Aenza SAA (AENZ) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the Aenza Second Quarter of 2021 Earnings Conference Call. (Operator Instructions)

Please note that this event is being recorded. Presenting today on behalf of the company are Luis Diaz Olivero, CEO; and Dennis Gray Febres, CFO. I would now like to turn the conference over to Luis Diaz Olivero, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good afternoon to all attending this conference call. As we usually do, I will make a brief summary of the relevant highlights of the past quarter. Then Dennis will expand on the financial results.

Ladies and gentlemen, the second quarter finished with mixed results. As Dennis will elaborate in the second part of this presentation, revenues, gross and operating profit continue the recovery trend. The amount of revenue was below our budget. However, the margins were in line with our estimates. This situation brought a lower operating profit than expected but it still show a large recovery compared to the same quarter of the previous year. In spite of the recovery, the company was affected as most of the companies in Peru by the exposure to the exchange rate volatility and the rise of the country risk that ultimately produce a loss in the bottom line for this quarter.

Regarding the plea agreement, the prosecutor has not filed the request for court approval of the plea agreement within the contemplated deadline of July 21. Our new estimate to reach this milestone is now August 15. All the documents required to begin this process are being assembled by the prosecutor, and there is a little that the company can do until this stage is completed. However, we are confident based on the latest communications with the prosecutors that our new estimate will be reached. Due to this delay, the judicial approval of the plea agreement is estimated to be completed by November 15.

Regarding our financial plan. As we announced in our last conference 2 months ago, immediately after signing the preparatory plea agreement, the company touched base with all potential investors to complete the third stage of the $90 million convertible bond. As of today, the company is waiting for the tender offer launch to be concluded on Tuesday to confirm if all the present conditions have been reached and issued a bond.

There has been significant interest in the bond, and therefore, the company is expecting to issue the full amount of the bond approved by the shareholders. We are confident that with this cash inflow, the company will be able to improve substantially its financial situation. However, this is only the first stage of a larger financial plan approved in November 2020. Due to the delay in its implementation, a lot of variables have changed with reference to such plan, including the amount of the civil compensation, the political and economic situation of Peru, a tender offer for a significant portion of the voting rights in the company. Therefore, the company will be reviewing the following steps in its financial plan and will announce them once they are defined.

Based in our current revenues and the backlog to be executed for the remaining quarters in the year, we estimate total year revenues in $1.2 billion, EBITDA close to $145 million and net income close to $5 million. In terms of backlog and new orders, last quarter has been a slow one since the Peruvian elections and its effects have reduced or delayed substantially the interest of clients for new projects and investments. Current backlog is close to $1.7 billion, and the company is expecting to maintain this figure by year-end.

In a positive note, drilling campaign in Block IV will start by August 9, after being halted 17 months ago due to sanitary restrictions. The additional production will boost revenues and EBITDA in the Infrastructure business. For critical milestones in the quarter, we have defined for the third quarter the following 2 milestones: the issuance of the $90 million convertible bond and to present to judge the final agreement to start the homologation process by August 15. I now leave you with Dennis for the financial analysis of quarter.

Thank you, Luis. Our consolidated results for the first semester of 2021 show a significant recovery at the operating level compared to the first semester of 2020. As it was reported in previous quarters, since March 2020 and due to the outbreak of the COVID-19 pandemic, the group's operations were affected as a consequence of the measures decreed by the Peruvian government. Nevertheless, during the first 6 months of 2021, our projects are developing in a normalized manner and with established health safety protocols. Thus, the Engineering and Construction business increased the productivity of its project under execution and the real estate business increased the sales and delivery of low-income housing units.

Likewise, in the infrastructure area, our Norvial concession exceeded pre-pandemic traffic levels and the energy business benefited from a significant recovery in oil prices.

