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Edited Transcript of FERREYC1.LM earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 Ferreycorp SAA Earnings Call

na Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Ferreycorp SAA earnings conference call or presentation Thursday, July 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mariela García Figari de Fabbri

Ferreycorp S.A.A. - General Manager

* Patricia Gastelumendi Lukis

Ferreycorp S.A.A. - CFO & Corporate Finance Manager

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Conference Call Participants

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* Babatunde Ojo

Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner

* Daniel Rojas Vielman

HDI Capital, LLC - Investment Specialist

* Roberto Lampl

Alquity Investment Management Limited - Head of Latin American Investments and Portfolio Manager

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good morning, and welcome to Ferreycorp's Second Quarter 2019 Conference Call. (Operator Instructions). It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

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Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

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Thank you, and welcome, everyone, to Ferreycorp's Second Quarter 2018 Earnings Conference Call. Presenting on behalf of Ferreycorp, and joining us from Lima, Peru are Mrs. Mariela García, Chief Executive Officer; Mrs. Patricia Gastelumendi, Chief Financial Officer. They will be discussing Ferreycorp and subsidiaries consolidated result per the press release is distributed by the company yesterday. If you have not yet received a copy of the earnings report, please visit www.ferreycorp.com.pe to download a copy where there is also a webcast presentation to accompany discussion during this call.

Before we begin, I would like to remind you that today's call is for investors and analysts only. Therefore, question from the media will not be taken. Please be advised that comments made today by Ferreycorp's management may contain forward-looking statements, which are subject to various conditions that may differ materially. For a complete note on forward-looking results, please refer to the last page of the quarterly report.

It is now my pleasure to turn the call over to Mrs. Mariela García, Chief Executive Officer of Ferreycorp. Mariela, please go ahead.

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [3]

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Thank you, Rafael. Good morning, everyone. Welcome to Ferreycorp and subsidiaries' conference call. Thanks for joining us and for your interest in the company. Today, we will review a brief presentation, which is available in our website, to discuss the main highlights and the company results for the second quarter and first semester 2019 according to the financial statements published yesterday.

Let us start with Slide 4, where I will begin with a brief introduction of market conditions. During the first semester of the year, the corporation was able to deliver strong results in a challenging environment, where the economy showed a weak performance explained by the contraction of primary sectors, such as fishing that went down by 26.8% and mining in 1.5%, and also affected by a lower public spending amid the changes in regional and local authorities. GDP between January and April 2019, reached 1.7% -- GDP growth reached 1.7% -- and derived in an adjustment of GDP forecast for this year from 4% to 3.4%. These factors will gradually dissipate in the coming months, and we expect that large investment projects in infrastructure and mining will start to gather momentum as well as public investments.

Expectations for 2020 are more favorable. Exports should improve due to greater domestic demand, a recovery in public and private investments, as well as an improvement in business confidence, should derive in a GDP recovery for next year to 4%. With this optimism about the future of the Peruvian economy, we keep focused in market coverage in order to detect commercial opportunities that can leverage our sales growth based on our segmented value proposition approach to different industries and segments.

On the market environment just described, we must point out that competition continued to be strong. However, Ferreyros and the other companies that are dealers of Caterpillar in Peru showed, once again, the leadership in the market, evidenced by a market share of 60% in Caterpillar=branded equipment. At the same time, we would like to point some highlights and important matters that happened in the last month after our last call. On May 15, the Board, according to the power delegated in the General Shareholders' Meeting, approved the distribution of an extraordinary dividend of PEN 50 million, 5-0, which equals to PEN 0.05, 0.12 per share. The record date for this dividend was June 5 and the payment date was June 17 as well as the ordinary dividend; both dividends were paid together. Additionally, Ferreycorp was awarded with the Lima Stock Exchange Key for the seventh time as a recognition to the issuer with best corporate governance practices in Peru.

Now please turn to Slide 6 of our earnings presentation to discuss financial highlights for first semester, and then we will do for second quarter. During the first semester of the year, consolidated sales amounted to PEN 2.7 billion and rose to -- and rose by 8% compared to the same period last year, led by the diversification of the corporation's portfolio through the supply of new and used capital goods, the rental -- of equipment, the spare parts and services and by its consistent leadership in the market in the main product lines. Likewise, the corporation continued to maintain a high gross margin of 25.3% and went up from the 24% as of June last year, benefited from the sales mix or spare parts and services amounted to 53% of total sales and margin improvement in almost all of the subsidiaries.

