Aenza SAA (AENZ) 2018 Q3 法說會逐字稿

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

Thank you very much. Good afternoon, everyone. Thank you for attending this conference call.

Before we formally start this call, I would like to communicate the following. As the company has publicly announced in Peru and on a Form 6-K filed with the SEC on October 10, 2018, the Board of Directors approved the calling of a shareholders' meeting to be held on first call on November 6, 2018, in order to propose to shareholders the approval of matters relating to the issuance by the company of up to 211,864,407 new common shares at a purchase price per common share of not less than USD 0.6136, including among other related items approved of: one, a capital increase; two, the issuance of preemptive rights in connection with such capital increase pursuant to the provisions set forth in the Peruvian law; three, a private placement by the company of the common shares not subscribed for in such preemptive rights issuance; and four, the use of the funds from the capital increase to strengthen the balance sheet of the company and/or its subsidiaries.

The preemptive rights to subscribe for common shares of the company as well as the common shares issuable upon the exercise of such preemptive rights have not been and, if issued, will not be registered under the U.S. Security Act of 1933 as amended or under the securities laws of any state or other jurisdiction outside of Peru. In addition, such preemptive rights, if issued, would only be made available pursuant to applicable Peruvian law only in Peru and may not be offered, sold, resold, transferred, delivered or distributed directly or indirectly into or within the United States under applicable U.S. securities laws or other jurisdictions were prohibited. The common shares issuable upon exercise of such preemptive rights may not be offered, sold or subscribed for directly or indirectly except in a transaction that is exempt from or not subject to the registration requirements of the U.S. Securities Act of 1933 as amended. Our description of these matters is not an offer to sell or a solicitation of an offer to buy any securities in the United States or U.S. persons.

The shareholders' meeting has not yet occurred, and all relevant information relating to the foregoing can be found into the company's public filings. Accordingly, we will not take any questions today during the question-and-answer period relating to these matters.

Coming back to the subject of this call, we have organized it as follows. First, I will make a brief summary of the relevant highlights of the third quarter 2018 in order to continue with the commitment to information and transparency that this management and Board of Directors have pledged to in order to make Graña y Montero an efficient, nimble and profitable company. Then, Mónica Miloslavich, our CFO, will expand on the third quarter financial results. She will also provide details on our risk analysis executed by the company and its potential impact on the results at year-end. We will finally open a Q&A session as we usually do.

Ladies and gentlemen, third quarter financial results are in line with company expectations. And as mentioned previously, Mónica will provide details on the financials. During this quarter, the company has focused on financial consolidation and company reorganization with emphasis on corporate governance and business development in order to resume the regional consolidation strategy during 2019.

The company has continued with its strategic debt reduction plan in order to advance its financial stability and has reached a $735.6 million level of debt at the end of this quarter, equivalent to $92.8 million reduction in value, which represents an 11% reduction against the December 2017 financials.

On August 21, PRINSUR paid Almonte S.A.C., a subsidiary of Viva GyM, $74 million as part -- as a partial payment for the sale of 421 hectares of land with a balance of $13.8 million remaining, which will be completed by December 2018 upon the occurrence of the agreed conditions precedent for the pending payment. Dividends received by Viva GyM from Almonte S.A.C. as a result of this sale were applied to our debt reduction strategy.

The company entered on August 2 into a purchase and sales agreement for shares of CAM, our electrical service subsidiary with operations in Chile, Colombia and Peru, with SUEZ Energy Chile and Energy Services Peru under which the parties agreed to sell all their shares of CAM. Graña y Montero holds a stake income of 73.16% of its share capital. The closing of the transaction is subject to the consent to be issued by the Chilean antitrust entity, FNE. We estimate that such pending approval should be obtained no later than November 23.

In addition, the company is pursuing the sale of its stake in Adexus after successfully resolving a dispute with the minority shareholders of such subsidiary. We expect to finalize the sale of Adexus by the end of the first quarter of 2019.

As I mentioned above, the company has also advanced with corporate governance and organizational restructure. A key strategic change has been the creation of the Engineering and Construction Business Development Committee on July 20, which is responsible for the approval of the presentation of [Bix] and proposal for new projects for all the E&C business with a deep and complete risk assessment. This new entity has received delegated powers from each of the boards of our 4 companies: GyM, Vial y Vives-DSD, Morelco and GMI.

Mr. Antonio Rodriguez, our former Corporate Investment Officer, has been appointed the new CEO of Morelco, our Colombian subsidiary for Engineering and Construction, and has been charged with the task of developing and aligning the regional strategy in Colombia and expanding the current Morelco business, which today is mainly limited to oil and gas into broader opportunities.

