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Edited Transcript of GRAMONC1.LM earnings conference call or presentation 5-Nov-19 5:00pm GMT

Q3 2019 Grana y Montero SAA Earnings Call

Lima Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Grana y Montero SAA earnings conference call or presentation Tuesday, November 5, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luis Francisco Díaz Olivero

Graña y Montero S.A.A. - CEO

* Mónica Miloslavich Hart

Graña y Montero S.A.A. - CFO

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Conference Call Participants

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* Eithel Mc Gowen;CAPIA Servicios Financieros S.A.C.;Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Graña y Montero Third Quarter of 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

At this time, I'd like to turn the conference over to Luis Díaz Olivero, Chief Executive Officer. Please go ahead, sir.

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Luis Francisco Díaz Olivero, Graña y Montero S.A.A. - CEO [2]

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

Ladies and gentlemen, third quarter 2019 closes in line with our sales forecast but with lower financial results than initially expected. Lower margins are directly related to the performance of our E&C business as I will explain further on. Our EBITDA has not yet -- has not been affected yet by these results. However, it may be impacted accordingly by year-end.

The Minera Escondida project in Chile, operated by our E&C subsidiary, Vial y Vives, experienced bigger losses than expected in the third quarter due to delays in the start of the project, unexpected changes in personnel and inefficiencies in the execution. The total loss in the project was $18 million, and it has been fully recorded by the end of the third quarter. The project will be concluded by November 22, and we do not expect any additional impact in the last quarter. This project is one of the last projects contracted by the company before the implementation of our Business Development Committee and was the reason behind the dismissal of the former CEO of Vial y Vives last year.

In addition, during this quarter, we have included impairment in earnings of investments as well as a discount of long-term accounts receivables in Colombia, and the announced claim against the Ministerio de Vivienda for the low-house income project in Ancón that has impacted our results in USD 13.3 million.

Adexus remain as an asset held from sale, although the project -- the process has to slow down, and we do not expect to conclude the sale earlier than the second quarter of 2020.

Consequently, we have raised USD 34 million debt with CS Perú Infrastructure Holdings to increase liquidity and refinance E&C debt. This debt will be partially canceled with the sale of Adexus at the adequate time.

As we have said in our previous conference call, our financial debt levels have reached an adequate capital structure for the company. However, we are still finalizing agreements with certain suppliers in the E&C business in Peru, which we will expect to conclude before year-end, as a final stage of our financial plan to be completed. As of today, total debt is close to $500 million, with a large portion issuing the capital market linked to our concession projects.

The political context in Peru coupled with the more recent social unrest in Chile has resulted in a slowdown in both countries, which affected our commercial efforts during last quarter. Following this scenario, after 2 strong quarters adding backlog, last quarter only reports 2 contracts for the E&C business: service contract with the Aceros Arequipa for steel plant expansion of USD 37 million; and the Stage 2 of Iberostar Miraflores Hotel for $20 million.

In spite of this context, Backlog remains strong with a total $2.25 billion in backlog and recurring business with $1 billion to be executed in 2020. This amount of backlog for next year reduces substantially our commercial risk, looking into 2020 budget.

Looking into our products and operations. The E&C projects mainly concentrated in mining, hotel construction and oil and gas in Colombia are advancing at a normal pace with no significant issues to report besides the effect reported in this quarter in Chile. In the oil and gas subsidiary, after 22 years, our operation contracts for the 5 southern terminals of Petroperú expired and the consortium composed of GMP and Oil Tanking returned the terminals to the state company from November 2 of this year. However, the same joint venture maintains the operation of the northern and central terminals in a similar operation contract that still has 16 years to go.

In the other hand, Block IV is not only producing oil but also associated natural gas that is being collected and delivered to our fractionation and separation plant at a rate of 3 million cubic feet per day, increasing the plan occupation accordingly.

The Line 1 of the Metro de Lima reached a new record of 574,000 passengers per day transported during the Señor de los Milagros procession on October 19. The metro line is now operating at full capacity with 44 complete 6 wagon trains and all infrastructure facilities upgraded in place. This expansion of the service has required close to $400 million and has been executed on time and on budget despite the critical times lived by the company during the execution.

