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Edited Transcript of GRAMONC1.LM earnings conference call or presentation 28-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Grana y Montero SAA Earnings Call

Lima Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Grana y Montero SAA earnings conference call or presentation Friday, April 28, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Monica Miloslavich

Grana y Montero SAA - CFO

* Luis Diaz Olivero

Grana y Montero SAA - CEO

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Conference Call Participants

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* Francisco Suarez

Scotiabank - Analyst

* Jonathan Comotti

InfraLatinAmerica - Analyst

* Flor Felices

Inteligo - Analyst

* Marco Aleman

Kallpa Securities - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Grana y Montero first quarter 2017 conference call. All participants will be in listening-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Luis Diaz Olivero, CEO, please go ahead.

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Luis Diaz Olivero, Grana y Montero SAA - CEO [2]

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Thank you. Good afternoon to all of you. Thank you for attending this conference call. The conference today will go as follows, first, I would like to point out some of the most important figures of the results of the first quarter and subsequently the actions that we have implemented to improve the Group's financial strength and good corporate governance practices. Later, Monica Miloslavich, our CFO, will explain the Group's results. Finally, we will hold a Q&A session.

Regarding our main results, we have reached a net profit of PEN79.1 million in the first quarter of 2017, which represents an increase of 11.6% compared to the first quarter of last year partly due to the profits generated by the asset sales. During this quarter, we have new orders for an amount of [$291 million], which have been incorporated to our backlog. As it was previously announced, in order to increase liquidity and reduce the Group indebtedness, we approved the sale of non-strategic assets that as of today amount to $108 million. The last sold asset was our 51% of participation in COGA. This asset no longer holds any strategic value for the Company given that we are no longer shareholders of TgP nor we have made a decision to participate in the [Gasoducto Sur] project in the future. Even though we have reported a sale price of $21.5 million, which is lower than the purchase price reported in 2014, it is important to mention that for the Group, the real value in COGA relies in its participation in the A&M contract that currently represents $80 million in the backlog of GyM.

The following milestones have been achieved in relation to the debt compensation related to the Southern Gas Pipeline project termination. As disclosed, we reached an agreement in March with the insurance company Chubb Peru SA for $52.5 million. We have reached favorable commercial agreements with both the bank syndicated line by Credit Suisse and the bank syndicated for the bridge loan. We are close to finalize a syndicate line agreement with our main banks BCP, BBVA, Scotiabank, and Interbank that will ensure working capital and warranties are available to execute our backlog and to incorporate new projects to the Group.

Finally, in relation to GSP, an asset administrator should be appointed today by [senior team] as part of the re-launching process of the project. Regarding the insurance of the audited financial information for 2016, PwC is currently working on additional checks and procedures. The Company is making all efforts to have the financial statements published by May 15. In addition to the normal business development, we continue to strength our good corporate governance and compliance program. It is important to note the following measures: the forensic investigation commissioned to our prestigious international firm is in progress. Its results will be reported directly to the risk, compliance and sustainability committee in accordance with international standards in this area.

During April, the Company has carried out a training process about the business of the Group for the seven new directors in accordance with our good corporate governance regulations. The Board appointed the members of the [fourth support committees and the fourth] operative committees emphasizing that in the audit and process committees, the HR committees, and the risk, compliance and sustainability committees, all of its members are independent. In the support committees, the majority of the members are also independent. Also, it is important to note that in order to give more visibility to the Board, independent directors have been appointed in the Group's key subsidiaries as well. The process of selecting the new risk, compliance and sustainability officer who will report to the new risk, compliance and sustainability committee directly is in progress. At the moment, a shortlist for the mentioned committee has already been submitted for its final decision and we expect that the process will conclude in the following weeks.

We already concluded the diagnosis of measures in order to improve our FCPA practices, which will implement shortly. In the legal scope, there is no variation regarding our previous report. it is important to note, by this time and in agreement with our legal advisors, there is no ongoing legal process or investigation in which our companies are included neither in Peru nor in any other country. Regarding the civil claims file in the United States federal courts, we would like to point out that we are aware only of two civil claims. Now, I give the floor to Monica Miloslavich, who will explain the results of the Group in the first quarter of 2017.

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Monica Miloslavich, Grana y Montero SAA - CFO [3]

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Thank you, Luis. Please turn to page five on the presentation. The total amount of revenues of the first quarter of 2017 decreased 1% compared to the first quarter of 2016. The engineering and construction area reported less projects under execution during the first quarter of 2017, which resulted in a reduction of revenues of 31.7%. This was offset by the increase in revenues in the real estate area due to the sale of Cuartel San Martin land and the increase in units delivered compared to the first quarter of 2016. Additionally, the technical service area reported increase in revenues due to new contracts awarded during 2016 and the consolidation of Adexus since August 2016. Finally, the infrastructure area reported higher revenues due to the increase in production of barrels per day and the increase in the oil price.

Gross profit increased 47.2% and the gross margin increased from 10% to 14.9%. The results are explained by better margins in the engineering and construction area reflecting more stable margins in this area and an increase in the infrastructure area due to increase in the oil price. And in the real estate area, the increase in gross profit is related to the sale of Cuartel San Martin land.

General expenses increased 3% compared to the first quarter of 2016 mainly because of the consolidation of Adexus since August 2016. The profit from the sale of investments in subsidiaries as of the first quarter of 2017 includes the sale of 8.69% participation in Red Eagle Mining Corporation through our subsidiary, STRACON GyM and in 2016 -- the first quarter of 2016, the profit from the sale of our 1.64% stake in Transportadora de Gas del Peru.