Moreover, operating profit surged by 28% and amounted to PEN 263 million. Operating margin recorded to 9.7% compared to the 8.2% in first semester 2018, led by higher SG&A expenses that increased by 7% following, partially, the increase in total sales and went to PEN 436 million, mainly in -- explained by higher expenses related to the product support for mining customers.

Financial expenses for this semester boosted by 50% and amounted to PEN 48 million compared to similar period last year as a result of, first, the higher average cost of debt of 4.08% compared to the 3.17% average cost of debt as of June 2018. And secondly, the average debt that increased in 17% -- increased by 17% in this first part of the year, mainly driven by the growth in inventories that we'll explain later.

As of June 2019, the corporation results were affected by PEN 33 million exchange gain, which favor the bottom line and resulted in PEN 173 million net income, unlike first semester last year results that were impacted by a FX loss for PEN 11 million. Without considering FX distortions in both periods, net profit for the first semester 2018 would have increased by 8%. Year-to-date, EBITDA amounted to PEN 377 million and surged 34% compared to EBITDA reported in the same period last year, led by higher sales and by growth and operating profit.

The corporation reported a strong 13.9% EBITDA margin compared to 11.2% in the first semester 2018. However, we would need to include -- exclude the impact of the IFRS 16, that generates some distortions in EBITDA if we compare June 2018 to June 2019. If we adjust by this impact of the IFRS 16, EBITDA would have reached to PEN 343 million, still higher for what we got last year that was PEN 281 million and where EBITDA margin was 12.7%. So we have a growth, still in EBITDA from 11.2% margin to 12.7%, if we exclude the impact of the IFRS 16.

Let me now mention comparisons quarter-to-quarter, second quarter 2019 versus second quarter 2018. Consolidated sales for the second quarter went up 8% compared to those of second quarter last year and amounted to PEN 1.4 billion. As a result of further delivery of Caterpillar equipment for mining customer as well as for other sectors, such as construction; and secondly, the record sales of the spare parts and services of PEN 742 million during the second quarter. Gross profit increased by 12% and amounted to PEN 349 million, led by major sales at greater margins. Gross margin surged to 25.5% from 24.5% in the same quarter last year, as a result of the sales mix where product support maintained a high share in total sales of 54%, and also margin improvement in almost all of the subsidiaries and also the sales of used equipment during the quarter. In turn, operating profit rose 22% and reached to PEN 136 million, impacted by SG&A expenses that amounted to PEN 220 million and increased by 6%, however overcome by the high growth in sales and gross margins. This growth in expenses was still slightly lower than sales increase and was impacted by variable expenses related to product support, thus operating margin recorded to 9.9%.

Second quarter 2019 EBITDA amounted to PEN 194 million and less 30% compared to EBITDA of PEN 149 million reported in the same period last year, less, as we have been explaining by higher sales, higher gross margins and controlling increasing expenses. The corporation reported a strong 14.1% EBITDA margin in the second quarter 2019 compared to 11.7% in the second quarter 2018.

If we exclude the impact of IFRS 16, the EBITDA would have reached to PEN 175 million, still higher than last year's figure, and the margin would have been 12.8%, higher than the margin of last year.

Now let's move to Slide 7 to review the net income during the second quarter 2019. Net income during the second quarter reached to PEN 81 million and boosted by 50% compared to net income of PEN 54 million in the same quarter last year. This result is explained by the EBITDA that increased by 30% or PEN 45 million. The financial expenses or net in the financial expenses increased of 38% or PEN 7 million. R&D FX gain that increased by 150% or PEN 26 million derived from 0.93% nuevo sol appreciation during the second quarter compared to the 1.39% sol devaluation during the second quarter last year. And finally, depreciation and amortization, that increased in 64% or PEN 20 million, mainly derived from the incremental depreciation of assets that have been recently added as a result of the adoption of the IFRS 16, and then during the quarter amounted to PEN 17 million.

We will now review the commercial performance.

