Aenza SAA (AENZ) 2020 Q1 法說會逐字稿

Good afternoon, and welcome to the Graña y Montero First Quarter of 2020 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

Presenting today on behalf of the company are Luis Díaz, CEO; Mónica Miloslavich, CFO; and Dennis Gray, CFO of the Infrastructure Business Units.

I would like to turn the conference over to Luis Díaz, 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 first quarter of 2020. And then Mónica Miloslavich, our CFO, will expand on the financial results. We will finally open a Q&A session.

Ladies and gentlemen, today's call takes place during an unprecedented time. The current COVID-19 pandemic has paralyzed most of the world and the countries in which the group operates have not been an exception. Peru, Chile and Colombia have been on varying degrees of lockdown since mid-March. The E&C and real estate business are -- are at a veritable standstill, at least until mid-May, and only the infrastructure business declared as an essential sector in Peru remains operational, with certain restrictions. First quarter results for 2020 were below our expectations. However, mostly explained by the effect of the additional costs assuming during the first -- the last 15 days' lockdown of March and the oil price. Mónica will provide the details of the results, but it is very important to anticipate that the impact of COVID-19 will show its real dimension in the next quarter. And throughout most of the year, we will see the efforts to revert such impacts.

The COVID-19 pandemic took the world by storm and by surprise. It became a worldwide catastrophe as it expanded from China to the rest of the world in a matter of a few weeks. There were no contingency plans in place for a crisis of this magnitude or -- on any level. Governments and company have had to react to a new reality in a very short time with a high degree of uncertainty and volatility.

We have been no different. We acted quickly to develop a new strategy and a new outlook for the company. Our people have shown great resilience and strength given an unexpected, uncertain and challenging times, and they are in the process to adapt to this new reality.

We have collaborated a plan to face this new crisis that will be executed in three phases: stabilization, survival and transformation and relaunch. Phase 1, which started on March 16, the first day of lockdown and was finalized on April was reacted fast and responded to the generalized suspension of all operations, excepting infrastructure operations which were declared essential. Give me 1 minute, please. This phase was based on 4 pillars: one, operation; two, liquidity; three, the new forecast of the year; and four, existing commitments.

On the operation pillar, the goals were: protecting the health and safety of all workers; keeping operations declared as priority by the government functioning under new operating conditions; demobilizing in a safe and orderly fashioned projects that were ordered to stop, which involves ensuring the safe return of more than 10,000 persons to their homes; and finally, rapidly adjusting the organization to a long period of remote operations.

The liquidity pillar focused on preserving cash flow in all projects, subsidiaries and business, minimizing cash disbursements to subsistence levels while understanding the liquidity position of each operation and establishing a 12-week look-ahead process, which was the time estimated for the progressive return to operations. This has been a quite useful tool to secure cash and maintain all operations ready to start once possible. So far, all operations may support a period of 6 to 8 weeks from today with the current cash balance. The new forecast for the year meant a complete revision of the results of the company, adapting the numbers to the new reality. This included substantial cuts in the size of operations and staff to minimize impact on the year's -- on the results for the year.

Finally, certain financial obligations and payment to a handful of suppliers were still pending and will become due during 2020. Some of these obligations have been partially rescheduled towards 2021, and some are in the process to be rescheduled. The idea behind this strategy is to defer these payments until market conditions provide a better source to properly attend these obligations. During this phase, we have assessed the impact by business based on new projections and an outlook towards 2021. As expected, concessions will be the least affected, while real estate business and oil production in marginal fields will be the most affected. Our E&C business will be affected in a lesser proportion than these last two.

Phase 2, survival and transformation, seeks to ensure the company takes the right measures to navigate the crisis and to maintain operations at the lowest possible of expenditure, while things get back to normal. This phase is estimated to last from May to December 2020, with three main objectives: one, minimize the impact on the company results; two, buy time to attend upcoming financial and nonfinancial deadlines; and three, retain and assure critical resources and talent to be able to relaunch the company next year.