The housing division sold 481 units in the quarter versus 409 units in the last quarter, mostly in the low house income housing division. The plans for the new residential business in San Isidro and Barranco districts are advanced.

Regarding legal issues, we continue with our commitment of truth, transparency and integrity and continue to collaborate with the authorities. The ongoing coverage regarding the southern gas pipeline should not affect the company's ability to recover the investments made through legal avenues. Legal issues will continue to exist and to develop, but the company has taken and will continue to take precautions to isolate legal contingencies from current and future business.

While the quarter results are not as positive as we expected, the company has reached a level of financial and legal stability, which allows the focus to be on the business: to generate new contracts and operate our projects in the most efficient way. We have started a complete transformation of the company, which after the last 2 years has suffered significant changes, and we are sure that our renewed purpose will contribute to growth and profitability.

Looking forward into 2020, we expect to consolidate our business in the region, increase our profitability and complete the company turnaround strategy.

Thank you very much for your attention. And I will now hand over to Mónica Miloslavich, CFO, for the financial results.

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Mónica Miloslavich Hart, Graña y Montero S.A.A. - CFO [3]

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Thank you, Luis.

As we mentioned on the last report, as a consequence of the sale of Stracon GyM and CAM, according to IFRS rules, the results as well as the profit from the sale of investments net of taxes, are presented as discontinued operations in our financial statements. Therefore, the results of 2018 has been reclassified accordingly. This effect is presented only in the income statement, not on the balance sheet. Also the subsidiary, Adexus, has been reclassified as an asset held sales for sale. Therefore, the results of the period are also shown in the discontinued operations line item. For more information, please see note 20 of our third quarter 2019 financial statements.

Revenue for the third quarter of 2019 reached PEN 2.8 billion, slightly lower than the revenues reported at the end of the third quarter of 2018. Revenues of Engineering and Construction increased mainly due to the increase in the volume of projects under execution like Quebrada Blanca, MAPA and Quellaveco. On the other hand, revenues in Infrastructure decreased due to the completion of the expansion work of the Lima Metro, partially offset by the increase in the amount of kilometers traveled due to the new trains under operation and by the reduction in Concar's revenues due to lower maintenance works executed in the period.

In addition, the execution of Norvial expansion work increased revenues, while in the oil and gas business revenues were similar to the previous year due to the increase in production of barrels per day, even though the oil price was lower than previous year.

Finally, revenues in Real Estate decrease compared to the third quarter of 2018, explained by the reduction of units delivered of traditional housing and the sale of Almonte land during the third quarter of 2018.

Consolidated gross profit decreased by 33.1%, and the margin decreased from 18.9% to 13% in the third quarter of 2019. These results are mainly explained by the real estate area that sold Almonte land during the third quarter of 2018. Additionally, as of the third quarter of 2019, Sexto Peralte mining project in Chile reported a loss of $18 million, which impacts E&C results.

Administrative expenses for the third quarter of 2019 reached 5.1% of revenues compared to 6.5% at the end of the third quarter of 2018. This decrease is mainly explained by the reduction of expenses related to third-party services, legal expenses and the reduction of expenses associated to the sale of assets.

Other income and expenses include a partial impairment of investments and the discount of long-term account receivables in Colombia and the claim against the Ministerio de Vivienda for the Ancom project, recently announced to the market. As a result, operating income decreased 29.1% in the third quarter of 2019 compared to the third quarter of 2018, with margins of 12.8% and 9.4%, respectively, as a consequence of the results explained above.

Lower financial expenses in the third quarter of 2019 are mainly explained by the reduction of debt associated with the Gasoducto Sur Peruano and the cancellation of working capital debt for the expansion of Line 1 of the Lima Metro as well as by the financial discount of the long-term account receivables of GSP due to a reduction of rates from one period to another.

The line of participation in associates reflects the results from the minority investments held by the group. The exchange rate at the end of the third quarter of 2019 depreciated compared to the end of 2018. Therefore, it impacted negatively as a consequence of the net position of assets and liabilities in U.S. dollars.