Please turn to Slide 9 to explain the behavior of main lines of business during the second quarter. Sales of Caterpillar Mining trucks and equipment for large mining customers amounted to PEN 56 million, showing a slightly -- slight increase of 3% compared to second quarter 2018, led by the delivery of mining trucks, reflecting businesses closed in prior months. In addition, sales of Caterpillar machines and engines for other sectors than mining went up 12% compared to second quarter 2018, led by sales to contractors and marine. Rental and used equipment business line surged by 38%, derived from an important sale of used equipment to one customer. Likewise, parts and services achieved record sales of PEN 742 million, 9% above second quarter 2018 and 7% above the last 4 quarters' average, showing an important share of 54% in overall sales.

Please let's go to Slide 10 to review our results by groups of companies during the second quarter 2019. When we analyze sales by groups of subsidiaries, both from Ferreyros, Orvisa and Unimaq, the dealer Caterpillars in Peru represent 70% of total sales and went up 11%, mainly driven by an increase in Caterpillar engines and machines for sectors other than mining that rose 12%; a significant growth of 51% in rental and used equipment business line, derived from an important sale of use of equipment and spare parts and services sales -- excuse me, derived from the use of used equipment, the sales -- the growth of used equipment; and finally, spare parts and services sales enhanced by 9% and accounted to 64% of overall sales of this group of companies, only of this group of companies. Gross margin for this group of companies reached 26.3% compared to gross margin during second quarter 2018 of 26.1%, mainly driven by margin improvement in the subsidiary. The companies that carry Caterpillar business and other elite lines in Central America represent 8% of total sales and rose by 7% compared to the second quarter 2018, led by Caterpillar engines and machines for sectors that are not mining, that increased by 11% and spare parts and services that went up 14%. These results were achieved even though this region is still going through a complicated political and economic situation. Gross margin during the second quarter increased to 26% in the region.

Finally, the local subsidiaries and businesses abroad that complement the Caterpillar business and represent 15% -- which represents 15% of total revenues, shrunk by 5%, impacted mainly by Trex and Motored who had lower sales that decreased by 27% and 9%, respectively. This result was in part offset by higher sales in the subsidiaries, aimed to provide logistic services, which grew by 23%. We need to point out that the Trex sell for equipment of $0.5 million through $3 million, so it's not -- it can have variations quarter-to-quarter and not necessarily the sales coincide in same months of last year's sales. However, we expect an improvement in the Trex sales for the second semester and have a better result overall year-to-year. This third group of companies reached a gross margin of 21% in this quarter, improving from 18% recorded during second quarter 2018.

Now move to Slide 12 to review the state of financial position, main accounts. As of June 2018, total assets amounted to PEN 5.6 billion, an increase by 12% compared to June last year, as -- turnover, however, remained stable at 1.01. The variation in total assets compared to June 2018 is explained by, mainly inventory that rose by PEN 370 million, led by components in order to keep mining truck fleet in full operation and in spare parts, components and spare parts, for PEN 127 million. An inventory of mining equipment for $90 million related to deliveries scheduled for the second half of the year. So mainly the growth in inventory is equipment for mining that will be delivered in the second half of the year and spare parts to serve those equipments. And secondly, the variation in total assets come from fixed assets that were affected by the IFRS 16 for PEN 178 million, derived from the recognition of leased assets, such as facilities, rental fleet and vehicles, that last year were not appearing in our balance sheet because they were in lease -- they are in lease, operating leases.

The cash conversion cycle has ramped up to 163 days, impacted by inventory days that rose to 155 days because of this growth of PEN 370 million just explained. This effect was, in part, offset by collections days that went from 71 to 63 days, a significant reduction, having a positive impact on the size of cash generation, while payables days stayed stable in 55 days.

Now let's turn to Slide 13 to discuss our CapEx. Investment in fixed assets as of June 2019 reached to PEN 110 million or $33 million, composed mainly by the following: $9 million were invested in infrastructure and work in progress, $18 million to replace units in the rental fleet and $4 million for components for mining equipment. The CapEx was also impacted by approximately $8 million derived from the recognition of leased assets, such as rental fleet and facility and fixed assets by right-of-use in application of IFRS 16. As of June, the corporation recorded a $9 million income from sales of fixed assets, which turned into a fixed asset net investment of $32 million. The investment in intangible assets reached PEN 36 million or $11 million, related to the implementation of SAP platform. Two subsidiaries are already feeling the implementation of the platform, which are Motored and Orvisa. And Unimaq should go live during the last portion of 2018. Ferreyros should go live next year in 2020.

