Aenza SAA (AENZ) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to Grupo Graña y Montero's Second Quarter of 2018 Conference Call. For a copy of the earnings release and more information available on the company, we ask that you visit the company's website at www.granaymontero.com.pe in the Investor Relations section, where there is also a webcast presentation to accompany the discussion during this call.

I would like to remind you that this call is for investors and analysts only. Therefore, questions from the media will not be taken.

I will now introduce our speakers. Presenting on behalf of Grupo Graña y Montero are: Mr. Luis Díaz Olivero, Chief Executive Officer; and Ms. Mónica Miloslavich Hart, Chief Financial Officer.

During this call, management's comments may include forward-looking statements, which are subject to various conditions and 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. Díaz, please go ahead, sir.

Thank you very much. Good morning to everyone, and thank you for attending this conference call. Today's presentation will be structured as usual. First, I would like to describe relevant issues which have taken place during the second quarter of 2018; then Mónica Miloslavich, Chief Financial Officer, will go into more detail regarding the second quarter 2018 financial results. We will then open a Q&A answer session.

Ladies and gentlemen, second quarter 2018 financial results have not been as we expected, showing a PEN 28 million cumulative loss. Mónica will provide details on the results, but I would like the say that they are mainly due to the following matters: on one hand, there is a negative impact on UIM, the larger company of our E&C business, in a project we are 8 months from completing for the main works in the Talara Refinery. We are reversing profit we registered in 2017 as well as recorded losses in 2018, since the client has not recognized certain cost and additional expenses currently under discussion. This situation has affected the gross profit of all the E&C business.

Adexus income, the remaining companies in the technical area, had higher sales cost as well as exceptional losses in the first semester of 2018. Part of these results will be partially compensated during the second semester when we finalize the selling profits of these 2 companies.

Our financial debt reduction plan, based on asset sales, continued during this quarter. The sale of Stracon GyM represented a debt reduction of close to $100 million during the quarter. During the current term debt to PEN 766 million, we aim to close the year with a total debt in the neighborhood of PEN 600 million. Several operations were announced during the second quarter, but are not -- but are pending to be concluded and applied to our books for different reasons. This operations will be reflected during the third quarter. This is the case of Almonte and Norvial transactions as well as the first installment of the collection of the Contugas settlement -- as we said before, we aim to finalize the sale of the 2 pending assets of our technical area during the next semester. CAM is expected to happen in the third quarter, final exit during the last quarter as we recently finalized a dispute with its former owner and minority shareholder that will allow us to complete this process.

Economic forecast for Peru showed that last quarter, with a tendency towards a growing GDP for the country, due mostly to a positive trend in mining and public spending on major projects. Even though mining projects have been announced, contracts are right now under engineering stages or in a budgeting phase.

Our E&C business have several mining projects in the budgeting pipeline. Our work on any of these will bring an increase in our current PEN 2.5 billion backlog in the next quarter. An important example is the contract for the construction for Minera Escondida, the largest copper producer in the world in Atacama, Chile. This contract is especially important to the new regional strategy focused on the strengthening of our presence in Chile and Colombia in the mining sector.

In terms of the operating business, GyM Ferrovias has made a significant progress in the expansion of the Line 1 of the Lima Metro. There are 16 new trains in operation, and 73% of refurbishment and expansion of the pipe extensions is already completed. With these trains, there are now 37 trains in operation, which transport around 307,000 passengers per day, with a reduction in waiting time from 6 to 3.5 minutes during rush hour, improving quality of service. The total expansion on services stationed work is scheduled to be completed by the end of 2019. By that time, the EBITDA generated will increase accordingly to the new size of the operation.

GMP, our oil and gas company, is in its 2nd year of investment in the oil blocks 3 and 4 in the northwest part of Peru, having 658 oil wells in production, which last month produced on top of 4,100 barrels per day of crude oil. This represents more than 10% of the national oil production of Peru for that month.