Consolidated results in the first 6 months of 2021 reached PEN 1.8 billion, 38% higher compared to the same period in 2020. This is mainly explained by the revenue increases in our Engineering and Construction and Infrastructure business units, which amounted to 23% and 20.6%, respectively. Our E&C revenue growth was due to higher production volume in Vial y Vives—DSD for the Quebrada Blanca and MAPA projects in Chile, the contract extension in the Quellaveco tunnel construction in Peru, the new contract with Lima Airport Partners for the construction of the second runway of the Lima International Airport and the contract with Gases del Norte of Peru.

Likewise, our infrastructure revenue growth was due to higher oil and gas prices in the energy business. And the average oil price in the first semester of 2021 was $63.02 per barrel versus $39.4 per barrel for the same period in last year. And also an important increase in the traffic on our Norvial concession. In that concession, lightweight traffic increased from 1.9 million to 3 million units while heavy traffic increased from 1.67 million units to 2 million units.

Consolidated gross profit increased 100% in the second quarter of 2021 due to higher productivity in the E&C projects, mainly in Marcobre and Quellaveco projects and the lower comparative base of the Engineering and Construction business in the same period in 2020, increasing the gross margin from 6.9% to 10%. Likewise, there was a positive impact in the gross profit of the Infrastructure business unit due to increases in oil prices and higher traffic.

Our admin expenses at the end of the second quarter of 2021 increased 32.1% compared to the same period last year, reaching 5.1% of the total revenue compared to 5.3% at the end of the same period last year. The increase in general expenses was mainly due to the lower comparative base of last year, the year or a period in which some of the projects were suspended due to the pandemic. As a result, our operating income increased in the first 6 months of 2021, with a margin of 4.8% compared to 1% in the first semester of 2020.

In the first 6 months of this year, our net financial expenses increased 50.7%. This is mainly explained by the update of the present value of the accounts receivable related to the Gasoducto Sur Peruano project, the accrued interest provisions related to a loss of a claim to the tax administration and the interest related to Cumbra indebtedness with Banco Santander that resulted from the execution of a surety bond by Técnicas Reunidas in December of last year. The dollar at the end of this quarter went from PEN 3.5 per dollar to PEN 3.86 per dollar. Considering the net position of assets and liabilities in dollars, there is a negative impact on the exchange difference.

Our consolidated net loss in the first semester of 2021 was PEN 61.6 million, and the net margin went from negative 5.1% to negative 3.3% in the same period, explained by the results described above. Our adjusted EBITDA, on the other hand, increased 45.5% in the same period, going from PEN 157.1 million to PEN 228.6 million. This also led to an increase in the EBITDA margin from 11.5% to 12.1%.

In terms of backlog, our consolidated backlog amounted to $1.1 billion, plus recurrent businesses of $560 million. The 2 of them total accumulated of $1.7 billion at the end of the second quarter of 2021, which represents 1.7 years of revenue. It's important to mention that on July 13 of this year, the Vial y Vives-DSD was awarded with a contract with Mina Spence for the engineering, procurement, construction, commissioning and start-up of a material handling system for the transportation of rubble, a contract that amounts to $50 million. This contract will be included in the third quarter backlog. In the infrastructure area, the increase in recurrent businesses is mainly due to the updated revenue estimates in the energy business due to recovering oil prices.

In terms of indebtedness, our consolidated financial debt was $465 million as of June 30, 2021. Our indebtedness or our total debt at the end of this quarter decreased 8.1% compared to the end of last year. This is mainly due to scheduled amortization in our infrastructure concessions, financing and also a reduction in working capital debt in the real estate business. Of our total indebtedness, $126 million corresponds to working capital associated with clients' account receivables and $265.1 million correspond to financings in our Infrastructure business unit.

In terms of our consolidated surety bonds outstanding, they amount to $398 million as of the end of this quarter, from which 55% belong to the E&C business unit, 41% to infrastructure unit and 2% to the real estate business.

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

(Operator Instructions) And our first question will come from Sebastián Montoya with Compass Group.

I have two questions. The first one is about Cumbra. Well, the year-to-date EBITDA margin has decreased from around 3% in the first quarter of this year to around 1% in this quarter. And gross margin has fall also from around 7% to 5%. What could be the main reason behind this? And why have administrative expenses increasing in Vial y Vives?

