Aenza SAA (AENZ) 2020 Q3 法說會逐字稿

Good afternoon, and welcome to Aenza Third Quarter 2020 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 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 third quarter of 2020. Then Dennis Gray, our CFO, will expand on the financial results. We will finally open a Q&A session.

Ladies and gentlemen, third quarter was as expected when showing the first signs of recovery after the impact of COVID-19. Based on our 3-phase plan, we kept the focus on our 3 main goals: one, minimize the impact on company's results on 2020. Despite the fact that most of our E&C projects have lower activities than the ones we anticipated for this quarter, the company was able to negotiate the additional costs incurred during the second quarter as well as the new health and operational standards for the remaining backlog, and therefore, was able to sustain forecasted margins estimated for this quarter. This situation should remain stable next quarter.

Our Infrastructure business presented a recovery in most of its indicators. Whether traffic, fuel consumption or oil price, this situation helped the company to present a positive quarter as expected in this line of business.

In the case of our Real Estate business, low-income units -- low house income units began to be delivered during July. However, the deliveries have not speed up yet. Consequently, it has been still a slow quarter for this business unit.

With the exception of one E&C project that will not resume operations until the last quarter, as of today, all projects in the company are in execution and implementing all the new safety standards. Most of the projects have gained momentum to what we will accept as the new maximum production rate, given the current social distance restrictions and safety protocols linked to COVID-19. The largest challenge is still to maintain ongoing operations, especially if a second wave of COVID-19 comes into place.

Two, pipeline to face upcoming financial and nonfinancial deadlines. Access to new credit lines of money from the capital market remain restricted until the plea agreement has been signed. This event is delayed, but it's still possible to happen before year-end. This situation represents a strong challenge in the next month for our cash flow.

The shareholder meeting held on November 2 approved the financial plan submitted that contemplate several scenarios based on the timing of the plea agreement signature, whether it is in last quarter or later in 2021. Based on such scenarios, the company will seek to execute the bridge loan portion of the bonds during the next 75 days. This is an event that we have defined as key to avoid the alternate scenario of selling core assets.

Three, retain and assure critical resources and talent to be able to relaunch the company in 2021. During third quarter, as most of the companies, we have operated remotely. Our organization has changed and adapted. In this process, we have reduced 10% to 15% of our staff. However, we've been careful to identify and retain the new talent needed, as well as we are defining our succession plans and contingency plans for any undesired impact of this situation.

In respect to the latter, we regret to report the loss of 18 members of our team because of this pandemic. As of today, more than 3,400 persons have been confirmed positive to COVID-19 in the organization. This represents close to 20% of our total population. We are taking all necessary precautions and implementing safety protocols in all our projects to prevent the expansion of this situation, which unfortunately, due to the public transportation exposure and the reality of our countries, makes it very hard to control. In all cases, we have secured medical and economical support for our workers in the event they got infected.

Regarding risks that may affect our plan, as we mentioned, we have classified risks in 3 categories, as you can see in the next slide.

External risks: the return to the lockdown due to a second wave of the pandemic; political and social instability in the countries where we operate, such as the ones that have happened in Peru or Chile lately; and financial health of clients and suppliers are the most identifiable risks.

Project execution. We have agreed with most of our clients new conditions in the backlog for E&C contracts. However, there are a couple of projects where cash flow is complicated and pending on approval of new conditions and payments related to such events that can jeopardize the future event that need to be resolved during this quarter.

Project assumptions. We have improved the reliability of our forecast and projections after this quarter. However, production rates and certain other risks may affect our revenues and defer them to the future, affecting consequently our gross profit. We will maintain our last quarter forecast for 2020 in next result. Estimated revenues are close to $1 billion. EBITDA will be in the neighborhood of $115 million. Net profit will improve from its current loss in [$2 million to $3 million] during the final quarter. And financial debt levels will close near to $460 million.

To complete the full understanding of the financial and nonfinancial debt of the company, there is a mix to a nonfinancial debt related to the conclusion of the plea agreement, the settlement of the class action and some other debts disclosed in the last shareholder meeting to amount a total of $720 million, out of which $360 million required to be refinanced to match our future cash flow generation.

