Aenza SAA (AENZ) 2018 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to the Graña y Montero Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to Luis Díaz Olivero, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good afternoon, everybody. Thank you for attending this conference call. As we usually do, I will make a brief summary of the relevant highlights of the last quarter of 2018. Then Mónica Miloslavich, our CFO, will expand on the financial results. We will finally open the Q&A session.

Ladies and gentlemen, during last quarter of 2018, the company has focused on financial consolidation and commercial efforts to improve our backlogs. Today, we are standing a more solid financial situation. As previously informed, in November, we transferred our 74% income during this, and last week, we announced the agreement which has happened to transfer 100% of our equity interest in Adexus. We expect to close this final market sale transaction in the next 120 days.

Thanks to all effort in place, during last year, we managed to close our consolidated debt in $654 million, which represents a $174 million reduction during the year. On the other hand, last quarter, the company started an equity increase, reaching a private placement process that after completion of the preemptive rights has raised $42.6 million. The final part of this placement is expected to have a recognition in the next 10 days.

After the private placement is concluded, the Board of Directors will incorporate the new independent directors. The board of 9 members will then be composed of 7 independent directors. We are not yet where we would like to be in financial terms, but we are confident that we will be at the end of this quarter. It will allow us to start looking to the future with renewed optimism. 2019 should be the year of stabilization and a more streamlined and focused business. We have implemented significant changes in management of the company and showed the good governance principles and with a commitment to transparency, integrity and truth as declared by the board in May 2017.

2018 proved to be a positive for sales and new business, which shows that there is ongoing trust in the excellent growth that the company has been building. The renewed and compliance function has also proven in the commercial effort that has allowed us to complete successfully due diligence for companies with highest standards, such as Anglo American and BHP Billiton.

Current backlog plus a recurring business is up in $2.1 billion level, with several new contracts signed in 2018, with a special emphasis on mining projects, which are a key strength for the company.

This backlog that might include the most recent contracts announced on January 29, received the works of the concentration plant for the Quebrada Blanca mine in Chile for a sum above $250 million. The backlog includes projects such as the $36 million Minera Escondida project; 2 Anglo-American contracts for the projects in Quellaveco mine, one for a total of $54 million and the other for $42 million. Other projects include the expansion for the Aceros Arequipa plant for $25 million and the construction of the oxidization plant for Mina Justa for $85 million. In Colombia, 2 projects were awarded in 2018, Electrinorte for $101.3 million EPC and O&M for $19.6 million. Total awards for 2018 are more than $600 million.

In January 2019, we closed a small, but significant contract of $10 million through Concar, our infrastructure operator for the conservation and operation of the highways in the south of Peru, but significant in this contract is that it is with the Rio Nacional with state-owned highway authority. Revenues for the year were close to our budget despite a more difficult start of the year by E&C, which has been showing signs of recovery since the middle of the year.

2000 (sic) [2018] results show a $21.8 billion provision calculated at the net present value of the $48.9 million possible future payments that the company has decided to include in 2018 results due to the potential Chile operation to be paid to the Peruvian government for the concepts of gains incurred into the 2 projects executed in association with Odebrecht and others, once the legal processes in the Lava Jato and the construction capital investigation complete. The calculation of the $48.9 million potential liability gross amounts have been estimated under the provisions of Law 30737.

With regard to the ongoing business, Line 1 of Metro de Lima will transport close to 5 million passengers daily by mid-2019 with the completion of the Infrastructure expansion project already at 96% completion rate. GMP completed the preparation of 33 new roads in Block IV during 2018 with an investment of $21 million. In 2019, the objective is to fulfill the commitment to invest $25 million in Block III. We did $21 million investment in Block IV and attempts to commitments in terminals in Peru. Viva GyM shows more than 1,900 units in 2018 within its 2 main business divisions: social interest housing and traditional and office housing. This amount represents a 35% increase over total sales in 2017.

Last December, the company delivered a notice to the Peruvian government informing it of the existence of a dispute related to the Peruvian government's payment to pay GSP the net accounting value of the assets at time to the concession and formally commencing direct negotiations to reach a settlement to solve such dispute. The company may conduct international arbitration proceedings, again, with the Peruvian government if the nation dispute is not solved within 6 months. The reorganization and consolidation of the new business and strategy will be our priority for 2019.

