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Edited Transcript of GRAMONC1.LM earnings conference call or presentation 4-Feb-20 5:00pm GMT

Q4 2019 Grana y Montero SAA Earnings Call

Lima Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Grana y Montero SAA earnings conference call or presentation Tuesday, February 4, 2020 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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* Lucia Calvo Perez

LarrainVial S.A., Research Division - Equity Analyst

* Sebastián Montoya Granda;Compass Group;Research Analyst

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Presentation

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Operator [1]

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Good afternoon. And welcome to Graña y Montero Fourth Quarter of 2019 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Luis Díaz Olivero, CEO. 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 to all attending this conference call. As we usually do, I will make a brief summary of the relevant highlights of the fourth quarter 2019, then Mónica Miloslavich, our CFO, will expand on the financial results. We will then open a Q&A session.

Ladies and gentlemen, we have had a very intense past few months. In October, the company, exercising its rights as creator of Gasoducto Sur Peruano, filed a claim against the Peruvian government to recover the equity invested and the debt assumed after the cancellation of the concession through ICSID, or as known in Spanish, CIADI, which we then withdrew in December. The same month, we signed a preliminary plea agreement with the Peruvian authorities in search of closing all open legal matters linked to the Lava Jato and Club de la Construccion. Yesterday, we held an Extraordinary Shareholder Meeting, which ratified both actions with 72.3% of those in favor. We presented financial statements for 2019, which showed a significant growth as a result of the above-mentioned decision.

Last Friday, January 31, we took down the Graña y Montero main logos from both buildings in Lima. And last night, we took a bold and final step on the company's transformation journey, which will take us towards a new identity. We offer our workers and all Peruvians a public apology for the damages and wrongdoings performed by former executives and provide a firm promise never to allow them to happen again.

3 years ago, the company entered into a long and complicated crisis, which forced us to take swift and decisive actions in many fronts, finance, governance, legal, commercial and reputation, among others. We had to appoint a new Board as well as a new management. We had to sell assets to pay debt and stay afloat. We reviewed and strengthened our risk and compliance processes, and they are now a key element of the way we do business. We streamlined our business strategy into 3 core lines with a regional vision. We secured new contracts and had a solid backlog, which will take us well into 2021. And we changed the shareholder composition with a successful capital raise, which brought in new shareholders and diluted the original family position.

We converted the crisis into an opportunity for a renewal and transformation. With the Board's commitment to truth, transparency and integrity at the core of our actions, we continue to search for evidence of wrongdoing and upon finding it, we presented the evidence to the authorities in order to pursue a collaboration deal that will allow the company to turn the page around its legal issues and enable it to move forward. We might not be there yet, but it is clear that we are getting closer every day. The transformation process also includes a renewed focus and aspiration in order to ensure that the organization's culture aligns with the new business strategy. The transformation is almost complete. And after a reflective period without the logos, we will announce a new identity.

I will not dive into the details of the financial statements as Mónica will explain the numbers and results when she takes over next. However, I would like to say that the resulting impact on the financial statements goes beyond the numbers and the heavy loss. It is significant as it will allow us to close the chapter of the crisis with potential reparations, settlements and provisions of accounts receivable taking as included and provisioned in the last year record.

2019 has been a difficult year, but we are now at the process of closing the chapter of a crisis, which has been much longer than we have anticipated or wanted. In spite of the losses, I would like to highlight that revenues, EBITDA and debt were in line with forecasted figures despite external factors that we were unable to foresee such as the economic slowdown in both Chile and Peru. There is still significant effort to be made during the first quarter of 2020 to close the collaboration agreement with the authorities, but we are confident that we will reach an agreement in the next 90 days.

We believe we are now closing a chapter of a process that has been hard and sometimes painful, but that has transformed the company. We closed the past year and now begin a new one with optimism. Thanks to current backlog, we can anticipate a year of 2020 with at least at the same level of revenues of 2019. EBITDA should improve based on the results of executed investments and better margins in our E&C business, which we clearly understand is our pending issue to attend, while we will work to keep improving our financial structure and providing less expensive financial resources to our operations.

After being able to reduce our legal risks, we should be able to cut costs in several fronts that we expect to benefit our P&L by the third and fourth quarters.

Thank you for your continued support and confidence in our company. I now leave you with Mónica for the detailed explanation of 2019 financial results.

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

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Thank you, Luis.