In Slide 9, I will mention the critical milestones for the last quarter of 2020. The company needs to achieve certain goals during next quarter. Some may be critical and some other important to start 2021 with the right foot. Among them, the following are the key goals company wants to achieve: Secure a bridge loan not shorter than $50 million as defined in our financial plan in the next 75 days to face different potential scenarios discussed in the plan; conclude negotiations to lock amounts and terms of payments to be included in the plea agreement and sign it, if possible; prepare the company to resume mandatory investment plan for Blocks III and IV with no external new money during 2021.

Looking into next year, after the approval of the shareholders' meeting, the new identity, purpose and aspiration of the company has been revealed. We will continue to reveal identities and purposes in the relevant subsidiaries that will complete the identity renewal of the company. With a total backlog of close to $1.9 billion, where almost $900 million will be executed in 2021, the company's outlook for 2021 is positive, with low commercial risk complete our estimated preliminary budgets. Therefore, the commercial efforts to be deployed in future months will be oriented to better margins and to increase backlog for 2022.

I now leave you with Dennis for the financial analysis.

Thank you, Luis. On March 15 of the year, due to the outbreak of the COVID-19 pandemic, the Peruvian government declared a national emergency state and decreed a mandatory social immobilization until June 30 of this year. These restrictions have been -- that have been gradually relaxed since July to the date of this consolidated report has generated a situation in which the government measures had a significant impact on the economic activity in the countries where the company operates and has affected the operations of the group, with a particular emphasis during the second quarter of this year.

After the mandatory shutdown of operations, since July of 2020, our engineering, construction and real estate projects are developing their activities on a normalized basis with the established health safety protocols. And on the other side, the Infrastructure business was declared as a key sector for the economy and continued its operations during the period of the mandatory social immobilization.

For example, our Norvial highway concession, although was affected by a decrease in traffic, has substantially recovered its activity level of 2019. On the other hand, GMP, our oil and gas company, was affected by the substantial reduction in oil and gas prices between the months of March and May, prices that have recovered at the close of this earnings report.

Going to Slide 12, we can see that the revenues for the accumulated 9 months of -- or the accumulated third quarter of this year have reached 2 thousand 2 billion dollars -- or PEN 2.2 billion, which is 26.7% lower than the figure that was reported at the end of the first 9 months of 2019.

Revenues of the E&C business decreased mainly due to a lower production volume in the ongoing projects, which was a result of the restrictions established by COVID-19, mainly in Peru, a situation that was partially offset by an increase in revenue of Vial y Vives in Chile.

Likewise, the reduction in revenues in the infrastructure area was mainly explained by lower revenue in GMP related to the oil price reduction and fewer wells drilled since lower production. On the other side, the substantial decrease in traffic in the context of social immobilization and lower revenues in Concar due to less maintenance work performed.

Finally, the results of the 9 months ended in September of 2020 versus the similar period last year is also explained by the comparative effect of activities -- or activities done during 2019, such as the completion of the expansion of Line 1 of the Lima Metro and the works of the second railway of Norvial. Both were completed in 2019 and had a statistical effect.

As a result of the gradual normalization of activities since July, the results of the 3-month period between July and September 2020 show a significant recovery in activity. On the consolidated gross profit side, our gross profit decreased 44% year-on-year, mainly due to the reduction in margins in the E&C area due to the suspension of works and also as a result of an arbitration initiated by a supplier of the Cerro del Aguila project, which was concluded in the first quarter of 2020 and the write-off of an accounts receivable in Morelco in Colombia with the client Bioenergy, a subsidiary of Ecopetrol. Likewise, our gross profit was impacted by the reduction in oil prices and the number of wells drilled and the reduction of maintenance work and traffic at Norvial, reducing the margin from 12.5% in the first 9 months of 2019 to 9.6% in the first 9 months of 2020.

Our administrative expenses at the end of the same period decreased 26.1% compared to the same period last year, reaching 5.5% of sales compared to 5.4% of sales at the end of the third quarter of 2019. This was a result -- or the result of a very substantial cost-saving measures taken by the company in the context of COVID and the preservation of liquidity during this year.

Other income and expenses may include an additional impairment at the Via Expresa Sur project and an increase we have included in the provision for civil damages with the Peruvian government, pursuant to our conversations and negotiations with the judicial authorities in the context of the plea agreement.