The income tax of the third quarter of 2019 is less than the income tax of the third quarter of 2018 because in the third quarter of 2018, it included the income tax of the sale of Almonte land. The line of profit from discontinued operations shows a loss of PEN 15 million from the results of Adexus, an asset held for sale, compared to PEN 11.9 million net profit during the third quarter of 2018 from the sale of Stracon GyM, CAM Chile and CAM Servicios as well as a result of Adexus as an asset held for sale.

Consolidated net income in the third quarter of 2019 was PEN 34.9 million, 122% higher than the third quarter of 2018. The net margin went from 0.5% to 1.2% in the third quarter of 2019, explained by the results described above.

The total amount of consolidated financial debt is $499.1 million. Of the total debt, $96.2 million corresponds to working capital associated with the clients' accounts receivables and leasing's for the acquisition of machinery and equipment. The amount of $301.7 million corresponds to the Infrastructure Project finance, which is debt without recourse, with guarantees and cash flows from the project itself.

On the other hand, $33.9 million corresponds to CS Peru Infrastructure Holdings financing. $43 million corresponds to the debt from dividends monetization of Norvial and $24.3 million corresponds to the leasings according to IFRS 16.

The debt at the end of the third quarter of 2019 decreased 21.2% compared to the end of 2018, mainly due to the cancellation of the debt associated to GSP with the capital increase funds and the cancellation of the working capital debt of Line 1 of the Lima Metro due to the completion of the expansion work.

What is important to mention is that from the amount of debt outstanding, 62% corresponds to debt associated to the infrastructure projects and only 19% is the working capital debt of Engineering and Construction and Real Estate.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today will come from Eithel Mc Gowen of CAPIA.

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Eithel Mc Gowen;CAPIA Servicios Financieros S.A.C.;Analyst, [2]

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My question is regarding oil and gas business. So according to the quarterly report, EBITDA for the year so far is PEN 140 million. And if you add the EBITDA of every segment of the oil and gas business that you presented today in the earnings presentation, it's -- that would up to PEN 126 million. So I'd like to know where does that difference come from? That PEN 14 million?

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Luis Francisco Díaz Olivero, Graña y Montero S.A.A. - CEO [3]

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Give me 1 second, please.

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Mónica Miloslavich Hart, Graña y Montero S.A.A. - CFO [4]

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So could you please repeat your -- the figures that you mentioned?

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Eithel Mc Gowen;CAPIA Servicios Financieros S.A.C.;Analyst, [5]

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Pardon? Hello? I can't hear your answer.

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Luis Francisco Díaz Olivero, Graña y Montero S.A.A. - CEO [6]

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Can you repeat the figures that you mentioned? What are you comparing?

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Eithel Mc Gowen;CAPIA Servicios Financieros S.A.C.;Analyst, [7]

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According to the quarterly report, EBITDA for the oil and gas business was -- for the year is PEN 140 million. And if you add up the numbers on your presentation for the EBITDA for the oil and gas business that adds up to PEN 126 million. So is that -- I was wondering if that difference was -- is there like a termination fee for the Terminales del Sur contract? Or you could explain what the difference is, please?

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Luis Francisco Díaz Olivero, Graña y Montero S.A.A. - CEO [8]

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Let us check the presentation right now, but we don't think -- that might be a mistake in the -- yes, you're right.

Yes. The presentation and the figures that you have in the quarterly report are not using the same figures. There must be a mistake. And I think the mistake is in the presentation. There is no cancellation fee at all regarding the Consorcio Terminales contract for the southern terminals and that just because the contract expired in time after 6 expansions, and there is no cancellation fee linked to it. So there is not any reason to the EBITDA reduction. Essentially, we are talking that there is a mistake in the figures of the presentation. Sorry for that.

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Operator [9]

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(Operator Instructions) I'm showing no further questions. We will -- this will conclude our question-and-answer session and will also conclude Graña y Montero's Third Quarter 2019 Earnings Conference Call.

We thank you for attending today's presentation, and you may now disconnect your line.