On December 27, 2019, the company announced as a relevant information communication the signing of our preliminary plea agreement with the Peruvian authorities for the cases under investigation, Club de la Construccion and Lava Jato. In compliance with these agreements, the company has withdrawn its arbitration application for the recovery of the investment in Gasoducto Sur Peruano. Consequently, the results as of 2019 include accounting adjustments mainly due to the additional impairment of the investments and accounts receivables of GSP and additional provisions for civil damages according to Law 30737.

Revenues for 2019 reached PEN 4,000 million, higher than the figure reported at the end 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 contract revenues due to lower maintenance work 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 the production of barrels per day, even though the oil price was lower than previous year.

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

Consolidated gross profit decreased by 34.5%, and the margin decreased from 17.3% to 10.8% in 2019. These lower results are partially explained by the real estate area that sold Almonte land during 2018. Additionally, 2019 includes the effects of the provision for the Tecnicas Reunidas project and the discount of long-term accounts receivable as well as the negative result of the Sexto Peralte project in Chile.

Administrative expenses at the end of 2019 reached 5.2% of sales compared to 7.1% at the end of 2018. This decrease is mainly explained by the reduction related to third-party services, legal expenses and the reduction of expenses from the sale of assets.

On Page 8 of the presentation, we present the adjustments associated to the plea agreement under withdrawal of the arbitration application and other adjustments according to IFRS rule: first, in the additional requirement of the investment and of the account receivable of GSP of PEN 501.7 million; second, the amount of PEN 77.4 million corresponds to the present value of the possible additional damages according to Law 30737 to be paid in the case of GSP and Concar in addition to adjustments of the amount registered in the previous year; third, provision of PEN 49.8 million as a result of the estimate of the possible exposure of the claim in New York, the class action; four, update of the GSP accounts receivable based on the estimated time for the collection and the reversal of the account -- discount applied to the provision of civil damages of the previous year for a total of PEN 44.5 million; five, reversal of deferred income tax as a result of the impairment described above for PEN 154.7 million; six, the impairment of accounts receivable and update of other long-term accounts receivables for PEN 6.7 million; seven, the provision of costs in the project for -- with Tecnicas Reunidas and the present value of accounts receivable based on the collection period generated by the arbitration process, which mainly corresponds to the same project, for a total of PEN 79.4 million; and eight, impairment of Morelco's goodwill by PEN 33 million due to the reduction of contract awarded during the last year that impacts the volume of the company's backlog and, as a consequence, the value of the goodwill and the revaluation of the Vial y Vives plan by PEN 20.6 million as a consequence of the increase of backlog during the year; nine, the impairment of the investment in Larco Mar Hotel project due to the impossibility of developing this project in the short term and the impairment of the investment in Vesur due to the suspension of the concession contract agreed with the municipality for a total amount of PEN 35.2 million; ten, reversal of impairment of the investment in the Ancon project registered at the end of 2018 for PEN 19.4 million because of the judicial process initiated by the company; eleven, impairment of unused intangibles for PEN 1.8 million; twelve, the present value of the accounts receivable of the Ancon project according to the collection period estimated for the judicial process for an amount of PEN 26.1 million; thirteen, the impairment of the balance of Adexus investment due to the restructuring process in which the company is involved for PEN 14 million.

Excluding the adjustments mentioned, the operational income of the company would have been PEN 427.9 million instead of a loss of PEN 317.1 million.

Lower financial expenses in 2019 are mainly explained by the reduction of debt associated with GSP 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 GSP long-term accounts receivable.

The income tax expense in 2019 is higher than in 2018 because 2019 includes the reversal of the deferred income tax as a result of GSP's impairment of PEN 154.7 million.

The line of profit from discontinued operations shows a loss of PEN 43 million from the results of Adexus operation and the impairment of the investment in that subsidiary. The net profit would have been PEN 15 million instead of a loss of PEN 880.4 million if we exclude all these adjustments mentioned above.

Excluding the noncash adjustments accounted in 2019, the EBITDA was PEN 640.6 million, in line with company's estimates. It is important to mention that some of those noncash adjustments will have an impact in the cash flow of the company during 2020 and in future years.

The consolidated backlog of $1.4 billion plus the recurring businesses of $697 million reached a total amount of $2.1 billion by the end of 2019, which represents 1.7 years of revenues for the company. The total amount of new contracts awarded during 2019 was $977 million. The main projects awarded were Quellaveco contract of $318 million, Quebrada Blanca Phase 2 project for an amount of up to $250 million and the MAPA contract with Arauco for $112 million.