In the housing division, Viva GyM completed 2 significant projects in the quarter: Real Dos and Klimt, both in the upper housing market. Viva GyM handles over 100% of the Real Dos office space, which comes with a silver lead environmental certification. The Klimt project is already finalized. It's located in the exclusive San Isidro neighborhood and have sold and delivered 30 out of 32 apartments of the project.

This second quarter, the Graña y Montero Group has continued concentrating efforts in strengthening the group's management team. Daniel Urbina has joined as Chief Legal Counsel coming from Inkia Energy; and Julia Sobrevilla heads the newly formed Public Affairs division. She comes from Coca-Cola Peru.

On the legal front, on June 23, the first Criminal Chamber of the National Court of Appeals of the Superior Court of Lima reported the decision to incorporate companies into its preliminary investigation. Graña y Montero and GyM has been excluded in regard to Interoceánica project Sections 2 and 3. The court declare the prosecutor incorporation's request as inadmissible and excluded the companies from the process. On the other hand, on July 16, the First Court of National Proprietary Investigation notified Graña y Montero that our subsidiary, GyM, was incorporated as third-party responsible in the process of investigation in the construction of tranches 1 and 2 of Line 1 of Lima Metro. It is important to underline that this inclusion does not support the declaration of guilt or responsibility, but only the inclusion of the company in the investigation to define whether there is a responsibility to respond to acts committed by the persons being investigated.

We do not agree with the inclusion, and we'd exercise our right to defend ourselves during the investigation. However, if as a result of due process, a degree of responsibility was found, the company will obtain the bargain. Graña y Montero will provide its reforms to the class action filed against the company and employees and former employees before the Eastern Judicial Federal Districts of New York on July 30. However, do not -- we do not expect to have any news on this matter before early next year, since the process for accepting this class action will be ruled after October 3, 2018.

With regard to the status of the Gasoducto Sur Peruano, GSP, Enagás has independently initiated international arbitration against the Peruvian government, and Odebrecht is legitimated to do it as well. Graña y Montero, as local partner, is not able to file an arbitration independently and has made large efforts to do it through Gasoducto Sur Peruano as the counter-party of the state in concession contract without success due to the opposition of the aforementioned partners to adopt the decision in the shareholder court. In the next month, a creditor committee should take office as administration of GSP, and should decide and execute a proper legal action to recover the amounts GSP has invested in the project. This is a legal path to be followed by the company.

Despite the legal course taken by the company for its former partners, we still believe the best way to resolve this issue is not through legal action against the government, but promoting the execution of the project that will allow a new owner -- an investor to buy and use all or part, of the previous assets and rights of the project.

On July 6, the New York Stock Exchange received the trading of Graña y Montero ADS program in the principal market under the GRAM ticker and halted the delisting process. Graña y Montero has presented the 2017 annual 20-F, which brings the company up-to-date with all pending financial information.

Mónica Miloslavich, CFO, will now give you more detail in the first quarter 2018 final results. Thanks.

Thank you, Luis. As what was mentioned in the quarterly report, as a consequence of the sale of GMD and Stracon GyM, according to IFRS rules, the results are presented as discontinued operations in our financial statements. Therefore, the results of 2017 has been reclassified accordingly. This effect is presented only in the income statement, not on the balance sheet. For more information, please see note 20 of our audited financial statements.

Revenues for the second quarter of 2018 decreased 1.7%, mainly explained by lower revenues in the E&C segment. In addition, revenues in the real estate segment decreased 54.7%, explained by the sale of Cuartel San Martín in the first (sic) [second] Quarter of 2017. Revenues as of the second quarter of 2018 did not include the sale of Almonte communicated to the market on May 31, 2018.

This decrease is partially offset by an increase of 63% in revenues in the infrastructure area due to the increase in the average oil price as well as an increase in production of barrels per day. The increase in revenues in Line 1 of the Metro due to the works of the extension, and to a lesser extent, the company operation of new trains. In addition, more expansion work executed in Norvial road, and more maintenance work executed by Concar and Canchaque.