I will elaborate on the stages of Phase 2 in detail. One, minimize the impact of the crisis on the company results for 2020. The goal is to obtain a net profit as close to breakeven as possible for the year. In order to achieve this objective, the company will minimize the impact of additional cost of paralyzed projects or restricted operations during lockdown and until all operations and projects become normal. This includes the adoption of labor strategies for construction workers during the lockdown and the renegotiation of the terms that governed the projects, including the adoption of new project schemes and in-sharing and the sharing of cost overruns caused by the pandemic with client, partners and subcontractors, whenever possible, among others. Cost overruns estimated as of today are in the neighborhood of PEN 20 million;

Reduction in cost structure through personnel reduction, salary cuts, reduction of labor, labor costs derived from overdue vacations, elimination of nonessential expenses, et cetera. So far, the company has implemented a cost reduction program of $25 million during the year, reducing its staff by more than 20%, reducing Board member payments, temporarily cutting salaries of top 150 executives in ranges between 14% to 15% for 6 months beginning in April, and cutting all nonessential expenditures. Postponing all non-subsistent CapEx and enforcement of the force-majeure close contracts where necessary, postponements of preventive and periodic maintenance during 2020;

And finally, keeping detailed records of all surplus costs incurred during the emergency in ongoing operations.

Two, buy time to face upcoming financial and nonfinancial deadlines. The goal is to face these deadlines while normality in debt markets returns and better sources of liquidity are available. The plan includes: ensure positive or neutral cash flow in all projects; increased efforts to accelerate collection of collateral and security funds on the hands of our clients; rapidly refinance critical liabilities to liberate pressure; monetize certain noncore assets that were in the process of sale before the lockdown, and search for alternative financing to hold position until general markets stabilize and we can find a definite solution to these deals.

Three, retain and assure critical resources and talent to be able to relaunch the company in 2021. To do that, we expect to maintain business that have suffered less in the crisis to leverage them to relaunch the company, protect the diversification strategy that has supported the business since 2017, retain critical talent during this phase and access fresh resources or credit to relaunch the company in 2021.

This plan is not risk-free. We have group risks in 3 main types: one, external risks. The length of the lockdown, the scope of the potential macroeconomic impact, speed of return to normality, political and social stability in the countries where we operate, potential volatility of public and private investments, the strength of clients and financial providers as well as many others; Two, project execution: We have made an extensive risk mapping in our projects and have identified the 10 key risks. Each project and business is addressing and managing continuously these risks; And finally, project assumptions, production assumptions, these assumptions on which we base our forecast may not be correct. We are closely monitoring these assumptions to allow us to make timely adjustments in our forecast and adapt our contingency plans for any scenario.

Our new forecast for 2020, discussing last week Board meeting estimates revenues close to PEN 1.1 billion. EBITDA in the neighborhood of PEN 119 million, net profit in figures close to March 2020 results, and financial debt levels close to PEN 460 million. There is a wide variety of assumptions in order to achieve these figures. Among them, E&C only executing current backlog with all additional costs, oil prices at $25 per barrel for the rest of the year, lower traffic for road concessions, and only 65% of the original budgeted real estate units delivered in the year. Consequently, there are a few potential opportunities to improve this forecast: New E&C contracts won during this period that increase revenues in the year; reduction of the COVID-19 related expenses in the projects; additional trips for the metro line due to social distancing; and recovery in oil prices; and an increase in storage occupations in the terminal business.

In any case, the company is preparing to transit this year and try to make the best out of it. However, not only results and financial planning is needed to overcome the situation. There are also some critical milestones to achieve during the year. First, increase our E&C backlog. Under the current estimations, we will reach PEN 400 million for our E&C backlog by December 2020, without assuming any new contracts. However, we will aim to increase E&C backlog by an additional PEN 100 million by year-end. Second, sign the [plea] agreement during the third quarter. Third, obtaining enough financial resources to be able to postpone financial deadlines until third quarter 2021. And finally, launched new corporate identity in the last quarter 2020 upon right conditions.