Additionally, as a result of negotiations with the buyer of CAM Chile, a company we sold in 2018, regarding certain items included in the escrow account, we have recorded an impairment in that account as well. As a result, operating income decreased 78.6% in the first 9 months of this year compared to the same period last year, with an operating margin of 8.5% in the first 9 months of last year versus 2.5% in the first 9 months this year.

The net financial expenses or the consolidated net financial expenses were similar to the first 9 months of last year. However, financial income was PEN 12.9 million compared to PEN 54 million in the same period last year. This is a consequence of the fact that no financial income was recorded this year compared to the previous period last year, where we recorded a financial revenue, an extraordinary financial revenue related to the sale of the CRPAOS of Line 1.

In the holding company, the increase in financial expenses was mainly due to the increase in interest rates and commissions of the financing with CS Infrastructure Holding (sic) [CS Peru Infrastructure Holdings], offset by the recording of extraordinary financial income due to the change of the rate in the debt with BCI related to the transaction of transfer of economic rights in Norvial.

Consolidated net loss in the first 9 months of 2020 was PEN 55.1 million. And the net margin went from 1.2% in the first 9 months of last year to minus 2.5% in the first 9 months of 2020, explained by the results described above.

Adjusted EBITDA in the third quarter or as of the third quarter of 2020 decreased 42% compared to the same period last year, going from PEN 528.4 to PEN 306.3 million.

In the next page, in Slide 12 -- sorry, in Slide 13, we can see the consolidated backlog, which stands at $1.4 billion, plus the recurrent businesses of $485 million, reaching a total amount of $1.9 billion at the end of the third quarter of 2020. This number represents 1.9 years of revenue -- or 1.99 year revenue, to be precise. During the third quarter of this year, our E&C business was awarded with a contract with Lima Airport Partners for the construction of the second runway at the Jorge Chávez International Airport and an EPC contract with Gases del Norte del Peru for the construction of the Piura Gas Pipeline, the latter for an amount of $58 million.

In the infrastructure area, the decrease in the recurrent businesses was mainly due to the new sales estimate in GMP, including the new oil prices.

Going to Slide 14. The total amount of consolidated financial debt as of the end of the third quarter of this year stands at $499 million. Of this amount, $121.9 million corresponds to working capital associated with clients' account receivables and leasings for the acquisition of machinery and equipment. A total of $289.6 million relates to infrastructure project finance, which is debt without recourse, with guarantees and cash flows from the project itself. On the other hand, $28.3 million correspond to the financing from CS Peru Infrastructure Holdings, $41.8 million correspond to the debt from the dividend monetization at Norvial, and $17.8 million correspond to leasing according to IFRS 16.

The debt at the end of the third quarter of this year has decreased 9.9% compared to the end of 2019, which is mainly due to the amortization of the debt with CS Peru Infrastructure Holdings and the regular amortization of our project finance -- infrastructure finances at our infrastructure business unit. It is important to mention also that from the amount of debt outstanding, 59% corresponds to debt associated to the infrastructure project and 25% is working capital debt at the E&C and Real Estate business.

Finally, going to Slide 15. We, on a consolidated basis, the group holds a total amount of $430 million in surety bonds at the end of the third quarter of this year, from which 59% are related to the E&C business unit, 39% to infrastructure projects and 2% to real estate. From this amount, 82% are related to performance bonds within the E&C and infrastructure business units; 12% to advanced payments, mainly in the E&C unit; and 2% for finished works performance bonds at the E&C business unit.

Let's go -- I'll lead up to Luis in order to start the Q&A session. Thank you.

Thank you very much. We can start the Q&A session.

(Operator Instructions) Our first question is from Sebastián Montoya from Com Group (sic) [Compass Group].

I have a couple of questions. The third quarter quarterly report explains that there was an increase in the provision for civil damages with the state. Can you explain this increase? And what is the new expected figure for the civil reparation payment as a result of this?

And the second one is if you can explain the reasons why E&C EBITDA swing into positive territory for the year as of the third quarter and what full year revenue and EBITDA figures should we expect for this division.