Now please turn to Slide 14 to discuss the consolidated financial debt. As of June 2019, financial debt amounted to $664 million, and rose by 23% compared to same period last year, mainly driven by the high investments in inventory that we just explained, to cope with future demand and deliveries. It is important to note that financial debt includes $46 million derived from IFRS 16 application. Leverage ratio, net debt-to-EBITDA amounted to 2.92, and the adjusted debt-to-EBITDA ratio reached to 1.8. Both ratios within our covenant limit of 3.5.

We also continue to maintain a 95% exposure to U.S. dollar-denominated debt, as seen in previous quarters. Maturities for 2019 account for $326 million. An important part of these maturities belong to the debt regarding this growth in inventories, which are always financed at short term, and that will be canceled after recording the sale throughout the second semester. In this way, current maturities, as of June 2019, account to 58% of total debt. Financial expenses during the quarter posted a 38% increase and amounted to PEN 25 million as a result of more financial liabilities that we have been explaining, and an increase in the average cost of debt that went from 3.23% in second quarter to 3.90% as of June 2019, but less than the average cost of debt of 4.29% reached during this -- in the first quarter of this year. Financial expenses during the second quarter were also impacted by the IFRS 16 implementation by PEN 1.7 million.

After concluding this presentation on the balance sheet, on the debt and the cost of debt, I want to go to my closing remarks.

We're very proud of the results obtained during the quarter. This reflects our ongoing commitment to serve our customers and maximize our opportunities by following all investment projects and servicing the existing fleet in the territories we serve. While at the same time, remain focused on controlling expenses, managing working capital to the extent that not compromising future sales will imply, controlling the asset turnover to the limits our business model allows. And finally, generating positive cash flow through the cycle.

I want to close with some remarks. We will continue with our strategy aimed to profitable growth and shareholder value creation, leadership in the market and high customer satisfaction and positive impact in stakeholders. We are confident we're well positioned for the future with long-term partnership with the brands we represent and strong capabilities in our business. At the same time, we remain confident and optimistic about the future of the Peruvian economy and the other economies where we operate for the rest of the year and through 2020.

Thank you all for your time. And now we'll be glad to take your questions. Operator, please proceed to the Q&A session. I want to make sure that we understand all the questions and that any telephone line issue does not interfere with us, with our understanding of your questions. So we'd like to request that if possible when any of you make a question, shall try to send it at the same time in writing through an e-mail to our IR contact, Elizabeth Tamayo, who is here with us. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your question does come from [Louis Bargo] with Compass Group.

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Unidentified Analyst, [2]

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First of all, congrats on a really, really good quarter and the continued momentum despite the tough economic conditions. On that front, I want to kind of understand because there is a lot of speculation that I believe is unfounded, regarding all the social conflicts we're having at the different large mines in the country -- Las Bambas at the start of the year, Tia Maria, Quellaveco we're starting to hear some headlines. I want to understand if this actually does have an impact on your earnings generation potential, on your guidance for the year and what you're seeing in terms of growth? Because I believe they're unfounded, you've won the contract. So unless something majorly negative happens, I don't see how the momentum stops.

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [3]

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Yes. Thank you for the questions. Thank you for raising this. Of course, everybody is following the news on Tia Maria. We have been following this project for...

Hello? Sorry for that, I have no operator. Do you -- I am getting through?

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Unidentified Analyst, [4]

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Yes, Mariela. Yes, go ahead.

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [5]

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So as I was saying, we are following this project for several years. Some point in time, we have believed that it was moving forward fast. We are all very expectant to that project. However, we don't have it as of today in our projections for this year. Usually, we get the bookings in 1 year, and then we deliver in the next year or 2, as we have explained some months ago with the Quellaveco project. So we won it by the end of last year and early this year, but we are going to deliver throughout 2020 and 2021. So as of today, we are not including Tia Maria sales for this year and probably not even for early next year. Because if we close a deal, it's going to come by the end of 2020 or early 2021. So it shouldn't impact our numbers for the year.

The sale we have shown for large mining in this semester is low. However, we expect, as we have been explaining before, we expect a much better number for the second semester. We have just pointed out that we have $90 million in our inventory of mining product that will be delivered through -- by the end of the year. So that gives you, more or less, a clue of what we're going to sell in the second semester for mining, much higher than what we have sold in the first 2 quarters. Now if we move out away from just 2019, and we analyze what is going on, yes, we see these issues and concerns on Tia Maria. We don't think it's going to really impact all other projects in the country, Quellaveco has been already approved. A lot of investments, not only on the infrastructure of the site but also social investments have been made for some years already, not only this year. So we are very confident that Quellaveco is okay. Of course, there's a little noise in the southern region of Peru, but we don't see any significant risk at this point. And we already have a closed deal there.

