do.

With this fourth quarter we're discussing, we are ending without a doubt, the most difficult year for Graña y Montero in it's long 84 years of track record. However, despite a complex and challenging scenario, we have continued to operate focused on the execution of projects of great relevance for Peru and the region as part of our commitment to our investors, customers, suppliers and society as a whole. In the last month, Graña y Montero has demonstrated its high resilience capacity. In addition from the first day of its management, the new administration launched a new phase focused on the strengthening risk management, improving corporate governance and strengthening its operation. In this financial year that has concluded, and its most significant figures will be discussed afterwards, our team has shown that in the toughest conditions, we are able to achieve greater efficiency in the operational management of resources. We again have achieved better results are shown by the operating income for 2017 compared to the one of the previous year. However, the company's efforts has not been accompanied by a favorable political environment for its activities. Due to the effects of the Peruvian Congress intention to modify the Supreme decree 003 since November 2017, the asset sales plan for the last year has had to be postponed until a clearer set of goals is reached, delaying the benefit of the financial strengthening plan of the company. Regarding the new date of the Supreme Decree 003 in February 13, Graña y Montero believes that the government will be able to issue a new decree that will not paralyze the construction sector and the chain of payments that depend on it, avoiding irreparable damage to the economy of the country. This new Supreme Decree must address not only the issues related to the Lava Jato scandal, but also the alleged construction plot. With relation to these matters and the latest complaints related to the construction sector about the so-called construction plot, the company has shown its absolute respect for the investigations that in the government and the public prosecutor has been carrying out in this regard. Having said that, and as regards to Graña y Montero group, I have to tell you that in the previous investigation by the authorities covering the years 2011 to 2014, our company only carried out 1 lone construction project out of the 29 projects awarded by provias nacional. Additionally, if we extend the term of investigations to 10 years, from the 156 projects awarded by provias nacional between 2006 through 2017, Graña y Montero only executed 2. Graña y Montero group is not a company dedicated to road construction or the public sector in general, but it requires certified road construction experience for the development of its roads construction business and, for this reason, it has maintained a minimum presence in this market.

With regard to the recovery of the investment made by our company in the Southern Gas Pipeline, I have to tell you that despite the efforts made by Graña y Montero to reach a potential agreement with the other 2 partners, in order to join this, initiate the process of direct negotiations with the Peruvian government, this has been systematically blocked by (inaudible) who, as it is publicly known, has initiated a bilateral direct process under the protection of a binational expense law agreement. The company is taking all the appropriate legal actions to correct the situation and take the process where we believe it is natural and most likely to be successful and will interpose all the necessary legal actions against those who may attempt to harm our rights.

Consistent with this new scenario and guided by proven principles, the company has incorporated in its last quarter results a significant deterioration of its recovery plans of the capital invested in the GSP project. Although the company maintained intact its legal rights to recover its investment in this project, it recognizes the time it will take as well as the complexity and unpredictability of certain events that influenced these new estimates done by management.

Now making a brief summary of 2017. One of the issues that I want to highlight is the amortization of 53% of the debt that we maintained due to the cancellation of the GSP project, which has been reduced to PEN 167.3 million. This result is included, we see the reduction of the total debt of the company, which has decreased from PEN 1.05 billion at the end of December 2016 to PEN 829 million. Undoubtedly, one of the greatest of satisfactions we have received in 2017 has been to obtain new contracts and extensions of existing contracts, which has helped to keep our backlog approximately at PEN 3 billion at the end of 2017.

We are currently developing approximately 200 projects located in 50 regions of Peru, Chile, Colombia, Mexico and Panama. One of the projects that have been executed during 2017 and that will have a very positive impact on our society is a construction of the Línea Amarilla Road project for VINCI highway, whose start of operations is scheduled in the coming days and which will unite 11 districts of Lima, allowing more than 139,000 vehicles to move from point-to-point around the city. This project has been carried out in record time and with a significant deployment of human resources through all its expansions.

Another important milestone was obtaining the financial closing for the expansion project of the Line 1 of the Metro de Lima. This financing of PEN 360 million has allowed the acquisition of 20 new trains, 4 of which are already in Lima and the remodeling and expansion of 5 stations, which will help expand the capacity of this service. Thanks to the expansion project, it will be possible to reduce the time between trains in rush hour from 6 to 3 minutes, and will have the capacity to transport 500,000 passengers per day.