Regarding the plea agreement and the civil reparation, I cannot reveal much of the information of the status of the transaction. However, it is true that we have introduced an additional provision based on what is our current expectations of our -- of the outcome of the negotiations. But the only thing that I can tell you right now, we keep negotiating the amounts, and the progress is substantial up to date, but I cannot provide you any additional information on that.

Regarding the EBITDA of E&C. If I understand correctly, you were wondering why the third quarter has an important impact on the EBITDA. The reason behind that is that we have, as I mentioned, we have completed a lot of negotiations with certain clients where we were very cautious during second quarter and first quarter based on the estimates we have for the cost that we will have on the provisions coming from COVID. So once we have a certainty of what's the outcome of the future, we have amended the margins in -- accordingly in the projects. And that's the result that you are seeing for not only the margin but also the EBITDA of the business.

I don't know if that was the correct idea of your question, but let me know if that's not answering it properly.

Yes. And I have to quickly follow-ups. The first one is about the cash balance at [GyM]. Why did this account GyM decrease so much between the second quarter and the third quarter of 2020? And if you can explain what are the uses. The concern here is that EBITDA isn't being converted into cash, and I would -- then we would like to understand why.

And my final question is about the backlog. I would like to know, of the current backlog figure, how much of this pertains to claims or potential rebalances under negotiation as opposed to signed contracts? And what are the main ones?

Regarding the backlog. The figures that you are seeing as backlog are the ones that we are certain of. There is very little introducer of claims or potential negotiations. We are not allowed to record that as revenues, okay? And as I have said before, we have already cleared most of the negotiation that we have out of the [colleagues]. So you should feel certain of the amount of the backlog in E&C as well as the rest of the (inaudible) of the backlog of recurrent business that we are recording.

I didn't get a clear understanding of the previous question. Dennis, I don't know. I think it was something regarding one of the accounts. I don't know if you got it better and you have an answer for that.

If I understood correctly, you're referring at the cash balance quarter-to-quarter in E&C.

At [GyM]. Yes.

What [GyM] or E&C compared to -- but you're comparing the end of second quarter to third quarter or year-on-year?

Quarter-to-quarter.

Quarter-to quarter. Yes. Basically, going to your first question. The cash balance at GyM or, in general, in E&C is mainly comprised by client advances that are structured in trusts basically or individual trusts for each of the projects we're executing as per the financial structure that was agreed with the banks, the local banks in 2013. This amount is -- has basically a destiny, an orientation. And as the projects are being executed, that amount is called and incorporated in the amount of work. The reduction you're seeing quarter-to-quarter, conceptually speaking, is related to the fact that if you're looking at the second quarter of this year, we were basically almost non executing projects and the cash was fixed, let's say, or immobilized.

And following the process of returning to normalized operations, basically, the cash costs for each of the projects' execution is being called, basically. On the other hand, you -- this amount of advantage is the result of the cash you are calling to execute the projects you're already contracted versus the project you are getting, which usually develop an advanced payment.

And bear in mind that during the second quarter of this year, the backlog in terms of new contracts at GyM was very -- was almost not commercially moved. For instance, following the start of advances in -- related to new projects, the cash amount is expected to increase, but again, is cash that is basically assigned to the execution of each of the projects that is being awarded.

(Operator Instructions) Our next question is from Eithel Mc Gowen from CAPIA.

My first one is following up on the margins on the E&C business. Given these negotiations with clients about COVID provisions and this push for higher profitability in that line of business, what's the reasonable range of gross margin expectation for next year?

And my second question is regarding this possibility, this scenario where the plea agreement negotiations drag into next year and the company is not able to secure the bridge loan. Could you explain -- could you give us a little more color on how would that play out in terms of the size and timing of asset sales?

Okay. Regarding the first part of your question regarding the future margins of E&C. What I can tell you is essentially the same as I said on Monday on the shareholders' meeting. Currently, we have an outstanding backlog in the E&C business close to 950 million. All that backlog currently has an average margin -- of gross margin close to 7% to 8%, okay? There are some other projects that are finishing, that we have certain complaints, but from the 950 million that we are under execution right now, you can expect 7% to 8% margin, okay? In the case of the plea agreement, as we said in the shareholder meetings also, we are looking forward and pushing hard in order to try to settle it during this last quarter. However, that's a scenario we can't control, and we can't offer certainty, okay?