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Operator [6]

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Thank you. (Operator Instructions) Your next question comes from Roberto Lampl with Alquity.

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Roberto Lampl, Alquity Investment Management Limited - Head of Latin American Investments and Portfolio Manager [7]

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And really great results, so very well done to the whole team. A few questions. First is on the inventory levels. If you can explain, what can we expect over time for a normalized level for inventory days? Granted, I understand that you have to prepare for large orders, but how do you see that evolving in terms of -- what do you feel comfortable of a maximum number of inventory days? And what would be a normalized level? That is my first question.

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [8]

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Robert, thank you for the question and for participating in the call. And [Louis], before I didn't get your name so thank you for your question as well. So our days in inventory, now we are in 155 and this -- we have been much lower in previous quarters. However because we are having these sales to large mining, usually inventories are carried in our books for some months, the (inaudible) third, in the U.S., they are shipped, they come to Peru, they go to the site, they need to be assemble and then we have the commissioning. So this can happen in 4, 5, 6 months. And because we are going to be delivering trucks to a large mine for almost 2 years, we're going to see some impact for a while. And at the same time, when we sell a shovel -- right now, in our inventories, we have 20 million-plus in just one piece of equipment. The shovel has a much longer stay in our balance sheet. Because they -- just the same as trucks, they need to be shipped, come to Peru but then the assembly is a longer period. So -- but even though that we're going to be delivering trucks for a while. So trucks coming to our inventories and then being delivered this extended length of period. At the same time, we expect a reduction in our parts inventory for around $30 million. Because as we explained in the last 2 years, there was constraints in Caterpillar deliveries of parts, so we have to increase our inventory normal levels in around 30 million that we expect to reduce in the next 6, 8 months. So 30 million can be something that we can expect to reduce. And then you're going to see ups and downs each time new trucks come to our inventory. So we expect to come down to 150, 148 days, something like that.

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Roberto Lampl, Alquity Investment Management Limited - Head of Latin American Investments and Portfolio Manager [9]

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Great. My second question is on your debt? And could you elaborate on the refinancing plan, and -- given the amount of debt that you have maturing this year?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [10]

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Yes, I would like to hear, Patricia, with me to answer on the debt, Robert.

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Patricia Gastelumendi Lukis, Ferreycorp S.A.A. - CFO & Corporate Finance Manager [11]

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Robert. Yes, the debt has been increased by 23%. But it's because of this inventory we have already mentioned. And it's going to be -- the machine are going to be built during this year, and we expect to collect from our customers. So we are going to pay the short-term increase in the debt. We have 23% of increase, but we expect to have the same level that we had on December last year.

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Roberto Lampl, Alquity Investment Management Limited - Head of Latin American Investments and Portfolio Manager [12]

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Great. And then my last question is, what kind of tailwinds are you seeing in your business? And where are you experiencing the headwinds, more challenges? And where business is -- I know it's not granted, never easy in your field, but where you're seeing it being a little easier, either in Peru or outside of Peru?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [13]

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Yes. Well, our 2 engines of growth and our 2 main fundamentals are mining and large infrastructure. In mining, we see a very positive impact that we are going to have with the deliveries to Quellaveco. We also have some other repositioning of equipment in the mines that we currently serve for several years. In many of them, we have things going on, not in the large extent of hundreds of millions of dollars, but in the tens of millions of dollars. So that is something positive that we see happening. And also servicing that fleet of around 1,000 trucks already in the country that we are servicing. And as we said during the call, we speak this record sales in product support. We still see it continue growing because we are still selling more trucks. So that's a very important one. Of course, Tia Maria is critical in order to have next -- next deals, next greenfields. But regarding brownfields and service in the existing mines, we are very positive about it.

And the second one, which I mentioned, which is infrastructure. We think that we have reached the bottom of it, not only because of large infrastructure creation, but also the medium and small things that happen in the local levels and regional levels in the country, that were impacted because of the change in authorities in the -- early this year. But we are starting to see some more things that could happen in the months to come.

