Aenza SAA (AENZ) 2019 Q2 法說會逐字稿

Good afternoon and welcome to the Graña y Montero Second Quarter of 2019 Earnings 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, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good afternoon, everyone. Thank you for attending this conference call. As we usually do, I will make a brief summary of the relevant highlights of the second quarter 2019; and then Mónica Miloslavich, our CFO, will expand on the financial results. We will finally open a Q&A answer session.

Ladies and gentlemen, the second quarter 2019 shows a positive trend for the company with improved financial results, a strong backlog and recurring business, representing 2 years of operation and a stable ongoing business. We concluded the capital increase process on June 25, which allows the company to finally repay the debt related to Gasoducto Sur Peruano. Total consolidated debt was reduced from $633 million in December 2018 to USD 483 million, which represents a 24% reduction. After 2 years of significant efforts, we have finally reached our desired financial structure. We still have several outstanding nonfinancial commitment to deal with as well as the sale of Adexus pending, but financial health has been restored and our operations run normally today.

Backlog and recurring business reached $2.5 billion, which represents close to 2.2 years of sales. There is a renewed commercial interest in the company with various bids in process and significant contracts awarded during these years, in Chile and Peru. This quarter, we announced a new contract with [Papelera] Arauco in Chile for the construction of the cellulose plant for USD 112 million as well as a new contract for the new Vistamar Hotel in Lima.

Mr. Carlos Montero resigned as a Board Member on May 22, 2019, due to personal reasons. Chistian Laub and Esteban Vitón were appointed as Board Members, representing the 2 largest shareholders incorporated in the capital raise, concluded last month. With big changes in the Board composition, it is once again integrated by 9 Board Members with a majority of independent members in the Board.

Taking a look into our projects and operations. We would like to highlight the following: The construction of the oxide plant of the Mina Justa project registered an advance of 26.4%, while civil works and electromechanical assembly of the pebble grinding and crushing area of the concentrating plant for Quebrada Blanca Phase 2 project in Chile have just started as well as the construction of the concentrating plant of the Quellaveco mine, which began in April 2019.

Our investments in oil and gas have taken oil production to its peak, 4,604 barrels per day in June 2019. With the arrivals of new trains and the completion of the expansion of the stations, the Line 1 of the metro -- of the Lima Metro is transporting a record of 520,000 passengers per day. Our housing division has completed 409 sold housing units in the quarter, and we are also preparing to launch its new high-end projects in the exclusive San Isidro district. The project designed by award-winning French architect, Jean Nouvel, will have 23 units from 350 square meters to 700 square meters, and construction is forecast to start in the first quarter of next year.

The company held its first Investor Day on July 2 with the objective of sharing its renewed strategy and business plans with the investor community. Our management team presented the state of the business and plan with 57 investors in attendance. We will repeat this event on a regular basis and thank those who attended and provided questions and feedback.

On the legal front, we continue to commit to our pledge of trust, transparency and integrity, and continue to collaborate with authorities as we have done for the past 2 years. We still have open investigations and therefore expect some repercussions and noise from those ongoing processes, although none of which should have any impact on the recurrent operations or financial status of the company. The latest news regarding Gasoducto Sur Peruano should not affect the company's ability to recover the investments made through the legal avenue. Legal firm for direct negotiations expired last month, and the company is now entitled to enter into arbitration at any time. The legal situation will continue to evolve with the precautions -- but with the precautions and provisions the company has set in place, we believe it should not have an effect on the current business and the future prospects of the company.

We see with satisfaction that this quarter, after a difficult time, showed positive results. We have set the focus on the business and are now able to concentrate on the future of the company. Once again, we thank you all for your continued support. We are optimistic that with all the advances, we will be able to concentrate on regaining momentum and developing further opportunities for growth. Once again, thank you very much for your attention.

And I will now hand over to, Mónica Miloslavich, CFO, for the financial results.

Thank you, Luis. As we mentioned on the last report, as a consequence of the sale of Stracon GyM and CAM according to IFRS rules, the results as well as the profit from the sale of investments net of taxes, are presented as discontinued operations in our financial statements. Therefore, the results of 2018 have been reclassified accordingly. This effect is presented only in the income statement, not on the balance sheet. Also, the subsidiary Adexus has been reclassified as an asset held for sale. Therefore, the results of the period are also shown in the discontinued operations line item. For more information, please see Note 7 of our second quarter 2019 financial statements.