The current world situation forced us to devise a swift and decisive plan to maintain the company afloat, amid lockdowns and a sudden and unexpected halt in most of our activities. Our immediate priority is to ensure a smooth, safe transition for all employees into the new reality. The phase which we are starting now and will last until December, will allow us to survive. It is aggressive and bold, and we believe strongly that it is what we must do. We expect that the world and our operations will start going back to the new normal by the end of the year. However, it is also critical that we think into the future and devise a plan to relaunch the company and the business in the beginning of the next year. We have a new reality, and with it, a whole set of new opportunities.

Last quarter, in this same investor call, I was presenting the end of a difficult year -- a year where we were to close the chapter of the crisis that had started in 2017 after much sacrifice and much effort. This pandemic and the consequent actions and results will force us to take a deeper look into our transformation and to reevaluate the current business and the way we do business in the future. We will continue to uphold the values of truth, transparency and integrity, which have guided all of our actions. And with a renewed purpose and aspiration, we will relaunch the company with a culture aligned to our values and to our business strategy with ethics at the core. We are working hard as a company to face the new challenges and come out at the order -- at other side of this global crisis, a better, more agile and strengthened company.

Thank you all for your time and for your continued support. I'll now leave with Mónica for the financial analysis.

Thank you, Luis. The outbreak of the COVID-19 pandemic is affecting the operations of the group. To date, most of our engineering and construction and real estate projects have been paralyzed on a mandatory basis. The infrastructure businesses declared as a key sector have continued; however, our Norvial concession has been affected by the decrease in traffic, while GMP has been affected by the substantial reduction in oil and gas prices.

First Q 2020 revenues reached PEN 883 million, 29.1% higher than the figure reported at the end of the first quarter of 2019. Revenues of Engineering and Construction increased mainly due to the increase in the volume of projects under execution. This was partially offset by the decrease in revenues of the infrastructure area due to lower revenues in GMP related to the oil price, the completion of expansion of the line Metro and the second carriageway of Norvial in 2019, and by the reduction in Concar's revenues due to less maintenance work executed.

Consolidated gross profit decreased 34% due to the reduction of profits of the Engineering and Construction due to the suspension of works driven by COVID-19, and a provision for possible outcome of an arbitration initiated by a supplier of the Cerro del Aguila project. In addition, profits were impacted by the reduction in oil price and, to a lesser extent, by the reduction of traffic of Norvial due to the COVID-19 spike, reducing the margin from 15.3% to 7.8% in the first quarter of 2020.

Administrative expenses at the end of the first quarter of 2020 reached 4.5% of sales compared to 6.4% from the end of the first quarter of 2019. This decrease is mainly explained by the reduction of nonessential expenses as well as the cost for personnel reduction. Our income and expenses include mainly the provision for abandonment of wells in GMP in accordance with its contracts. As a result, operating income decreased 68.7% in the first quarter of 2020 compared to the first quarter of 2019 with a margin of 10% in the first quarter of 2019, versus 2.4% in the first quarter of 2020, as a consequence of the results explained above.

Higher financial expenses in the first quarter of 2020 are mainly explained by the increase in interest rates and commissions of the financing with CS Peru Infrastructure Holdings, while in the infrastructure side, this year, there was no financial income generated by the sale of CRPAOS of the Line 1 of the Lima Metro. The line of participation in associates reflects the results from the minority investments held by the group. The U.S. dollar went from 3.321 in the first quarter of 2019 to 3.442 at the end of the first quarter of 2020. Considering the net position of assets and liabilities in dollars, there is a negative impact on the exchange difference.

The income expense in both periods is impacted by fines and nondeductible cost provisions in operations. The line of profit from discontinued operations shows a loss of PEN 3.5 million compared to a loss of PEN 6.4 million as a result of Adexus as an asset held for sale. Consolidated net loss in the first quarter of 2020 was PEN 30.4 million. The net margin went from minus 0.2% in the first quarter of 2019 to minus 3.4% in the first quarter of 2020, explained by the results described above. The adjusted EBITDA in the first quarter of 2020 decreased 26.2% compared to the first quarter of 2019, going from PEN 122.8 million to PEN 90.7 million.

