Aenza SAA (AENZ) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Graña y Montero First Quarter 2018 Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Luis Díaz Olivero, CEO. Please go ahead.

Thank you very much. Good afternoon to all. Thank you for attending this conference call. Today's call will be structured in the following way: first, I will provide details into certain relevant issues, which have taken place during the first quarter of 2018, in order to inform the measures and advances the group's corporate general management and board are taking to regain the company's sustainable growth; second, Monica Miloslavich, Corporate CFO, will explain in further detail the results achieved during the first quarter of 2018. Finally, we will enter into a Q&A session.

In this first quarter of 2018, which has just ended, and the detail of which our CFO, Monica, will provide next, I would like to highlight and applaud the effort to maintain our current portfolio of projects by our team.

Thanks to our commercial efforts, our current backlog plus recurring business is up to $2.6 billion, principally due the award of the new contract such as the earthworks in Quellaveco, Moquegua, and the subcontract with the JV Cobra (inaudible) for the execution of the complementary works in the Talara Refinery.

These important commercial achievements partially compensated the reduction in backlog produced by the sale of the Stracon GyM, and the award of the construction of the Puruchuco mall to a different contractor generated by the delays in the construction licenses of the mall that demand price adjustments to the contract.

It is, however, important to highlight that this has been a slow quarter in terms of economic results. The company chose a total operating profit of PEN 72.9 million, with a margin of 5.6%, and a net profit which reflects a loss of PEN 14 million, due mainly to a value adjustment on the accounts receivable that the company had in the (inaudible) project, which was affected by the increase in the Peruvian sovereign risk that occurred in this first quarter.

We are confident that with the new projects in our backlog and with a more stable political and regulatory environment, the second quarter of the year will be more favorable.

Law 30737, approved by the Congress on March 2018, which replaces the Urgent Decree 003, has allowed the group to refill its strategic plans of debt reductions and organizational transformation with a view to making the group more focused and nimble in 3 lines of business: Engineering and Construction; infrastructure; and real estate.

Immediately after the publication of the law, the company announced the sale of industrial land by Almonte S.A.C., a subsidiary of Viva GyM, to be concluded in June of this year, for a total of $100 million, and the sale of the mining service company, Stracon GyM, in April, for a total $76.8 million. We will continue in this line in order to increase company liquidity, reduce [that] and reduce debt and conclude the financial strengthening process.

The new law defines payments and civil reparations to the Peruvian government. The company is included in the associated clause as Graña y Montero S.A.A., our holding company, and GyM S.A., our local construction company, are directly linked to their participation in the IIRSA Sur and construction of infrastructure of listed train projects, which are part of the projects included in the corruption investigations.

As we have stated in several opportunities, Graña y Montero will comply with the actions stipulated in the law, which are: the creation of a compliance program, which is already underway in both companies; collaboration with the prosecutor as needed; creation of trust in warranty to ensure the payment of the civil reparations when they come; and the suspension of wire transfer abroad, except with the specific authorization from the Ministry of Justice.

Graña y Montero will create the trust required by the law as soon as the final regulation is published and which will stipulate specific ways of doing so. We estimate the publication will be in the next couple of weeks.

With regards to the other requirements demanded by law, on March 22, the company sent the Minister of Justice a copy of the letter sent to the Supernational Corporate Prosecutor's office on December 4, which states the company's intention to fully cooperate with the investigations on IIRSA Sur South Sections 2 and 3, and a letter explaining the schedule to complete the implementation of our risk and compliance measures in the group.

On March 6, we were notified by the First Court of preparatory national investigations the decision to incorporate Graña y Montero and GyM in the criminal investigations on the IIRSA Sur Sections 2 and 3 case, together with 2 local construction companies. Our legal counsel considered the judge did not evaluate all necessary requirements to include us or analyze the argument expressed by our defense, and we have appealed this decision and are still waiting for a response in the ruling as to whether we will be included in the investigation.

There are currently 2 requests from the prosecutor to include as third liable parties Graña y Montero in IIRSA Sections 2 and 3, and GyM in the electric train. We will collaborate in the investigations and exercise our defense as we consider that the company has not incurred in any wrongdoing.

Since March last year, the company has focused efforts in developing solid strengthening of risk management and compliance. We would like to share some of the advances in these areas in the first quarter.

A, we have launched the due diligence policy and process to warranty the transparency of our commercial relations, also reinforcing the ethical channel and external and internal report line.

B, we have developed a schedule for internal framing to update associates on new internal policies of ethics and compliance and reinforce existing ones.

C, we have improved our internal controls with the newly created code of conduct, anticorruption policy, policy of contracting the government, which will be released this second quarter.