Revenues for the second quarter of 2019 reached PEN 1.6 million -- PEN 1.6 billion, sorry, slightly lower than the revenue reported at the end of the second quarter of 2018. Revenues of the E&C increased mainly due to increase in the volume of projects under execution, like Quebrada Blanca, Goldfields, Quellaveco and others. On the other hand, revenues in Infrastructure decreased due to the completion of the expansion work in the Lima Metro, partially offset by the increase in the amount of kilometers traveled due to the new trains' standard operation. In addition, the execution of Norvial expansion work increased revenues, while in the oil and gas businesses, revenues were similar to the previous year due to the increase of production of barrels per day even though the oil price was lower than previous year. Finally, in Real Estate, there were less traditional housing delivered compared to the second quarter of 2018 and more affordable housing units delivered in the period, which resulted in lower revenues.

Consolidated gross profit increased by 8.8%, and the margin increased from 12.3% to 13.9% in the second quarter of 2019. These results are explained by the good results in the projects under execution in E&C, improving margin as compared to the second quarter of 2018.

Administrative expenses for the second quarter of 2019 reached 5.8% of revenues compared to 7% at the end of the second quarter of 2018. This decrease is mainly explained by the reduction of expenses related to third-party services, legal expenses and the reduction of expenses associated with the sale of assets. Additionally, at the end of the second quarter of 2019, an extraordinary profit was recorded due to the participation in the financing of the concessions, partially offset by the impairment in minor investments of the company. As a result, operating income increased 76.7% in the second quarter of 2019 compared to the second quarter of 2018 with an improvement in margins from 6% to 10.9%, respectively, because of the results explained above.

Lower financial expenses in the second quarter of 2019 are mainly explained by the reduction of debt associated with GSP and the cancellation of working capital debt for the expansion of Line 1 of the Lima Metro as well as by the financial discount of GSP long-term account receivable due to the reduction of rates from one period to another. The line of participation in associates reflects the results on the minority investments held by the company. The exchange rate as of the second quarter of 2019 appreciated compared with 2018 end of year. Consequently, there was an impact on the exchange difference due to the balance of assets in U.S. dollars as of the second quarter of 2019.

The increase in income tax expense is due to the result of 2012 SUNAT's audit in GyM, the deferred income tax of the consortiums and the various nondeductible expense. The line of profit from discontinued operations shows a loss of PEN 11.2 million from the results of Adexus and asset held for sale compared to PEN 16.7 million profit from the sale of Stracon GyM, CAM Chile, CAM Servicios at the end of the second quarter of 2018.

Consolidated net income in the second quarter of 2019 was PEN 27 million, 195% higher than in the second quarter of 2018. The net margin went from negative 1.7% in the second quarter of 2018 to a positive margin of 1.7% in the second quarter of 2019.

The total amount of consolidated financial debt is $483 million. Of the total debt, $127 million corresponds to financing of working capital of E&C and Real Estate and leasing for the acquisition of machinery and equipment. On the other hand, $313 million corresponds to the project financed for the infrastructure project. In addition, $43 million corresponds to the debt from the dividend monetization of Norvial. The debt as of the second quarter of 2019 decreased 24% compared to the end of 2018, mainly due to the cancellation of the debt associated to GSP with associated capital raise and cancellation of the working capital debt of Line 1 of the Lima Metro due to the completion of the expansion works. What is important to mention is that from the amount of the outstanding, 65% corresponds to the debt associated with the infrastructure projects and only 26% is the working capital debt of Engineering and Construction and Real Estate.

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

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Jorge Opaso with KJK Investment.

Congratulations for your results. I have 2 questions. My first question is regarding the EBITDA margin of Engineering and Construction. You are reaching figures of roughly 6% in the second quarter. For the second half of 2019, we should continue expecting this number to continue increasing slightly. And if you can give us some -- just a color or some sense of what range we should expect for 2020.

That's one question. What's the second one?