Nonetheless, we are aware that it is necessary to address the future of the company in the best conditions. And for this reason, at the end of 2017, with the objective of achieving growth and achieving greater competitiveness at a regional level, the Board of Directors of Graña y Montero group approved a strategic measure to reorganize current structure of business areas by turning infrastructure consisting of 3 large operating companies and a shared service company. With this, our new organizational structure comes into place, which will make us an Engineering and Construction company with regional scope, an infrastructure concession company and a real estate development company.

Today, February 1, we have indication that the E&P infrastructure, real estate and technical areas will be effective. Also, as a reinforcement process will be initiated in the role of the subsidiary boards as the new instances of government as well as in the Board of Directors and support committees of the holding, seeking to enhance the analysis and risk management in the specialized instances of each type of business. We are convinced that with this new organizational structure, we will be able to optimize all our resources and processes to resume the path of growth and turn Graña y Montero into a powerful regional group, which is committed to Peru and the rest of the countries of the region and contributed to the development of key projects that improve the quality of life of citizens.

Now, I'll turn to our CFO, Monica Miloslavich, who will provide in detail the results of the last quarter. Thank you very much.

Thank you, Luis. Revenue for 2017 decreased by 3.2%, mainly explained by a reduction of 17.8% of revenues in the new construction as a consequence of a large number of work on the execution in GyM, Vial y Vives and Morelco as well as a reduction of (inaudible) on GyM. On the other hand, revenues in the technical service area increased 4.3% due to increase in revenues income as well as by the composition of Adexus as a robust 2016 compared to 2017 net growth basis for the full year. And which is partially offset by the sale of GMD. In the real estate segment revenues also increased, explained by the sale of Cuartel San Martin for $50 million in the first quarter of 2017, and by the greater number of units delivered in 2017. It went from 938 units delivered in 2016 to 1,418 units delivered in 2017. In addition, in the infrastructure area, revenues increased 23.2%, with respect to 2016, mainly explained by higher revenues in GMD, recent increase in oil price and as well as an increase in production of barrels per day, the Increased incentive (inaudible) and (inaudible) and the work of the extension of the Line 1 of the Lima metro.

Company rated gross profit increased 16.5%, and the margin increased from 9.5% to 11.4% in 2017. These results are mainly explained by the higher margins in the Engineering and Construction area. As the lease-specific expenses for 2017 increased 4.9% compared to 2016. Although all the areas have reduced their general expenses with respect to 2016, as a whole new level the evolution of expenses increased as a result of the expenses of the (inaudible). Other operating income expenses for 2017 mainly reflects the deterioration of the (inaudible) brand as well as the sale of machinery and equipment while in 2016, this figure reflects the sale of machinery and equipment with price adjustment for the purchase of Morelco and their regeneration of the goodwill of (inaudible).

Additionally, the line of profits from sale of investments in subsidiaries in 2017 reflects the profit for PEN 274 million from the sale of assets. This includes the sale of participation in revenue of mines, PRINSUR, GMD and COGA, while in 2016 included the sale of our participation into BCP. Therefore, the operating profit increased from PEN 249 million in 2016 to PEN 573 million in 2017, with an improvement of margins from 3.8% to 9.1% which is also reflected in the consolidated EBITDA that increased from PEN 541 million in 2016 to PEN 652 million in 2017, equivalent to 22.4% increase.

The increasing financial expenses is mainly explained by financial costs associated with the refinancing of the debt due to the obligations as seen as a consequence of the termination of the GSP contracts. Considering that more than 12 months have elapsed between the termination of the concession contracts without the Peruvian government having complied with taking any action to make the payment of the GPN to GSP, the company has reviewed the fair value of the capital investment in GSP as well as the regional value of the obligations that GyM part of a corporate guarantee granted to the (inaudible) GSP and the performance guarantee of the concession partner. Legal report has been taken into account that established -- that the procedure to bid [forward] to recover the investment and the obligations of GyM, will lead to the filing by GSP of an international arbitration after a direct negotiation with the Peruvian government. This would be at least, by securing GSP shareholders meeting or in substance by the creditors meeting or (inaudible) contributed. But in none of these scenarios, the payment will be received before 5 years. Taking into account the aforementioned and applying the principle of prudence, as of December 31, 2017, the company has reported an impairment of the investment in GSP for PEN 111 million as well as a financial discount of the long-term account receivables in GSP of [PEN] 24 million. Therefore, the company reported a net loss for the year 2017 of PEN 132 million. The company rated backlog of PEN 2.4 billion due to interest of PEN 585 million, reached a full amount of PEN 3 billion by the end of 2017, which represents 1.6 years of revenues. The main contracts awarded during the year has been: Toquepala mining projects in 2 (inaudible) hotels, 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, we have (inaudible) won in contract within ENAP and another within Minera Spence, while Morelco was awarded a contract with Eco Patrol. Finally, the contract for the maintenance of the Ayacucho Airport Road on several (inaudible) road, and the contract for the maintenance of the electric network of Santiago de Chile Metro.