Assuming that we will go into the first quarter of 2021 and we are not able to secure the loan that we are looking according to our financial plan, we will need essentially the same amount in the value of assets, okay, in order to attend our first 7 or 8 months of the year. I mean, if I am saying you that I need to receive a bridge for 50 million, okay, with those 50 million as a minimum amount, I am certain that I can keep the company operating under rate and the rational standards until July, August of next year, okay? Which are the assets that will be needed to be sell at the time and when, that's a decision that I will have to submit to the Board and discuss it internally before releasing any potential assets, as you may imagine.

Our next question is from Lucia Calvo from LarrainVial.

I have some questions regarding the cash conversion cycle of the E&C business. Do you think you can clarify the days of payments for the third quarter 2020 in the E&C business and its trend going forward? And how do you make the calculation? Like, do you include salaries, taxes or what else? And does that include the overdue suppliers that are sort of converted into debt?

Dennis, you would like to take that one?

Yes. Yes. If Lucia, please correct me if my understanding is not correct. Your first question is related to the calculation of the days receivable and payable and which concepts are being included in such calculation, correct?

Yes. If you can -- if you have like a number, you can clarify like the number you have calculated of days of payment and dates of receivables, the trend and how do you make the calculation. And for days of payment like this, does that include the overdue suppliers that are not converted into debt?

The supplier with all the receivables that -- especially the E&C companies and GyM have with third parties are included in the calculations of such ratios. I don't have the ratio with me exactly, but I can follow up with you with the components of the calculation. But we are applying the, I would say, the standard ratio calculation without any adjustments. But let me follow up with you with the specifics of what -- or on how could you, if you are looking to do that, to reach a more, let's say, tailored ratio calculation.

Okay. Can I ask you what -- if you have -- or maybe I can also follow up on this one. What is the EBITDA to cash conversion of the E&C in the third quarter of this year?

Let me check. In E&C, I would have to go back with you with that exact calculation on each of the businesses in order to absolve specifically that question.

(Operator Instructions) At this time, we have no more questions. So this concludes our question-and-answer session. I'd like to turn the conference back over to management for closing remarks.

We do have a question. Lucia came back. One moment. Lucia Calvo again with another question from LarrainVial.

Sorry. It's just a follow-up question. I was wondering, like the overdue suppliers -- the overdue suppliers are related to current projects. And if they are, why you have stated that the E&C is working in cash drop -- new drop for you?

The overdue...

Most of the project... go ahead, Dennis. Go ahead.

Yes. We have been -- okay. Do you hear me?

Yes, I can hear you.

The bulk of the -- I wouldn't call it overdue suppliers, but the bulk of the suppliers that have receivables with us or to which we have payables are related to either concluded or concluded projects or basically the previous canceled contracts. For instance, the main component of the supplier in GyM, it's related to supplier or subcontractors to the GSP concession contract. Basically, they were subcontractors to the main EPC contractor of such concession. And following the termination of the contract, we faced two -- let's say, two challenges. The first of them was as a concessioner to face to the financial creditors of Graña y Montero as a concessioner participant, and also you may conclude that the subcontractor that was working for the concessionaire was also currently or abruptly stopped. So we had payables to pay. So those are not related to the actual operation. And that's basically the bulk of the suppliers.

And why do we say that we are working on a cash-neutral basis? Basically, because of the projects we are currently executing, we are cash neutral. We are managing ourselves with the advanced payment of each of the -- in each of the trusts that govern or protect those projects. And we have been -- we have not been required to raise, let's say, working capital debt or collection advanced debt to fulfill our obligations in those projects. That is the mandate that our E&C business unit had in the -- since 2017, basically, of each of the projects to be able to manage it without having to raise working capital debt.

But we -- let's say, we hold, since 2017, payables related to those, let's say, past projects that we are managing to repay with the profits from the projects we are currently executing. And on the other side, they are a component of the financial needs that are intended to be managed in the financial plan.

This concludes our question-and-answer session. I'd like to turn the conference back over to management for closing remarks.

Thank you, Kate. Thank you all for attending the conference call. This has been a very challenging but positive quarter, and we expect to keep the trends and finish the year in the same sense. Thank you very much for your time.

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