On July 23, Mr. Ernesto Balarezo Valdez was appointed as Independent Director of the group, replacing Mr. José Antonio Rosas, who resigned for personal reasons. He has been appointed Vice President of the Board and a member of several support committees of the board. Mr. Balarezo is a reputed Peruvian businessman with extensive experience in mining. We are sure that Mr. Balarezo's knowledge of that sector will be instrumental to our efforts to grow the Engineering and Construction and regional business by expanding our mining customer base in our key markets.

Backlog has reached an inflection point thanks to the award of several new contracts during the past quarter, which include, in Peru, the expansion project for the Aceros Arequipa plant for $25 million, the construction of the oxidization plant for Mina Justa for $85 million; 2 significant projects in Chile, the construction project for Minera Escondida for $37.5 million and the contract for maintenance services for the equipment of the Aconcagua refinery for $12 million.

There is an important recovery of mining investment in the region that will present a significant opportunity for which we are preparing. We are building our commercial pipeline and between bids already submitted and those being prepared, we have a potential worth of projects close to PEN 1 billion. Despite the fact that we do not expect to be awarded all the projects we are bidding on, we envision a potential for a healthy and profitable backlog to be added into the next 6 to 9 months.

On the legal front, there are no relevant issues to report with ongoing proceedings in Peru or with regard to the class action suit. We have sent a draft of the trust agreement required under Law 30737 to the authorities and are awaiting approval to close the transactions, completing all former requirements under previously mentioned law.

The company has been working with Tecnicas Reunidas on resolving directly several disputes regarding non-recognized additional works in the Talara refinery project. Negotiations continue as of today, and we expect to have them resolved in the next weeks with some risk on our year-end results that will be explained by Mónica.

With regards to ongoing projects, we should -- we would like to highlight that Line 1 of the Metro Lima currently transports more than 400,000 clients per day with the operation of 42 trains, 18 of which have started operations in recent months, increasing the capacity of the service. The entire fleet will account with 44 trains with a capacity of 1,200 persons per train at the end of 2018. Frequency between trains is reduced from 6 to 3 minutes at peak hours and will be prepared to transport up to 500,000 passengers per day, which represents 5% of Lima's total population.

LatinFinance recognized the financial deal of $360 million for the expansion of trains and infrastructure of Line 1 of the Lima Metro as the best infrastructure finance in Latin American in 2018 and awarded us this distinction in a ceremony in New York last month. We are very proud to be recognized with this award under the challenging conditions lived by the company.

GyM delivered the complete Hyatt Centric hotel located in the exclusive San Isidro district and which accounts with 254 rooms and 3 restaurants. The complementary 10-story office building was delivered in October. Also in October, the 164-room Aloft hotel was completed and is ready for delivery in November.

GMP renewed the southern terminals contract for another year. And in August 2019 when this contract expires, we'll have managed the oil terminals for the past 20 consecutive years.

Viva's housing subsidiary delivered 241 social interest apartments in the Comas district, a total of 326 sold in the quarter, which brings the total to almost 1,300 units in the year.

Finally, I would like to mention that on July 2, the residual water treatment plant of La Chira completed 2 years of operation. The plant treats more than 30% of the residual waters of Lima from 14 districts. At 28 months of operation, La Chira has treated close to 350 million cubic meters of residual waters, equivalent to more than 100,000 Olympic pools and has removed more than 28 million kilos of solid waste, which would otherwise have ended in the Pacific Ocean. With this plant, Lima has regained a clean coast and has recuperated the marine ecosystem, directly improving the quality of life of Lima citizens.

Thank you very much for your attention. I will now hand over to Mónica for the financial results.

Thank you, Luis. As we mentioned on the last 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 have 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 third quarter of 2018 increased 3.4% mainly explained by higher revenues in Infrastructure area and the Real Estate area due to the sales of Almonte land during the third quarter of 2018. This increase is offset by lower revenues in the Engineering and Construction area due to less projects under execution. The higher revenues in the Infrastructure area by 55% compared to the third quarter of 2017 are due to an increase in the oil price as well as an increase in the production barrels per day, the increase in the revenues of the Line 1 of the Metro due to the works of the expansion and to a lesser extent, because of the operation of new trains in addition to more expansion works executed in Norvial road and more maintenance work executed by Concar and Canchaque.

Consolidated gross profit increased 40% and the margin increased to 16% in the third quarter of 2018. These results are explained by the sale of Almonte land in Real Estate area and higher results in the Infrastructure area due to the increase in the oil price, the expansion works of Line 1 of the Metro and the operation of new trains. On the other hand, these results are offset by lower profit in Engineering and Construction area due to lower results in GyM explained by claims and costs not recognized in the Talara project, finally, due to lower profit on the Technical Services area as a consequence of less efficiencies and higher costs in the projects under execution in CAM.