In 2018, the group concentrated on strengthening corporate governance and corporate sanctions, including our renovated legal department, our public effort and sustainability area and an internal audit function. The design of the new structure for the business is now ready to be executed with the regional E&C business at the core with Mr. Javier Vaca, its new regional head of the unit already working on the transformation. The Infrastructure business is consolidated and continues to expand in the strategic projects such as the expansion of Metro Line 1. We will continue in the line of being very selective and strategic in the expansion of this business. The housing division, in spite of not showing growth in 2018, continues to improve in sales and in sales figures.

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

Thank you, Luis. As we mentioned in the last report, as a consequence of the sale of GMD and Stracon GyM and CAM, according to IFRS rules, the results as well as the profit from the sale of investment net of taxes 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.

Revenue for 2018 decreased by 2.2%, mainly explained by lower revenues in the Engineering and Construction area compared to 2017, and to a lesser extent, by lower revenues in the Real Estate area. On the other hand, this decrease is offset by higher revenues in the Infrastructure and -- area and Technical Services area. The higher revenues in the Infrastructure area are due to the increase in the oil price of oil as an increase in the production of barrels per day, the increase in revenues of the Line 1 of the Metro due to the works of the expansion and the operation of new trains in addition to more maintenance work executed by (inaudible).

Consolidated gross profit increased 28.9% and the margin increased to 16.8% in 2018. These results are explained by the sale of Almonte land in the Real Estate area and higher results in the Infrastructure area due to the increase in the oil price and the expansion of work of Line 1 of the Metro and the operation of new trains. On the other hand, the results are partially offset by lower profit in the Engineering and Construction area, explained by claims and costs not recognized in Talara project and the impairment of some accounts receivable.

Administrative expenses for 2018 decreased 11.9% compared to 2017, mainly explained by the decrease in expenses in the E&C area. On the other hand, the administrative expenses in the Real Estate area increased due to the Almonte sale expenses and the impairment of expenses on the Aconcagua project.

The line of other operating expenses in 2018 registers the provision included for the potential civil compensation in favor of the Peruvian State of the 2 group companies that have been incorporated as civilly responsible third parties according to the terms of the Law 30737. Therefore, operating -- operational income increased 70.4% in 2018 compared to 2017, with margins of 4.6% and 8.1%, respectively. The increase in financial expenses is mainly explained by the financial discount of our long-term account receivables with GSP.

In addition, due to the increase of the rates and commissions of financing with GyM, and finally, as a consequence of the accrual of interest for the beginning of operations of the second global market of Norvial, offset by the financial income from the sale of CRPAO's in the framework of the financing of the expansion of Line 1.

The line of profit for discontinued operations shows a profit of PEN 44.4 million for the sale of Stracon GyM and CAM in 2018 compared to PEN 203 million for the sale of GMD in 2017.

Consolidated net income by the end of 2018 was in loss of PEN 74 million as a consequence of the results described above.

The total amount of consolidated debt is $654 million. Of the total debt, $140 million corresponds to financing of working capital of the different subsidiaries of the group and leasings for the acquisition of machinery and equipment. On the other hand, $373 million corresponds to project finance debt for the Infrastructure project. In addition, $98.4 million corresponds to the debt for the equity financing of Gasoducto del Sur, the proportional part of the bridge loan of GSP project, and $43.1 million corresponds to the debt from dividends monetization of Norvial.

The working capital debt was reduced by $58 million compared to the amount reported on the third quarter of 2018, mainly explained by the deconsolidation of CAM debt due to the sale of the subsidiary as well as the reduction of debt in different businesses of the group.

On the other hand, at the end of 2018, Chubb debt was canceled with part of the proceeds from the sale of CAM. The remaining proceeds were applied to the debt reduction on January 2019, after the authorization of the Ministry of Justice.

Thank you for your attention, and we can start now with Q&A session.

(Operator Instructions) And the first question comes from Raúl Jacob with CrediCorp Capital.

I was wondering if you could provide some more detail about the Quebrada Blanca project that you recently were awarded. Is that going to work with a (inaudible) like prepaid -- a prepay from the company -- from the mining company? Or are you going to require more working capital debt for that?