The consolidated backlog of $1.3 billion plus the recurrent businesses of $445 million, reached a total amount of $1.7 billion by the end of the first quarter of 2020, which represents 1.3 years of raise.

During the first quarter of 2020, the engineering contract for Goldfields for $72 million was awarded to the E&C business. Likewise because of the COVID-19 pandemic, the client of the Ibis Hotel decided not to initiate the construction of the new hotel. This implicated a minor reduction of backlog of $7 million and the scope of the MAPA contract in Chile was reduced in $9.5 million. On the other hand, there was -- there has been a reduction in the current businesses of approximately $200 million in G&P, explained by the reduction in oil price that had an impact in the estimated sales of next year, and in Norvial due to reduction in traffic as a consequence of the COVID-19 pandemic.

The total amount of consolidated financial debt was $497 million at the end of the first quarter of 2020. Of the total debt, $97.6 million corresponds to working capital associated with clients' accounts receivables and leasings for the acquisition of machinery and equipment. The amount of $305.8 million corresponds to infrastructure Project Finance, which is debt without recourse, with guarantees and cash flows from the project itself.

On the other hand, $27.6 million corresponds to the CS Peru Infrastructure Holdings financing, $42.9 million corresponds to the debt from dividend monetization of Norvial, and $23 million corresponds to the leasings according to IFRS 16. The debt at the end of the first quarter of 2020 decreased 17% compared to the end of the first quarter of 2019, mainly due to the calculation of the debt associated with GSP, with the capital increase funds and to the amortization of the debt with CS Peru Infrastructure Holdings in the first quarter of 2020. What is important to mention is that, from the total amount of debt outstanding, 62% corresponds to the debt associated with infrastructure projects and only 20% is the working capital debt on the new construction and the real estate businesses.

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

(Operator Instructions) Our first question comes from Eithel Mc Gowen with CAPIA.

I have 2 questions. The first one is regarding (inaudible) business. What is the current all-in sustaining cost of -- per barrel? With these prices, what's the production outlook for this year, are you planning on shutting down certain unprofitable oil wells? And are you still planning on drilling 56 new wells this year, given the prices? And that's on the oil business. And then on the other side, if you look at the balance sheet today, you have PEN 400 million sitting on the E&C business. And I was just wondering why so much cash sit on the balance sheet? And why not use it to pay down certain loans or debts that are carrying high interest rates?

Let me begin with the oil and gas business. In the case of our E&P business, which is the one that is affected the most, we started the process of reducing the costs in the business before -- like 1 week or 2 weeks before the COVID-19 generates the shutdown. Currently, we have stabilized the cost production of the company around the cash cost production of the company, including general expenses a little bit below $25 per barrel. So with the current prices or the prices of yesterday, we are able to pay any deals coming out of the production, and we are not -- we don't have any needs to shut down any wells or shutdown the operation. However, as you may expected, that's not enough price or money in order to pay a drilling campaign.

So what we have done is, at the moment of the shutdown we halted all the drilling campaigns, declared the wells -- or declared the campaign in force majeure, we have been already accepted that force majeure. And at the time of the shutdown, we have drilled in Block 4, 18 wells out of 33 that were supposed to be drilled this year. In the case of Block 3, Block 3 was and remains in force majeure since the beginning of the contract because of some social license that we haven't been able to get. And we anticipate that this is not going to change during the year.

But coming back to Block 4, the 15 pending wells are programmed to drill next year when we have better oil prices. This is no breach in our contract. We are still discussing and negotiating the terms of the force majeure, and if there is going to be an extension in the mandatory investments of these 15 wells. But the worst-case scenario will be that, instead of drilling 15 wells, these pending 15 wells next year, we will have to add 50% more. This means 7 additional wells in the drilling campaign of next year.