Now apart from that, with our companies in Central America that should have a better year next year. The political and economic events there should start to stabilize due to the change in the governments in the countries where we are. So those are mainly the 3 main comments that I could make on the future outlook and the outlook.

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Roberto Lampl, Alquity Investment Management Limited - Head of Latin American Investments and Portfolio Manager [14]

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Wish you continued success.

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [15]

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Thank you, Robert.

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Operator [16]

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And you do have a follow-up question from [Louis Bargo] with Compass Group.

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Unidentified Analyst, [17]

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You cut me off before, operator, I'm not happy with that. Just quickly, a follow up on the first question I made. These social conflicts. Do you see them having an impact on your product support or spare parts and services' momentum that you're having today? Are they impacting, today, your growth in the spare parts and services?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [18]

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No. They are not impacting. We have a very strong logistic capability. We also have a dedicated capability in the southern part of Peru, so we have a CRC, a component review center there, so we have that. We have been explaining about La Joya last year because it was a significant investment. It was a significant portion in our CapEx. So in the past, we only had one CRC here in Lima, but now we have one in Lima and one in the South that makes us less vulnerable to this social event, so we're not seeing any impact. However, we need to be very careful on having different options to move parts around. We have -- we had another challenge earlier this year with Bambas, some strikes there as well. And we were successful to find different ways to continue our product support capability.

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Operator [19]

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And your next question comes from Tunde Ojo with Harding Loevner.

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Babatunde Ojo, Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner [20]

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You've answered some of my questions already. Few ones I have left is, are you seeing your customers sort of shifting from buying new mining trucks and machineries to now buying used? Is that the reason why you have that jump and still have used equipment this quarter? Or is it just a one-off, one customer is just buying? Just wanted to get a sense of whether this is structural or temporary?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [21]

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Yes. So in the mining arena, we don't see a trend there. We have a couple of customers. One is a large mining customer that did buy used 2, 3 years ago from another mine, and that brought us the opportunity to repair those trucks and sending the product support to repair those trucks. So that was one case. And the second one is a mining contractor that is also buying used. In most of the cases, we don't have those used trucks, so we buy them from other distributors, Caterpillar distributors in the world. So in fact, it was in just 2 specific cases in mining.

In the construction space, we see, and as we always mention, we have a segmented approach to the market. We serve customers differently according to their needs, according to their development -- state of development in their industry and their activities. And we do see smaller contractors that buy new or that rent. So we have a very -- in the construction space, we have -- every year, we have a much more diversified portfolio to serve those different needs. This is something that even comes from our branded distributor, from Caterpillar. So we have the rental, we have the used, we have the legacy configuration but we also have less configurated machines for less intense applications. So in construction, we do see 4 different needs, and we serve all of them. In mining, it's just 2 specific customers that are doing this. And well, Patricia is adding here, you can explain here.

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Patricia Gastelumendi Lukis, Ferreycorp S.A.A. - CFO & Corporate Finance Manager [22]

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Yes. Another explanation of used machines for this, we have a projection, it's almost a guideline that we are going to have a peak of used machines for the end of the year, but just a peak because of 1 or 2 business in mining. It's just a peak for this year.

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [23]

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For the mining construction, and we have not a trend, a general trend in mining but a couple of customers. One is the large mine and the other one is a mining construct -- contractor.

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Babatunde Ojo, Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner [24]

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Okay. The other question I have is on the machines you sell to other sectors, including construction. Can you help me understand how much exposure of that is to public work infrastructure-type segment compared to work that has to do with construction around mining, which is sort of still an exposure to mining at the end of the day? So I just want to distill it into those 2 different parts, where would you put the infrastructural, kind of, public work segment? If you understand my question?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [25]

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Yes. I understand. Yes, first of all, we need to point out that government is almost 0. You can see in our sales, government today is 1%. In some years before, it has been 10% and that came from regional and local purchases for specific things that are done in each region, a small growth and things like that. In that same line, since government is not doing investments or expenditures, they are not hiring contractors at the same point, no? So it's coming very little from local, regional or large infrastructure. It's -- some things look at the local level. We are not seeing today, large infrastructural projects, no. Some things are being [called] like the airport here in Lima or some other airports or ports throughout the country. But at this point, moving very little, the growth, the growth is coming and some of it, I would say 50-50 coming from construction and the rest of that is from the mining operation. So Quellaveco is starting to move the construction space.