The reduction of debt for the year 2017 was PEN 228 million, from which, PEN 167 million corresponds to a reduction of the debt related to the termination of the (inaudible). And the PEN 53 million of the reduction corresponds to working capital debt that opened to the reduction of debt due to the sale of GMD.

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

(Operator Instructions) Our first question comes from Adrian Huerta from JPMorgan.

2 questions. One is, what is your expectation of new backlog that you can obtain this year from the E&C segment? And then the second one, I know you kind of addressed that at the beginning, but I wasn't -- I didn't understand it well. Any other potential asset sales that you're targeting to have this year?

Let's begin by the second one. As I stated in my speech at the beginning, we postponed all the decisions regarding the asset sales because of the intent of the Congress of Peru to modify the Supreme Decree 003, with no for the intent. As we understand as of today, there is a new decree regarding the issue on the ring clear rules in order to sell off OpEx among them, the sale of the assets. Therefore, we are expecting to have clarity in that regard before restarting our -- all the process that we started in November of last year. Regarding expectation for new backlogs, I would say that we have a -- as we've said it before, continued submitting tenders and receiving invitations for several types of clients for different projects. The reason why, there is no new large projects coming into our backlog is not because we have not been successful, but because of the lack of existing projects or large projects that we have tendered. As we have said before, we have gained several contracts during last year, and we have also expanded existing contracts with additional and complementary works, in most of the contracts that we had in last year. We do expect that after the issuance of the Supreme Decree and the clarity of the rules of what will happen with all the construction sector is more evident, then in the private sector we will know which construction companies will be able to hire contract in order to execute the pipeline of the investments that they have. Therefore, I am hoping to increase our backlog in the agency business, yes, and this is not only in Peru, but also we want to expand our presence in Chile and Colombia where we have our subsidiaries.

Our next question comes from Cesar Perez-Novoa from BTG Pactual.

On GSP, considering that the firm is under arbitration with the state in the center for settlement of investment disputes, when would you expect to collect for your PEN 400 million investment? And further on, is there any more money that we will see booked in the following quarters or the remaining of 2018?

There are several things in the GSP model, okay? You must understand that right now, the proper vehicle to begin negotiations with the government, which is GSP, has not entered into a direct negotiation or in early touch with the government of Peru. And (inaudible) has done it directly through a binational agreement, Peru and Spain, and is blocking the attendance of pursuing these direct negotiations from GSP. That may cause the reasons, I'm not going to comment on those reasons, okay? But in the general terms, we expect that either because we get the consent of the other 2 partners or because the creditor entity that is going to look for the cancelation of the society that as we know is under litigation, we'll have to go at any time into a direct negotiation or an arbitrage with the government of Peru. So this is going to happen. We don't have certainty of time. We believe that this is probably the only way to go in order to achieve the recovery of our investment in GSP. When we have time in the fourth quarter are 2 things: first, we have acknowledged that there is a very long period of time before we will collect any money. And if I am not mistaken, we are considering 5 additional years in order to collect any money. These are under U.S. GAAP for users of our financial impact that has been recorded in our books. On the other hand, even though we considered that we have all the legal rights to collect 100% of our investment, we are trying to be prudent in here and acknowledge also that there -- this is a very big and very complex project that will require different decisions in the time and it will submit it to political pressures and different matters of negotiations. Therefore, we have been very prudent and we have reported more than $100 million of a reduction of our expectations to collect from the $400 million that we declared last year. I believe that this is a conservative scenario, okay? But I think that as responsible and CEO of the group, I need to send the market a proper assessment of my expectations of recovery based on the time and the complexity of the situation.

(Operator Instructions) Next question comes from [Joshua Vega] from Integra.

Have you participated in the bidding process for expanded Chinalco mine? And if you did, the reason behind not winning the bid was only financial or there were any other reason?

Yes, we did participated in the auction that was done for the earth movement of the Chinalco mine, that's correct. And we lost because of financial reasons. We were not the lowest bid.

The next question comes from Francisco Suarez from Scotiabank.

A follow-up question on Adrian's question. And particularly, the backlog at GyM, which stands now at roughly $456 million. Do you think that it is fair to assume that, that could be just close to the bottom in -- for the rest of this year in 2018? And on a related question, you have done well in recovering your overall gross margins in the Engineering and Construction division. Any risk to see you guys bidding more aggressively for new contracts just to restart your backlog?