Consolidated gross profits decreased 18.9%, while the margin decreased from 12.9% to 10.6% in the second quarter of 2018. These results are explained by the lower profit in the E&C segment because of claims and costs not recognized in an ongoing project. On the other hand, lower profit on Technical Services segment, due to less efficiency and higher costs in the projects under execution by CAM.

And finally, a decrease in gross profit in the real estate segment due to the sale of Cuartel San Martin in the first quarter of 2017.

Administrative expenses of the second quarter of 2018 increased 2.5% compared to the second quarter of 2017. The line of other operating expenses in the second quarter of 2018 registers the sale of GyM participation in one of its own consortiums and the sale of machinery and equipment.

Additionally, the line for profit from sale of investment in subsidiaries in the second quarter of 2018 reflects a profit of PEN 41.9 million from the sale of Stracon GyM on April 2018, compared to the profit of PEN 98.7 million due to the sale of GMD, Coga and Prinsur during the second quarter of 2017. Therefore, operational income increased 47.5% compared to the second quarter of 2017, with margins of 10.2% and 5.4%, respectively.

The increase in financial expenses is mainly explained by the financial discount of the long-term accounts receivables with GSP, for an amount of PEN 22 million. In addition, due to the increase in interest rates and commissions of the financing in GyM, and finally, as a consequence the accrual of interest for the beginning of operations of the second road of Norvial, partially offset by the financial income from the sale of the CRPAOs in the framework on the financing of the expansion of Line 1.

The line of profit from discontinued operations shows the profit of GMD and in Stracon GyM for the second quarter of 2017, and on the Stracon GyM for the second quarter of 2018. Consolidated net loss in the second quarter of 2018 was PEN 28 million as a consequence of the results described above.

The consolidated backlog $1.8 billion, plus the recurring businesses of $642 million reached a total amount of $2.5 billion by the end of the second quarter of 2018, which represents 1.6 years of revenue.

In the last quarter, Vial y Vives-DSD was awarded a new mining contract with Minera Escondida for $35.7 million. The total amount of consolidated financial debt is $766.8 million, which includes the financial debt with Chubb. Of the total debt, $206 million corresponds to the financing of working capital of the different subsidiaries of the group, and leasings for the acquisition of machinery and equipment. On the other hand, $366 million corresponds to project finance debt for the infrastructure project. The decrease of $93 million of the debt in the second quarter of 2018 is mainly explained by the amortization of GyM debt due to the sale of Stracon in April of this year. The funds coming from the collection of Contugas were received in June. However, the funds destined to the amortization of the working debt of GyM for USD 17.5 million were applied in July. On the other hand, as a result of Norvial's monetization of dividends, part of this funds, $27 million, could not be applied to the amortization of the debt, pending approvals for transfers abroad by the Ministry of Justice. With these amortizations, the debt would be in a total amount of $722 million.

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

(Operator Instructions) The first question comes from Mr. Raúl Jacob with CrediCorp Capital.

I just wanted to be sure about these claims and costs not recognized on the Talara Refinery. That's -- these have been taken out of -- I mean, are these going to be recurring in the next quarters? Have they been taken out of the backlog for GyM?

This is not a matter of backlog. This is a matter of cost and profit in the project, okay? We were talking about the main construction of the refinery in Talara, not the new contract that we announced 2 or 3 months ago, okay? What we have right now is we are in the final stage of a 2-year project, okay? As you probably are aware, there are several problems with different contractors in the Talara refinery, we are not the exception in this case. We recorded some profits as we do in general terms in our accounting process for 2017. Based on the expectations on the progress, on the profit that we were supposed to get. Right now, we have a different perception of that level of profits. That's the reason why I mentioned that we have reversed profits from 2017, and recovered some losses in 2018. Right now, we have claims and complaints against the client, but they are under discussion. And until I have certainty of what's going on in the level of recognition on certain things. I cannot anticipate any different result in this project.

Our next question comes from Mr. Carlos Rojas with Andino.