Thank you, Raúl. As we have announced before regarding our new contracts, the company is aiming and negotiating with its customers to manage net cash flows positive or at least in balance cash flow for each of our projects. In line with that, we will receive partial advance payments as well as related payments during the life of the contract in order to manage the situation of not needing additional working capital for such contracts. And initially, we will reach a security such as performance loans or down payment loans, but we do not expect to raise our debt in relation to that project.

(Operator Instructions) And the next question comes from (inaudible).

I have 3 questions. The first one goes to E&C. I would like -- if you can give us a little flavor of when do you think the operating income in each quarter we will see a turnaround in that business, do you have an outlook on that? The second question goes to the GSP about what Luis mentioned, if you can give us a little bit of color of what are the next steps that we should be expecting from the company or the government? Or what timing we should be for next steps in getting back the money that State owes us? And the last one is about the private placement, if you can give us color on how it ends? When are the shares going to be issued? And what is the amount of shares?

Okay. Regarding the operating income of E&C, as we have outlined through the process of the road show, we are expecting to have probably a 5% to 6% margin EBITDA during the year. In line with that, we should be seeing both results starting in the second quarter. We may still have a weak first quarter, but after that, we should be somewhere that amount of margin -- EBITDA margin. In the case of GSP, next steps are the following: we should receive an answer of our letter sent to the government in the next days. After that, we should start discussions regarding couple of things with solutions at this level for the next 6 months, the 6 months, we should count starting from December 21. If that has not concluded after 6 months, then we are entitled to start a formal international arbitration at the CRE, and that's probably the most likely scenario. We do not anticipate at this point in time and after 2 years of being -- complaining the government to receive a solution, to get an end solution in the next 6 months. But what you can say that the clock has already started for this process. And after we start the arbitration, as we have said before, 5 years should be a reasonable term in order to complete all the discussions linked to that arbitration. We hope that since the energy minister has announced that they will launch the notification of the natural gas in the southern part of Peru, some project may arise earlier than the 5 years, and there might be an opportunity to find a solution. However, as of today, the only expectation that we can provide to our shareholders is that we should go for the arbitration, and then we should follow the legal proceedings in order to collect. Regarding the private placement, as I said during the call, we expect to deliver additional news regarding that situation later this week. As far as this moment, I cannot provide any additional information on that process.

Just on GSP, I have a question following this one. Are we going as Graña y Montero or are we going as GSP as a consortia? And the last question is if you have any update on Adexus? Is this going to be ended up this quarter or we should expect one more?

In the case of GSP, we have presented our Graña y Montero, but on behalf of the consortium, but we will be the ones who will be pushing that scenario. That's a legal argument that is a little bit complex to explain on the phone, but that's where we're going to work. And in the case of Adexus, as I said during the call, we do expect to close the transaction within the next 120 days. So you should expect that to happen during the second quarter.

(Operator Instructions) And the next question is a follow-up from Raúl Jacob with CrediCorp Capital.

If I may, I'd like to ask more an accounting question, I guess. There is PEN 214 million of other losses -- other operating losses in 4Q '17. What are those 4, because I think you moved the GSP impairment to 2016 when the numbers were audited, right?

You are asking about 2017 audit financial statements?

Yes. The SMV, the fourth quarter of 2017, there is other losses for PEN 214 million?

Yes. As we mentioned, remember that last year, we were auditing 2 years at the same time, 2016 and '17. And when we were about to close the audit process, we had to change the impairment that we registered in 2017 and put it in 2016, the impairment of GSP. That is the main difference between that and the final 2017 figures.

Okay, yes, but I mean, there is still in the 2018 results that you have just published, you have the comparison with 2017. When you do that comparison, there is -- in the comparison column, there is loss of $214 million, which shouldn't be of the impairment, right? I'm wondering what are those $214 million losses.

Raúl, if you don't mind, because I don't have all the information of all the last quarters here with me, why don't you send me the comparison you're making, and I will give you an answer as soon as possible.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you. 2018 posed to be a very challenging year for Graña y Montero, but a year which has allowed the company to achieve more stability. We envision 2019 as the year where we turn the page and set behind matters related to current investigations, a more business-oriented deal where the company's focus will be on profitable growth. After 2 difficult and challenging years, we aim to look forward to the future. Thank you very much.

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