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Babatunde Ojo, Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner [26]

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Okay. And then the last question for me is on the impact of IFRS 16. I appreciate you've talked about the impact in EBITDA, which sort of artificially inflates it, right? But what is the impact on net income for the first half?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [27]

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Yes. Yes, so we explained the impact in EBITDA comes from less operating cost in the expression of rental payments that we had last year or leasing payments that we had last year. So that reduces the operating expenses but increases the depreciation and the financial expense, no? Now at the level of net profit, there's no -- we have made an adjustment to the P&L statement. And at the level of net profit, it levels out. So it's the same net profit. If we reexpress our numbers of this year to previous IFRS 16 or numbers last year -- if we expressed numbers this year, previous to it, IFRS 16, the net profit would be the same, PEN 173 million, because it's just a reexpression of operating costs in the way of rental payments or operating leasing payments that we reexpress it to depreciation and financial expense. It's just a reexpression in the same P&L, so the impact in net profit is 0.

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Operator [28]

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And your next question comes from [Lino Conroy] with Compass Group.

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Unidentified Analyst, [29]

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The first question I have is in regards to inventory and what percentage of the inventory is considered to be old? And if that may lead to further adjustments or to a lower gross margin?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [30]

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Yes. We have inventories in our books for more than a year that we consider old. Our turnover in inventory is almost 2-point-something this year. So up to 180 days is normal inventory, between 180 and a year. We are doing some things, and after a year, it's where we need to do the adjustments that you are referring to. We have a policy to make those adjustments on a regular basis in order to be able to sell them in the market, to have them at market value, and we are even following the financial reporting standards, no? Our view that we could have by one quarter then changes a little bit for next quarter when we try to sell them in the market. So we still have some adjustments to make because of our view of this year compared to December 2018 but nothing significant, nothing that wouldn't allow us to continue selling those products. I don't have the exact number right now, I can follow up further on -- later on, but it's not significant.

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Unidentified Analyst, [31]

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Okay. And the second question is, you mentioned that you were investing in IT, basically, on the SAP project. What other things should we expect on regards to CapEx, looking forward to closer this year?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [32]

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Our budget is for $45 million, so we should continue to do what we have done. So we have already mentioned $33 million, our budget was $45 million so $12 million to go, which would mainly be SAP.

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Operator [33]

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And your next question comes from Daniel Rojas with HDI Capital.

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Daniel Rojas Vielman, HDI Capital, LLC - Investment Specialist [34]

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Mariela, Patricia, in the past, you've mentioned you've had delays with Caterpillar. I was just wondering if this continues to be the case. Or what the relationship with them as of today? And how do you see that developing going forward? That's my first question.

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [35]

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Excuse me, you mentioned delays?

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Daniel Rojas Vielman, HDI Capital, LLC - Investment Specialist [36]

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Yes. It's my understanding, and please correct me if I'm wrong, that in the past, Caterpillar had some delay delivering equipment to you. I was just wondering if this has been normalized. And if you see any potential delays going forward?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [37]

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Yes. As I mentioned before, when we had this question of inventory, what will happen in inventory, we were explaining that inventory in parts should be reduced in the months to come because we took them to peak. Normally, we had 90 million now we have 120 million, and we expect to be able to reduce those 30 million of incremental part because Caterpillar has improved their delivery days, has improved the service level of their inventory. So that sign out that Caterpillar has reduced those delays that you are referring to, we see a much better situation than what we had -- it started 2 years ago, and it continued throughout 2018. But now we have a much better situation that will allow us to reduce our parts -- our inventory of parts. So it has improved.

In machines, we don't see any major situation. There's always -- every year, there's one category, that one product category that has bigger demand, a larger demand. In Caterpillar, it has a [Challenger] but in one family -- not in family, in one category. But at this point, we're not seeing something structural in machines. We only saw something structural in parts, but it has been corrected.