I lost part of your first question. The thing that I follow was that you were concerned of the amount of $456 million that we have backlog in GyM. And I didn't know exactly what you were trying to ask regarding that [definition] if I think it was a fair amount, or what?

I was -- if you think that it is fair to assume that we might be close to the bottom on that backlog. I mean, do you think it is feasible to keep that amount of backlog for the rest of this year or actually you might be able to increase that amount of backlog from these low levels?

I mean, I think we are close to the bottom, yes. We are discussing and pursuing several projects right now under the name of GyM, okay? I don't have like huge expectations of increasing substantially this backlog, but I think we will at least maintain the level of backlog during the year and maybe increase that by the end of the year. But going back to your question, this is more like a situation based on the number of projects that we have in Peru or where GyM is in tendering. It's not a -- I'm linking back to your second question, let me put it this way. I am quite surprised of the effort that GyM and the E&C business have done this year. With scarcity of resources and under the pressure of the reputation among the financial prices of the company, basically the thinking in the E&C business have been successful to improve the margins. This is improvement based on management -- managing resources and managing efficiency for the construction business. It does not have to be with any low -- excuse me, high original gross margin in the tender. It's more a consequence of the process and improvement of the efficiency during the performance, okay? In general terms, the construction market is being aggressive. That doesn't mean that we are being more or less aggressive than the competition in here. We are looking to gain backlog with the proper margins, even though we are tendering as low as the rest of the competition because of the scarcity of projects in the sector. However, I still feel that even if we tender low with low margins, we will be able to continue improving our margins during the year and that's what I hope to do.

Next question comes from Lucia Calvo Perez from LarrainVial.

I was wondering what were your expectations on the new decree for the construction companies including the companies on the construction group and the Lava Jato case?

As I've said before, I don't have a direct link to the government or to any that have been assessing the government in the issuance of the decree. I am hearing probably the same news as you are hearing and I am reading the same articles as you are reading, such as the ones that was issued by the Claudia Cooper, which is our ministry of economy yesterday in one of the media in Peru. But we do acknowledge that there is a huge concern within the bank system and within the Ministry of economy regarding the situation of the construction sector. Therefore, we think that some practical solution discussed among the two entities must have been in place during the past weeks, and we do expect that because of that situation, something good should come in order to preserve the companies that belonged to the construction sector. Otherwise, I will really do not understand what we will be trying to do. Did I answer all your questions?

Next question comes from Mr. Vega from Integra.

I'm sorry, I just -- one more question. It's -- maybe a didn't hear very well, but can you give us an update of the audit process of the financial statement of 2016 and maybe 2017? And correct me if I'm wrong, but CAM is going to be included into the infrastructure business lines, right?

The schedule for the closing of 2016 financials -- audit financial statements (inaudible). The date should be April 4, and by the end of April, the 2017 financial statement.

What do you want to know about CAM exactly (inaudible)?

Yes, yes. Because I understand that you are going to restructure the business line of the company and the technical services is going to disappear. And I would like to know if CAM is going to be included in what of the -- in what business line?

So far, we're going to define where CAM is going to be expanding, okay? At this moment, it's reporting directly to me through a manager that is helping me to supervise us -- a couple of companies that we have under the service area but we are in the process of defining where this company may end up in the organizational structure. We will confirm that once its defined.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Luis Díaz for any closing remarks. I'm sorry, there's another question. It comes from Mauricio Agudelo from Crédit Suisse.

So I have a quick question. In the short to medium term, meaning 2018 and 2019, should we expect an increase in the gross margin for the year in E&C business? Or should we expect more of an aggressive bidding process for -- to increase the backlog in the next 1 or 2 years? And when I say improve the gross margin I mean to improve it from 8% to the 10% that we've seen in the past.

Mauricio, as I've said before, competition is intense right now. So at the bidding level, you should expect smaller margins. The capacity of each company in order to improve after winning a bid depends on the efficiency and the process and the way you handle with the performance of each of the projects. During past year, GyM and the E&C business has improved substantially their margins over the margin that was tendered. I think we still will be able to at least maintain the level of margins that we have if we can keep the strength but the competition is more aggressive. So if you're trying to forecast, definitely, I think it should be the same or lower.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Luis Díaz for any closing remarks.

Thank you very much. Thank you, everybody for coming to this conference call. This has been a very challenging year for the company and we hope that this 2018 will be a better year for us. Thank you very much again.

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