It's that -- it's for second half of 2019, we should continue expecting this 6% that you are reaching in the second quarter of EBITDA margin in the Engineering and Construction segment to continue increasing. And if you can please give us a sense of what range we could expect for 2020.

Okay. Since -- as we have mentioned, there is an important improvement in the margins in the E&C business. Currently, all our projects are reporting positive results and you should expect, for the end of 2019 all other things equal, that margins keep improving, and we should be aiming to reach the lowest range of the EBITDA target for E&C, which is 6% by year-end. Next year, it should also keep improving as we have offered, we are aiming to keep improving that EBITDA margin, and we should expect something in the neighborhood of 6% to 7% for 2020.

The only potential risk that we still have open in the E&C business is the final negotiation with Tecnicas Reunidas regarding the cancellation of the contract. Negotiations are still open and we have not recorded any additional loss currently in that sector. So that's the only risk that I can anticipate in those -- in that area.

Okay. Okay. And the second question is regarding the backlog. It's for remaining -- the remaining of the year, sorry, especially in Engineering and Construction, considering the proposals you are studying. If you could give us a sense we should expect similar figures, I mean increasing, decreasing for the remainder of the year.

We have reached the level of backlog that I was expecting to have by year-end. We also talked about $2.5 billion in terms of backlog by year-end. Considering that this is the second quarter that we have with the same level, I am expecting to maintain those levels. We have won several contracts in the mining sector, which have -- we have already recorded into the backlog. There are some bids coming but not in that sector, which means that we may be winning contracts but not that big. Therefore, my expectation is more in the same level rather than improving.

And finally, considering just a sense on what you are currently starting, the proposals and starting, I mean how is the activity in Peru and Chile for you guys for -- I mean for the backlog that will be, I mean, for 2020? I mean what are you starting now? Only a sense.

As you can see -- yes. As you can see in the report, current backlog for 2020 is on top of $1 billion right now -- or at $1 billion level. So I think that we should see -- well, we can forecast a minor increase in revenues for next year based on the current backlog that we have. So it's in the line of the business that we -- or the business strategy that we have developed. Remember that for us, backlog is important but profitability is more important also. So we are more in the target of aiming for an EBITDA margin level and a profit rather than the size of the company. But of course, having a strong backlog is also important in order to make the results happen.

Our next question comes from Sebastian Montoya with Compass Group.

It's not Sebastian. It's [Luis] here. First of all, congratulations on the good results and the solid improvement on the balance sheet. That was key for the story. Now with these numbers and this improved balance sheet, the company is -- and the growth in backlog, the company is obviously in a much better situation anyways than this time last year. So my question to you, Mónica and Luis, is what is the market missing? Because there has been some clear improvement in -- operationally, yet the stock price is below the capital issue price. So my question to you is, what do you think the market is missing? Because you guys are delivering on everything you said you would do and at some points -- or some key factors better than expected. So what are we not seeing?

I will speculate but there is a lot of noise regarding...

Yes. I just want to get your view with your...

The legal situation, of course, there are certain concerns probably regarding any potential corruption in the GSP project. And this may or may not impact any further in the company. I am thinking that on that area that we still have a pending situation to solve. As I said during the capital increase road show, a lot of the energy of -- especially my energy, is trying to close these little contingencies and try to reach towards a certain level of comfort that we may transfer to the investor community and to the banks. But what we have already recorded is what we need to consider for legal contingencies. But until I have something certain that I can show to the market. I think that the market still have its doubts on that matter.

The rest may be certain things linked to liquidity in the shares. We don't see any much movement in that area, but again, these are probably a couple of speculations. As you probably said -- and this is something that I would give continuously to the market, 2 years ago, the level of the -- I mean if you discount the capital increase, we are exactly in the same network or value of the equity that we have when we have a company in very complicated financial and reputational situation. Two years after, I honestly don't understand why the share price is not reflecting all the improvement in the company. Maybe you can help me but I don't have...

We don't have the right answer.

We don't have the right answer for you honestly.

No. It's all speculation. I just wanted to get your view. And I think your view makes a lot of sense. Now unfortunately, despite of the efforts, you are dependent on -- let's try to be polite here -- the inefficient Peruvian government, to remove that legal overhang that you're talking about. Is there any chance that we accelerate this process? Or how is the Peruvian government dealing with the situation? Because we see a lot of speculation in the press and that obviously doesn't help the issue.