I have several questions. Regarding Norvial, the specific transaction, can you give us a little bit of update on what was the interest rate, the total cost that it could imply for the company. And if there's a -- you mentioned that there could be a buyback and there's a penalty there, we just want to have an overlook if you can get back the assets. That's the first question.

Okay, you want to go 1 by 1?

Yes.

Okay. In the case of Norvial, as we have disclosed, this is a monetization of the future dividends of the company, okay, so $42 million. The overall cost of the monetization is around 10%, a little bit below 10% in U.S. dollars. Reason behind this is as follows: this is a monetization that has -- it is tied to certain risks for the one who's providing the money. This monetization is supposed to be paid with dividends for the next 7 years, while we have 10 years to complete the final term of the concession. If by any means there is a change in law, there is a change in the traffic, there is a change in the price or the rate of the concession, and the funds are not enough to repay this monetization, this is on the risk of the supply or demand, not in the company's risk, okay? We have the right to bypass this starting year 5 if we want, okay, and that's I think essentially all the questions that you asked.

Yes. About Gasoducto, the GSP, I -- what's your best expectation for the next 6 months? Do you think the company is finally going to go its own way by itself without Gasoducto consortia, because the other ones are going by themselves? Or are we still going to try to go as a group since Enagás already is doing things by themselves?

Legally, Graña y Montero, as a local company or local investor, does not have the same rights as Enagás or Odebrecht in this case. They can, as you have seen, Enagás has claimed, by national treaty between Spain and Peru, in order to retain the several investments in Peru. As you are aware, Grana & Montero cannot use similar legal resources in order to do that. So our only legal way to go is a -- since the thought is right now under the company rules, okay, a creditor committee will be appointment in the next months, and that creditor committee, that needs to resolve the company to collect. The only way to collect on legal matters is going in an arbitration against the Peruvian government as a credit committee. It will be a part of that credit committee and that will be the legal path. Once again, these are claims against the Peruvian government, and that's the legal way. I want to repeat what I have said, that we believe that probably for the country for the company, the best course of action will be if the government to promote or continue the projects, get a new investor, get somebody interested in the project, develop the project and use the assets or part of the assets and the rights of the concession in order to solve this solution.

Great. One last question. About the actual status of the construction sector, we know that the banks have been shutting credit lines and very, very hard for them to give new credit lines. What about the status in Graña y Montero? Are the banks waiting for you to pay them back what you -- basically what is sold? Or they are already starting to work with the company, giving credit lines, facilities open to new products?

After the release of the 30737 Law, that clarified certain rules for the construction industry. Banks are less cautious but are still working on a case-by-case situation. In our particular case, they are reviewing our new projects, they are going into deep analysis of the credit lines and are supporting, I would say, still partially, the company. They still have certain hopes of us delivering certain situations leading to the sale of assets, but this is not a main condition for continuing working with us. We know we have a part of our job to do. Banks also are supporting the company but -- and are providing partial credit lines, not enough yet for our expectations. But we think this is going to start easing up in the next quarter.

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

Could you please comment on the outlook for your backlog, considering the numerous announcements and efforts to resume mining and hydrocarbon investments? And can we get some qualitative assessments on the possible role, considering your know-how and the industry leadership? I would also have a follow-up question, if you don't mind, and that would relate to your divestment strategy. How much is there to monetize? And how much is there to allot on debt, if you plan to?

Cesar, let me get back to you one by one, okay? First one was coming from backlog, what was the second one?

If you're considering actually reducing some of your investments, your divestment strategy, and how -- would that roll into debt drawdown, if you plan that?