Administrative expenses as of the third quarter of 2018 increased 3.5% compared to the third quarter of 2017 mainly due to sales expenses of Almonte sale. The line of other operating expenses in the third quarter of 2018 registers the sale of GyM's participation in one of its consortiums and the sale of machinery and equipment. Additionally, the line of profit from sale of investments in subsidiaries in the third quarter of 2018 reflects the profit of PEN 41.9 million from the sale of Stracon GyM on April 2018 compared to a profit of PEN 98.7 million due to the sale of GMD, COGA, PRINSUR and Petit Thouars Building during the second quarter of 2017. Therefore, operational income decreased 10.3% compared to the third quarter of 2017 with margins of 12.2% and 10.6%, 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 16 million, in addition, due to the increase in interest rates and financing costs in GyM and finally, as a consequence of the accrual of interest for the beginning of operations of a second road of Norvial, offset by the financial income from the sale of certificate in the framework of the financing of the expansion of Line 1.

The line of profit for discontinued operations shows the profit of GMD and Stracon GyM for the third quarter of 2017 and Stracon GyM for the third quarter of 2018.

Consolidated net income by the end of the third quarter of 2018 was PEN 15.7 million as a consequence of the results described above.

For the end of the year result, we have identified some risks that could impact the result, among them the result of the negotiations with the client Tecnicas Reunidas for the Talara refinery project as well as possible impairments of accounts receivable and investments which are noncash effects.

The backlog -- the consolidated backlog of $1.9 billion plus the recurring businesses of $729 million reached a total amount of $2.6 billion by the end of third quarter of 2018, which represents 1.7 years of revenues. The main projects awarded during the third quarter are the expansion works in Aceros Arequipa plant for $25 million, the construction works in Mina Justa for $85 million. Also, in Vial y Vives-DSD, we won the equipment maintenance with ENAP for $12 million. And also, the extension for an additional year of the southern terminals contract.

The total amount of consolidated debt is $735.6 million, which includes the financial debt with Chubb. Of the total debt, $198 million corresponds to the financing of working capital of the different subsidiaries of the group and leasing for the acquisition of machinery and equipment. On the other hand, $390 million corresponds to project finance debt for the infrastructure project. In addition, $97.5 million corresponds to the debt for the equity financing of Gasoducto del Sur, the proportional part of the bridge loan of GSP project and $42.9 million corresponds to the debt from the dividends monetization of Norvial.

The working capital and the debt associated to GSP was reduced by $56 million compared to the amount reported on the second quarter of 2018 mainly explained by the amortization of GyM debt with the collection of Contugas and the amortization of GSP debt with the funds from the monetization of dividends of Norvial. On the other hand, project finance debt increased due to the financing of the expansion of Metro Line 1.

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

(Operator Instructions) And our first question comes from Ron Dadina from MUFG.

I just wanted to better understand what was the reason for the drop in net income during the third quarter. And also, can you give us an idea of your free cash flow and expected paydown in debt maybe for the next 6 to -- 6 months to 12 months?

Ron, the reduction in net profit is mostly explained because during the -- upon the third quarter of 2017, we sold more assets than we have sold during this year.

(foreign language), estimated debt.

Estimated debt for the end of the year?

Maybe over the next 3 to 6 months, estimated free cash flow and reduction in debt?

Would you please repeat your question? I'm not sure I understand.

Yes. Estimated free cash flow in terms -- meaning excess cash you expect to have after your expenses and interest and everything. And do you plan -- if there is going to be excess cash, is there going to be any reduction in debt?

No. All the reduction of debt will come from the asset sales that we have announced, and we don't see any excess cash at least for the year to reduce additional debt.

To complement what we said last quarter, there is a pending sale of the electrical company called CAM which should be announced during this last quarter. Okay. That should account for a debt reduction of around $50 million or $55 million as a consolidated basis. The additional debt reduction will probably come on the -- by the end of the first quarter of 2019, which is upon the sale of Adexus, and should be another -- similar amount of debt reduction that what we said with this asset sale, we intended to reach a level of debt close to $600 million once we finalize the sale of those 2 assets. And in terms of operating cash flow, most of the cash generated will be used to compensate the working capital problems that we have had in the past in our E&C business.

(Operator Instructions) And our next question comes from Raúl Jacob with CrediCorp Capital.

I'd like to know what would have been the EBITDA excluding the sale of Almonte, if that's possible.

Yes. Just hold on a minute, please. The EBITDA for the third quarter is PEN 556 million and from that, PEN 260 million is related to the asset sales of Almonte.

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

Just to say thank you very much for your attendance to this call. As you all -- as we said in the original disclaimer, we have our shareholder meeting on next Tuesday. And after the conclusion of such shareholder meeting, we will communicate to the market the results of it. Thank you very much.

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