No. Look, we are doing everything that we can in order to speed up all this process. But honestly, it doesn't rely only on our effort, okay? It depends on several or external factors that I cannot control. News like the one that we have today with our major, saying that he's canceling the concession for Línea Amarilla, doesn't help either, okay? So as long as we have this strange behavior coming from the government, it's difficult to say. The only thing that I can promise you is that we are, at the company, doing everything in our hands in order to finalize this process as soon as we can.

Yes. And you're gaining credibility, because I mean, the results are very, very good. Like I said, congratulations on that front. So again, that was it, and thank you very much and congratulations again, great, great numbers.

Thank you very much.

Our next question comes from [Aisel McGowen] with [Cavia].

I wasn't able to hear very well during the call, but could you please give more detail on the extraordinary profit of PEN 50 million recorded at the holding level?

That was part of refinancing in one of the projects, in infrastructure projects that was a gain for the company, in the purpose of issuing the bond that has a concession.

There was an opportunity that we'd capture, based on the fluctuation of the interest rate linked to one of our bonds in the Infrastructure area, and that has provided us with an extraordinary profit. This is, of course, a onetime profit but still is something that we are very happy that we find out and make it happen.

And what project would that be? Is that only Línea Uno?

Sorry? What project...

Yes. So what project was that?

Line 1 of the Metro.

Line 1 of the Metro.

All right. And one more question on the -- on CapEx. What would be the expected number for 2019 and for each line of business?

The only pending CapEx that we have, it will be in the -- in Infrastructure. Probably we are still meeting for some other 20 million in capital?

Yes, something in that range.

Naturally or organic?

Yes, plus/minus 20 million in Infrastructure. And probably -- there might be a couple of CapEx also in the Real Estate business, but that's something still to be analyzed, okay? But component meaning...

Recurrent.

Not recurrent. Mandatory CapEx that we have pending to securities in the neighborhood of the 20 million.

And that will be $2 million, right?

Yes, that's correct.

Correct. Yes.

Our next question comes from Froylan Mendez with JPMorgan.

I have 3 questions, please. Given the choppy outlook for oil and gas prices, can you remind me what are the short-term opportunities to increase EBITDA contribution from the E&P segment that are not related to these commodity prices? That will be the first. The second one would be, was there any additional impact from the Talara project in the E&C segment during the second quarter? And lastly, what are the level of minority interest in the balance sheet that we should expect for the full year '19?

Okay. Let me try to solve most of your projects. As you know, we have mandatory investments in the E&P business in oil and gas, okay? As I have said before, while we do have oil prices in the neighborhood of the $60 per barrel, we should have in the -- we should be able to deliver a profitable business on top of our cost of capital, okay? We do -- there, we have mandatory investment of $40 million to $45 million per year that will -- of course, will bring additional production. Right now, we have only looked for with preparation campaigns. We should start Block III by year-end since we have already obtained the permits in order to do so. For next year, you should expect production levels on top of 5,500 barrels per day, and the peak that we are expecting to reach should be on the neighborhood of the 7,500 barrels per day, which should be accomplished in the next 3 to 4 years, okay? That's where you will see the future EBITDA coming from the E&P business.

In the case of Talara, as I have mentioned, and remember that we have 2 Talara projects: one which is under the contract or with Tecnicas Reunidas. That's the one that we announced the cancellation and that's where we -- where I mentioned that we have potential contingencies based on the negotiations that we have. And the other one, which is the Talara auxiliary works, is running smoothly with correct margins. And we are having that project engagement on time and on budget. So we don't expect any in surprises coming from there.

In the case of minority interest, okay, you should try to find out this on business-by-business level, okay? Where we have minority interest is in Morelco, okay, which is our E&P subsidiary in Colombia. That's where we have 30% minority interest. We do have minority interest in Line 1 of Metro, 25%, okay? We have minority interest in Viva, but we have minority interest in Viva in 2 projects in Parques de Comas and in Almonte.

50% in both.