Regarding project completions. I'm happy to announce an important milestone, which will have a positive impact on the City of Lima, the Línea Amarilla road infrastructure project, which will join 11 districts of Lima, allowing more than 139,000 BFOs to meet from point-to-point with greater ease was finished and delivered in early April. We expect [busy] highways will finish all final permits soon in order to start operations in this important road concession.

With regards to the issuance of the pending audit financial statements of 2016, let me assure you that the company has all available resources working to reach the May 15 deadline, and as of today, we are on track, according to our schedule. 2017 audit financial will happen soon after the release of the pending 2016 financial.

I would finally like to thank you all for the signs of confidence you have shown these past few months. I now leave with you our CFO, Monica Miloslavich, who will provide detail on the financial results for the first quarter 2018.

Thank you, Luis. Please turn to Page 6 of the presentation. Revenue for the first quarter of 2018 decreased 7.6%, mainly explained by lower revenues in the technical service area due to the sale of our subsidiary, GMD, on June 2017. In addition, revenues in real estate decreased 67.5% due to our number of units delivered in the first quarter of 2018, and also explained by the sale of Cuartel San Martin in the first quarter of 2017.

This decrease is partially offset by an increase of 62% in revenues in the infrastructure area, explained by more expansion work executed in the Norvial growth, the increase in GMD revenues due to the increase in the average oil price as well as it had an increase in the production of barrels per day and also an increase in the prospective levels in the [gas plants].

Revenues of Line 1 of the Metro increased mainly due to the work of the expansion and, to a lesser extent, because of the expiration of [the new train]. On the other hand, revenues on Concar and Canchaque increased as a consequence of more maintenance work executed during the period.

Consolidated gross profit decreased by 27.4%, and the margin decreased from 14.9% to 11.7% in the first quarter of 2018. This reduction of gross profit is mainly explained because during 2017, we sold GMD and Cuartel San Martin, a real estate asset, and both impacted positively the gross profit of previous year. This is partially offset by an increase in gross profit in infrastructure area, mainly due to increase in oil price and the production of barrels per day as well as more production in the gas [plant].

Administrative expenses in the first quarter of 2018 decreased 4.1% compared to the first quarter of 2017. The reduction of administrative expenses was across all the businesses of the group, but at the holding company level, the increase -- it increased as a result of the extraordinary legal expenses.

In the line of our operating expenses in the first quarter of 2018, we registered the sale of GyM's participation in one of its consortiums. Additionally, the line for profit from sale of investments in subsidiaries in the first quarter of 2018 reflects a loss of PEN 1.5 million from the sale of the balance of the stake of the Stracon GyM in Red Eagle compared to the profit of PEN 25.8 million of the first sale of the stake of the Stracon GyM in Red Eagle in previous year.

Therefore, operating income decreased 48.2% compared to the first quarter of 2017 and the operating margin reduced to 5.6%. The increase in financial expenses is mainly explained by the financial costs associated with the refinancing of the debt due to a commitment assumed upon termination of the Gasoducto Sur Peruano contract, as well as the financial discount of the long-term accounts receivable with GSP.

Consolidated net loss in the first quarter of 2018 was PEN 14 million as a consequence of the results described above. The consolidated backlog of $1.9 billion plus the recurring business of $630 million reached a total amount of $2.6 billion by the end of the first quarter of 2018, which represents 1.4 years of revenues.

The main contracts awarded as of the date of this report are the earthworks in Quellaveco and the subcontract with Cobra for the execution of complementary work in the refinery of Talara. Additionally, we have excluded the backlog of Stracon GyM due to the sale of that subsidiary last April.

The total amount of consolidated financial debt is $860 million, which includes the financial debt with Chubb. Of the total debt, $318 million includes the financing of working capital of the different subsidiaries of the group and the leasing for the acquisition of machinery and equipment. On the other hand, $382 million corresponds to the project finance debt for the infrastructure project. The increase of $45 million of debt in the first quarter of 2018 is explained by the financing of the expansion works of Line 1 of the Lima Metro.

Finally, the debt for the equity financing of Gasoducto Sur Peruano, the proportional part of the bridge loan of that project and the corresponding debt for the performance loans executed due to the cancellation of the Gasoducto project last year, as of the date of this report, has reduced more than 50%.

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

(Operator Instructions) Being that there are no questions, this concludes our question-and-answer session. I would like to turn the conference back to Luis Díaz Olivero for any closing remarks.

Thank you very much. Since there is no additional question or no particular question, we would like to thank you for attending this conference call, and we will be reporting any (inaudible) impact soon. Thanks.

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