The total amount of consolidated financial debt is $519.3 million. Of the total debt, $99 million corresponds to working capital associated to the clients' accounts receivables and leasing for the acquisition of machinery and equipment. The amount of $319.3 million corresponds to Infrastructure Project, which is debt without recourse, with guarantees and cash flows from the project itself. On the other hand, $34 million corresponds to CS Peru Infrastructure Holdings financing, $42.6 million corresponds to the debt from the dividend monetization of Norvial and $24.2 million corresponds to leasings according to IFRS 16.

The debt at the end of 2019 decreased 18% compared to the end of 2018, mainly due to the cancellation of the debt associated to GSP with the capital increase funds and through the cancellation of the working capital debt of Line 1 of the Lima Metro due to the completion of the expansion work.

It is important to mention that the amount of debt outstanding, 63%, corresponds to debt associated to Infrastructure Project and only 19% is the working capital debt of Engineering and Construction and the Real Estate business.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Sebastián Montoya from Compass Group.

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Sebastián Montoya Granda;Compass Group;Research Analyst, [2]

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I have a quick one. And it's, what do you think has been the main causes of the share price rebound in last day?

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

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I don't know. Hard to know. The only 2 events that we have publicly formalized is the approval of the ratification of the decision taken by the Board regarding the preliminary plea agreement and the withdrawal of our petition to the CIADI. Those are the 2 main events that we have announced besides the results that we published on January 13 -- 30, excuse me. So I have nothing to comment in there.

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Operator [4]

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Our next question is from Lucia Calvo Perez from LarrainVial.

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Lucia Calvo Perez, LarrainVial S.A., Research Division - Equity Analyst [5]

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Well, I had 2 questions. The first one is regarding the plea agreement. I was wondering what have your lawyers commented to you regarding the Enagás process with CIADI in the scenario that Enagás gets a complete resolution in your claim in GSP. Would you still be able to recover what corresponds to the stake you have in (inaudible)?

And my second question is regarding the E&C backlog. I know it's very difficult to give a guidance on this matter, but do you think you can comment us in what kind of projects -- or in which countries are you expecting to participate this year to that E&C backlog? Like any comments on this matter would be helpful.

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

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Okay. Thank you, Lucia. First, regarding the plea agreement and regarding the Enagás trial in CIADI, those are 2 separate events. Nothing -- there is nothing linking one to the other one. What we have agreed in the preliminary plea agreement is not to pursue any claim against the government through CIADI or through a news in any project where we are accepting responsibility or the damages produced by some other persons in the process, okay? We haven't quit or declined our possibility of collecting the money of GSP, as we have stated in the Shareholders' Meeting yesterday. If some creditor bought or some payment is received by any means to -- in GSP. So if money comes into GSP because the creditor has decided to pursue the filing in CIADI or simply because the government decides to pay for the assets in GSP, we will then collect the share of the money that is provided to GSP.

On the other hand, Enagás is pursuing a completely different approach. They are using a bilateral country-to-country agreement. And what they are claiming is that they have been, I don't know, expropriated of their investments. So they are -- basing on that statement, they are simply defending their rights to collect. That process is completely separate to any that the guys in GSP may follow. The reason why we pursue ours through GSP is because we believe that, that was the most fair approach in this claim, not only for us but for any party participating as a creditor or shareholder in GSP.

Regarding the E&C backlog, we are, let's say, optimism -- optimistic that at least in the second and third quarter, we should start seeing some direct investments in Peru. And we hope that the social turmoil that happened in Chile has settled a little bit. And so private investments in the different sectors where we are investing or where we are participating should start promoting offers where we can beat.

I need to make a statement in there. We know, and as I say during the call, that we know that we have a pending issue in our backlog in our E&C margin. We are working heavily on that matter, and we are going to be really selective on how we build our future backlog as well as how we execute that backlog, okay? But I don't have any names or projects to name at the time. I can tell you that we are building something in Infrastructure as well as we are building something in mining in Peru. But as far as that, you already know that it's part of our common market mix. There is nothing in particular to comment.

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Operator [7]

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(Operator Instructions) At this time, we have no more question. This concludes the Graña y Montero Fourth Quarter 2019 Earnings Call. Thank you for attending today's presentation. You may now disconnect.