And my second question is -- well, it's more like a comment because as per second quarter financials, the company has defaulted on the debt exposure and minimum debt service ratios for the CS Peru loan. And it is also not in compliance with the accounts receivable and bill receivables close for the financial stability agreement. Can you comment please on steps being taken in order to remedy this situation, please?

I'll answer the first. And please Dennis, you take care of the second one. In terms of the EBITDA margin in Cumbra, what has happened is that there is one project in Chile that has gone into a minor loss, okay? But once you have the project in a minor loss, you have to record the full loss of the project in your books even until the end of the project. So you will have to record the full loss of the project despite you haven't completed the project. That what has happened in Vial y Vives with the project for Papelera Arauco, which is right now recording a loss of 2.5%.

And that's the reason why you have seen an impact in the first quarter that hurts the EBITDA margin and the gross margin for Cumbra in general terms. The rest of the projects of E&C are right now under the adequate margins, under the budgeted margins that we don't have any other deviation but the project that I just mentioned, which is for Papelera Arauco. Dennis, do you want to go with the second question?

Yes. Your second question has 2 sub-questions. The first of them is the CS Infrastructure loan. As we reported last year, we were not in compliance with the financial covenants in the third quarter and fourth quarter of 2020, a situation that we waived with CS Infrastructure at the time. Also, the noncompliance in the second quarter of this year, is mainly related to the accumulated effect of taking into consideration previous quarters, what we have been implementing with Gramercy, which is basically a waiver on that amount.

It's important to also mention that an important component or a key component of the issuance of the convertible bond by the company is the repayment in full of that facility. So this noncompliance should be remediated in the following days, actually, if -- once the convertible bond is issued and the CS Infrastructure loan is prepaid. Regarding the status on the financial stability framework with the local commercial banks, the situation is similar in terms of the technical noncompliance with the ratios. That's something that is have been discussed in the last, I would say, months with línea syndicate with the commercial banks in order to adjust the loan or the stability framework to reflect the situation that is currently arising. Also, very much in line with what I mentioned related to the convertible bond. Among the proceeds of the convertible bond is also an amortization of an important amount of the direct exposure to the línea syndicate to the commercial bank that should also normalize the ratio compliance situation with them.

(Operator Instructions) Our next question will come from Enrique Grau with CrediCorp Capital.

I have two questions. The first one is, if I heard you guys well, you said that you expect a change on the amount to be paid for the civil reparation. We were told by you guys at around $130 million have to be paid to the Peruvian state. So I was wondering if this amount has changed.

No, it hasn't changed. Maybe there was a misunderstanding. The amount that we disclosed publicly regarding the civil payment is still the same. There is no change with that. Remember, there is the portion in soles and there is a portion in U.S. dollars, okay? So maybe the amount referred to -- the full amount in soles may have changed because of the change of rate. But that's the only difference.

Perfect. And my second question is -- if you guys have any news regarding the completion of the tender offer by IG4?

Well, that's going to go in my closing remarks. But yesterday, the tender offer -- I mean the term to submit shares for the tender offer concluded. We understand that the process is at that stage today completed. Therefore, we are today -- in the day where the shares should be settled and there should be a pro rata among all the submitted shares to the tender offer. And it is our understanding that on Tuesday, the tender offer should be completed and the money should be transferred to the shareholders that submitted the shares for tender offer. And that's the information we have right now.

(Operator Instructions) And this will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you very much. As I mentioned before, yesterday, at the end of the trading day, the term for the shareholders to attend the tender offer launched by IG4 expired. The company will disclose later today the final numbers of the shares submitted to this process. However, we must say that there was a significant interest in the tender offer. While the new shareholders coming soon on the Board -- with the new shareholders coming soon to the Board with a preparatory plea agreement signed last quarter that should be confirmed by year-end, and with an inflow of $90 million, the company has almost concluded its transformation process that began in 2017. It has been a painful, tedious and longer-than-expected process, but it is finally concluding, leaving a renewed company ready for the future. Thank you all for your patience and support through all these years. Have a good and safe weekend.

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