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Daniel Rojas Vielman, HDI Capital, LLC - Investment Specialist [38]

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And if I heard you correctly, you mentioned that you had a fleet of 1,000 trucks in the country at the moment. How many -- if you can share this with us, how many trucks do you think you will add in the second half of the year and into 2020?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [39]

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So it's around 1,900-something, no? Excuse me, okay, sorry, sorry. It's going to be 700, I was confusing with all other underground equipment as well. So in large mining, it's going to be like 700 units in trucks. And we sell every year, it can be -- we always have explained that the sales in mining can be as low as $60 million; that's more or less, if we see the -- in the period of last 6, 7 years, it can be as low as $50 million, $60 million and as big as $300 million, which we had in 2013. Last year, we had around $100 million; we have been in the last 2 years, $150 million on average, no? And there, we have 1, 2, 3 shovels and then 20, 30 trucks. So that's more or less the range of growth in the population that we could have every year -- 20, 30 trucks. But it's very, very rough averages, just because one year can be completely different than the other, no? Now we have mentioned that we have this order for Quellaveco, we also have the order for Marcobre. And altogether, it's 60 units, 70 units, more or less.

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Daniel Rojas Vielman, HDI Capital, LLC - Investment Specialist [40]

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So let me follow up on that one. So in the last couple of years, you said $150 million in average. So for 2020, you expect a big jump from that $150 million average?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [41]

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Not necessarily because Quellaveco, as we mentioned, is a large chunk of $250 million. And then the other $200 million, very rough numbers in product support. But the prime product, the trucks, are going to be delivered through 2 years. So -- and I think we mentioned in one of our calls that even that large operation because it's going to be delivered through 2 years, we shouldn't see a peak, but just an average of $150 million to $200 million in the 2019, 2020, 2021. And this is very rough averages. And Daniel, thank you for your participation and your question.

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Operator [42]

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And you do have a follow-up question from Tunde Ojo with Harding Loevner.

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Babatunde Ojo, Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner [43]

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Just a few follow up from me. The first question is on the large mining trucks and machine that you plan to deliver in the second half. You mentioned $90 million, did I get that figure correct?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [44]

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Yes. So in some of our calls, we've said, last year, we had around $100 million, and we were -- or $90 million I think, and we were expecting to double it for the year. We have sold already almost $50 million, and we expect to sell the remainder of it throughout the second half. The $90 million is what we already have in the inventory but of course, to continue to deliver what we need to deliver in the second half of the year, we don't have all the inventory yet, no? So we have a large portion of that, the $90 million, but our expectation is to sell throughout the second quarter, $140 million more or less.

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Babatunde Ojo, Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner [45]

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What -- I'm not getting the numbers right. So are you trying to sell $90 million for the whole year or something other in the next year? I just want to understand...

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [46]

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No, I am sorry, what I said is, in some of our previous calls, we mentioned that we should double mining sales this year, that is from $90 million to $180 million. We have already recorded $40-something million so the remainder of that will be sold in the second quarter, which is more than the $90 million we mentioned in inventory, okay. So we don't have all the inventory in our books yet but $90 million, but we expect to sell around $140 million approximately.

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Babatunde Ojo, Harding Loevner LP - Portfolio Manager of Frontier Emerging Markets, Analyst of Frontier Emerging Markets & Partner [47]

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$140 million in the second half, okay. The other question that I have is on spare parts and services, right? On the last call, you sort of had an expectation that the average will be around PEN 700 million, the average you've had over the last 2 quarters or 3 quarters actually. But suddenly you jumped this quarter, to about PEN 740 million. Did anything change this quarter that suddenly improved that line of business? And do you think that is a sustainable level?

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [48]

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Yes. So we have a -- we see a positive trend. But to this fact that we are delivering every year, 30 trucks approximately. So the trend continues to be positive. The exact result in each quarter depends on other variables, which is, if one customer wants to anticipate every [parts] or not. So as a general trend, we continue to see it positive, growing. If one quarter grows more than another quarter it's because of specific strategies of maintenance in each customer.

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Operator [49]

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And there are no further questions at this time. I'd like to turn the call back to Mrs. García.

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Mariela García Figari de Fabbri, Ferreycorp S.A.A. - General Manager [50]

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Thank you, operator. Thank you all of you for your participation and your questions. I want to thank you, all of you for participating in our conference call and for your continuous interest in Ferreycorp. We expect to continue seeing you in the calls or in the investors meetings that we are participating in the second half of the year. If you still have any additional questions or need for information, please don't hesitate to contact us. Our Investor Relations department and management team is glad to answer your questions, and your concerns and receive all of your ideas. Have a good day, and see you soon.

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Operator [51]

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And this concludes today's call. Thank you for your participation. You may now disconnect.