Okay. Okay, let me talk about the backlog first. Right now, we have $2.4 billion -- $2.5 billion in backlog. Out of which, what we have already said, we are going to keep as part of the group, meaning, E&C, infrastructure, real estate and all of our recurring businesses. We are talking of $2 billion in backlog, okay? We have, in our E&C business right now, I would say, a full pipeline of mining projects and private investments in Peru and Chile. I am confident that we will be awarded with some of them in the near future. With that, I am hoping also that backlog should be, at the end of the year, around 1.8 or 2x our future revenues, which is what I would consider a healthy backlog for the company, and based on that, we will start growing again. That's essentially in backlog. In terms of our asset sale program, we have already said that the 2 last assets that we need to sell right now will come on a decrease. With that, we are hoping to finalize our debt reduction program and reach a target of close to PEN 600 million by year-end. You need to understand that right now, we have pending to be applied to the debt, as Mónica said, PEN 27 million coming from the Norvial operation. We have not already collected anything coming off the sales of Almonte because they are still pending of some public bids, and register their need to happen in Peru. Then we have the money coming from CAM and the money coming from Adexus to be applied to the debt. After that, we hope we had almost finalized our refinancing program of the group, and we can start thinking and investing.

And if I may ask another question. Is -- our understanding is there will be some further announcements on the expansion side on the mining side. What would your financial strategy be if Peru encounters a faster acceleration in mining investment, for example? What would happen to your balance sheet if you need to engage in growth given your size and, of course, mining know-how? What would you do?

Cesar, if I have to grow in our E&C business, this is not a problem of equity, it's more a problem of credit lines on indirect credit, such as performance ones and advanced ones. And also, anything coming as a working capital needed for this projects. So I would have to rely on credit lines and have to rely on maybe some local capital market instruments to provide a working capital, if needed. The only concern that I may have is if the infrastructure program of Peru starts gaining some momentum, which I don't see right now in the next 6 months, to be honest with you, and that will be the case when I will need to start thinking a different strategy to provide equity to new projects. In the case of E&C, equity is not needed to grow, okay? What we need to grow, in general terms, is credit lines, and that's something that we are working on.

(Operator Instructions) Our next question comes from Raúl Jacob from CrediCorp Capital.

Just one more question on the legal front. The exclusion of Graña y Montero and GyM from the Interoceánica case, does -- is that subject to further appeal, or is the exclusion definitive?

The only thing that I can comment on that is that, the terms for the appeal has already been finalized. And there is no action coming from the prosecutor in that sense. That does not prevent them to try again on a different basis, okay? We think that, that line of action should be reconsidered based on the new legal strategy of the government and the merge of the prosecutors in the Lava Jato case. But that's something I cannot anticipate. I don't really know what's going to be the strategy on the prosecutors on that matter.

Our next question comes from Arthur Byrnes with Deltec.

Sir, can you a little bit of, I know it's extremely difficult, but sort of guidance on profitability for the next 6 months, the balance of the year and for next year, assume things go the way you think it goes. Are we in a loss situation for a while? Are we -- was this a one-off quarter? Can you just give us some sense of profitability going forward, please?

We usually do not provide guidance on the results of the company. However, I would say that the profitability in the third and the fourth quarter should improve based on essentially the pending operations that we need to record, such as the one as -- we have already announced, of Almonte, the sales of assets, and some improvement in parts of the businesses, which has been slow as of today. In my closing remarks, I'll provide a different guidance from next year, okay?

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

Thank you. The Graña y Montero Group celebrated its 85 anniversary on June 22. Since its foundation in 1933, the group, which has started as a construction company, expanded into a multimillion dollar diversified conglomerate with interest ranging from construction to mining and digital, as well as infrastructure and housing business in various countries in the regions. In the past 18 months, we have fought against countless numbers of events beyond our control. We have learned many lessons and improved most of our processes to avoid the future uncertainty periods such as the one we live. Today, we see the light at the end of the tunnel, and even though there are certain milestones to achieve before coming out of it, we look at the future with optimism and certainty.

Going forward, we will focus our business in our core strengths. The Graña y Montero group will focus on 3 lines of business: Engineering and Construction; infrastructure; and housing with a regional vision. For 2019, we will try to build a solid, agile and profitable business that should start with revenues around $1.2 billion and EBITDA close to $200 million, a backlog close to 2 years of revenues and a debt around USD 600 million, essentially lead and support by our infrastructure business. I would like once again to thank you for your trust -- for the trust that you continue to put in us as we look into the future. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. Have a good day.