So in general terms, in the case of oil and gas, and particularly in the blocks, what we have done is closed all mandatory investments, declare them in force majeure, starting renegotiating the terms of the contract to delay the investments, and we have already achieved a cash cost that will allow us to repay, not only the cash cost from today to the end of the year, but also with the other inflows that we have from the terminals or the gas plant, we will be able to repay any suppliers -- or at least most of the suppliers that we have pending to pay from the campaign. That's in the case of the oil and gas.

In the case of the E&C business, you have to understand a couple of things. Since we started the operation in the crisis of 2017, we started to assemble trust funds for each of the projects in the E&C business. So whenever we operate a project, we secure the funds in order to repay or to use the funds only in the project. So if we receive an advanced payment in the -- in a project that money only can be used for the project and not for other projects, this is financially -- may not sound efficient, but in any case, protect our clients and protect our contracts to have the proper funds in order to execute.

So what you are seeing in our balance sheet in the E&C business, it's the remaining balance of the funds that we have -- that we handled to collect at the end of March, and that are the funds that we are using in order to keep the project safe and be able to restart whenever we start during the second quarter. We are not entitled to use those funds to repay debts in E&C business or in any other business. That's part of the deal, and that's part of the security that we use to get our clients, the comfort that are -- that we will fulfill the contract. And also, that's part of what we are required by the banks in order to get the performance bonds and all the other instruments that we need to deliver to our clients in order to sign the contracts. So that's essentially the 2 answers to your question.

Our next question comes from Andrés Jarpa with Megeve.

So Luis, you mentioned that in the Phase 2 during the process of searching new alternative financing opportunities, I was wondering which opportunities are you considering for this year?

Well, there are a couple of ideas that we cannot reveal at this point of time, but we are looking for certain funds in order to be able to pay, or at least partially repay some financial and nonfinancial dues that we have during the year. As you know, we have come from a very heavy financial crisis, and we are taking -- we still have some pending financial situations to solve during these next months, we will not be able to repay the full amount. We were designing a financial strategy in order to refinance this -- part of these liabilities. However, right now, the only thing that we can do is try to refinance to the short term, and in that case, whenever we have better waters in the market, and we can be accessed to either sources of debt or sources of equity or monetize part of the assets that we have, we will be able to repay them. So there are different sources for these funds, but that's not something that I can comment directly at the time.

(Operator Instructions) We have a follow-up question from Andrés Jarpa with Megeve.

Luis, it's me again. I was wondering how much was the provision for this E&C project because of the arbitration initiated by the supplier? And when do you expect to pay this liability in case you have to pay?

We have an original provision recorded years ago for an amount close to PEN 14 million, okay? That was recorded at the end of our balance sheet in 2019. The additional provision is for PEN 5 million, that's the impact on the profit, which accounts for half of the loss of the quarter. Okay. There is -- we haven't received a final confirmation of such provision because we haven't received a final issuance of the arbitrage sentence. Once this is received, and we expect to receive this during May, there might be some 3 to 4 months before we'll have to pay this debt. However, we have been approaching the supplier which started the arbitration against the consortium of Cerro del Aguila, and we will start bargaining the way of payment. We do not anticipate to pay a substantial portion of such amount during this year.

Excellent; thank you.

(Operator Instructions) At this time, there are no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you very much. Last February, we announced that Mónica Miloslavich, our CFO, will leave the company after filing the 20-F. We estimate filing will be complete by the end of May. Consequently, this is the last conference call that Mónica will be hosting after more than 10 years as CFO of the group, and more than 25 years of dedicated work in several of our subsidiaries. On behalf of the company, our colleagues and the management team, I would like to publicly thank Mónica for her dedication and professionalism through all these years. In a personal note, I would like to thank Mónica, especially for these last 3 intense and difficult years. She has been a creative, strong and reliable CFO, especially in unprecedented circumstances. As announced before, Dennis Gray, who is currently in the call, will assume the position when Mónica effectively leaves the company. Thank you all for attending this call, and have all a good and safe afternoon. Thank you.

This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.