50% on each of the cases, okay? That's the source of the figures of the minority interest. If you go into our financial statements and do a drilling and look at the figures that we report, you will find more clear figures regarding the current levels of the minority interest and you should probably forecast them based on that.

Our next question comes from Lucia Perez Calvo with LarrainVial.

I was wondering if you just comment us a little bit, what you have talked to your lawyers regarding the Gasoducto Sur Peruano contract, like if they probably offer clients the recovery of investment could be affected by recent Odebrecht declaration of -- prior in the period. That's my first question. And the second one, if you could give us a range of the expected EBITDA margin in Real Estate business for this year.

Okay. Let me begin with GSP. In the case of GSP, I am going to provide you an answer based exclusively on the legal analysis that we have developed. And let's assume just for the case of the analysis that corruption is find -- or found in the bidding process of obtaining GSP. If we go directly and legally to the contracts, okay, the clause, the anticorruption clause in the contract says that in the event of corruption, the contract will be terminated. And if you terminate the contract, you should go directly to the clauses in the contract, based on the recovery of the investment, okay? Usually-- and there is a legal difference in here, if the clause sends you to termination processes in the contract, then you will follow all the mechanisms that we are using right now in order to complain the recovery of our investments. In the case the contract would have said that the process or the bidding process will be [void], then there will be no chance of recovery of investment, since the clause specifically mentions that it goes to termination...

I'm sorry. I can't hear anything in the call.

(technical difficulty)

Sorry for the interruption. I don't know if you hear everything regarding GSP or not. Otherwise, I can repeat it.

No. I only follow -- and you were talking about that if corruption was found in the bidding process, the contract should be terminated as you should go directly to the clauses of termination. That is the process that you were using, that you have used like last year.

Yes, that's the case. Legally, if we use only the legal analysis, you go to the cancellation -- excuse me, to the termination clause, and you should get exactly the same case that we have right now. Current anticorruption clauses in the contracts, instead of sending you to termination of the contract, voids the process of the bid. And therefore, you get no reimbursement of your investment. But that's not the case that we have in the GSP process. And therefore, you should expect that we can continue our legal process in order to recover the investment in GSP. Again, this is only based on legal and nothing else, okay?

In the case of the EBITDA margin, as I was saying before the call got interrupted, we are hoping that we will get 25% EBITDA margin level in our Real Estate business.

Okay. The answer was very clear. But for the Real Estate, are you considering in the 25% any sale from Almonte?

Yes, there is a portion of sales of Almonte in the Real Estate and that's -- I don't have the current level. I think we are speaking about something in the neighborhood of 10 million.

(Operator Instructions) Our next question comes from Andrés Jarpa with Megeve.

First, I would like to know if you -- have you talked with the banks in order to improve the financial conditions of the warranty letters. And the other one is that I know that despite of the lower delivery in the housing units, you have been -- there is an increase in the housing unit sales. So when is it possible to notice that increase in the financial statement?

In the case of the bond, we are right now under negotiation with them. We're trying to renew the trade lines that we have today. And the next step is going to be to negotiate a different or lower rate for those facilities but first, we need to be able to change the rate or...

Rating.

Rating that the company has locally in the Superintendencia, which is not a very easy process with the banks, but they are in the process of doing that. I think that would take at least until the end of the year. And once the ratings are improved, then we will be able to improve also the rates that they charge us with -- in all our facilities.

Exactly. And the other thing was...

Policy.

Policy. The problem with housing right now in the financial statements is that in order to improve that figure, we will have to complete the delivery of new projects, okay? Remember that in the case of housing, you only record sales once you deliver the physical products to -- the physical units, okay? So we will start bringing projects into our pipeline by the beginning of next year, okay? So you should see the levels of sales for the Real Estate during this year in the neighborhood of 90 million to 100 million and start growing by the end of 2020 or 2021, okay? That's basically not because of the sales that we are having but to the delivery of the units that we will probably be able to accomplish and record in our books, based on accounting rules.

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

Thank you very much. Thank you very much for your interest in the company. As we have said before, this has been a very important quarter for the company. I think we have accomplished a lot of what we expected to do during this quarter, and we hope that we can keep this positive trend for the company. Once again, thank you very much.

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