The increase in financial expenses is mainly explained by the increase in debt related to obligations assumed by the Company as a consequence of the termination of the Southern Gas Pipeline projects. The Participation in Associates account registered the profit generated in projects where our subsidiaries have a minority stake and are not consolidated. In first quarter of 2017, this includes the participation in the minority investments in COGA and Chavimochic and in the first quarter of 2016, the participation in the project Southern Gas Pipeline [offset] as of 2016 due to the termination of the project.

As a consequence of the results explained above, the net profit [of the year] was higher than in the first quarter of 2016, increasing from PEN70.8 million to PEN79.1 million, generating an improvement of margins from 4.9% to 5.6%. The consolidated adjusted EBITDA increased from PEN190 million to PEN296 million reaching a margin of 14.9%, in line with the better operating results explained above.

Turning to the next page, the consolidated backlog of $2.9 billion plus the recurrent businesses of $622 million reached a total amount of $3.5 billion in the first quarter of 2017, which represents 1.95 [years] of revenues. Even though during the last month, there has been a slowdown in the economy in Peru, during the first quarter, the Company was able to add new orders and additional works to assist in contracts for an amount of [$291 million].

In addition, as of the first quarter of 2017, due to the situation of the Chavimochic project, the Company has decided to extract from the backlog the amount of $87 million corresponding to this project and have adjusted recurrent businesses in Norvial that should have not been considered as recurrent businesses. The backlog of the Company is diversified in different end market, 24% in the oil and gas sector, 22% in contract mining, and transportation 23% among the most important ones. 75% of the backlog is located in Peru. 64% is with the private sector and 74% of the backlog is not related to construction.

Consolidated financial debt for the first quarter of 2017 reached an amount of $979 million plus the commercial debt associated to the execution of the performance bond of GSP project with Chubb of $52.5 million, amounted $1.031 billion of debt. From the total debt, $383 million corresponds to working capital debt associated to the clients' accounts receivables and leasing for the acquisition of machinery and equipment. $348 million corresponds to the debt of Infrastructure Project and $300 million corresponds to the obligations assumed by the Company as a consequence of the termination of GSP contract. The amount of project debt maintains similar levels of previous quarter. This is a structured non-recourse debt with guarantees and cash flows from the project. The gross debt-to-EBITDA of infrastructure area is 4.11 times and the consolidated gross debt-to-EBITDA for the Group is 4.48 times at the end of the first quarter, maintaining a total amount of cash of [$160 million].

In relation to the refinancing of the three obligations related to the termination of Southern Gas Pipeline contract, as previously announced, the Company has reached an agreement on March 31 with Chubb to pay the total amount of $52.5 million in a period of 12 months. In addition, the terms and conditions with the bridge lenders facility are being approved by the bank committee and all the amendments and waivers required in the Credit Suisse facility are in the process of approval also. We expect to close this agreement within the next 15 days.

As mentioned before, we have already sold four assets for a total value of $108 million, representing a net profit of $30 million approximately. The corresponding part of the net profit of Cuartel San Martin and Red Eagle have been reported as of the first quarter of 2017 and the other [two programs], PRINSUR will be included in April. As of today, we have received the total proceeds from these sales including PRINSUR paid today. Some relevant information related to the sale of COGA is that as part of the negotiation, the Company has retained the A&M contract to operate TgP gas pipeline for an amount of $80 million for the next four years. Considering the net proceeds of this sale, by the end of April, the three obligations will be [reduced to $221 million].

In relation to the credit line with the main banks of the Company, BBVA, BCP, Scotiabank, (inaudible) and Interbank, we are negotiating the terms and conditions of a confirmed syndicated credit line to assure the working capital and guarantees needed to execute the backlog and continue contracting in the future. We expect to close this agreement within the next 15 days. 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) Francisco Suarez, Scotiabank.

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Francisco Suarez, Scotiabank - Analyst [2]

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Hi, sorry for the quality of my line, it could be a little bit messy. I'm sorry because you are explaining this, but I joined later in the call. So you are basically refinancing all what you may need to have for working capital needs, isn't it? I mean, if you can provide us a certain guidance of what is the amount of this potential credit lines that will be supporting your working capital needs and the general conditions on how this is going to be repaid and any collateral on that? And also, on the refinancing of the syndicated facility that you also explained, that is going to be secured debt or it's going to be remain unsecured? Thank you.

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Monica Miloslavich, Grana y Montero SAA - CFO [3]

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Hello, Francisco, how are you? In relation to the syndicated credit line, the approximate amount, they are still in the negotiation with the banks, it's more or less $160 million for working capital debt and an additional $100 million for future or new guarantees for the projects. And the other question was related to the collaterals for this facility or you were referring to the other three facilities of GSP?

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Francisco Suarez, Scotiabank - Analyst [4]

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No, generally speaking, if there were secured transactions and what type of guarantees you maybe actually offering for those and of course if I may add another question, if you are planning to use also a portion of the proceeds on asset sales to pay for these facilities?

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Luis Diaz Olivero, Grana y Montero SAA - CEO [5]

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Francisco, this is Luis Diaz. The facilities that we are refinancing coming from GSP, the one with Credit Suisse, it has its own security package at the beginning. The ones that did not have securities tied to the facility were Chubb and the bridge loan facility. Now the three of them have a different package of warranties, mainly assets and some of the assets that we are having under the sale process. The main idea as we have said before is that the proceeds of the sale of the assets will be allocated to repay specifically this $300 million of the three facilities.

We are of course considering the possibility of if we have additional cash to use that cash to increase the liquidity of the Group, so it is not a priority, the main focus will be repaying those three facilities coming out of the GSP project, but eventually, we may use part of that cash to enhance the liquidity of the Group.

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Operator [6]

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(Operator Instructions) Jonathan Comotti, InfraLatinAmerica.

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Jonathan Comotti, InfraLatinAmerica - Analyst [7]

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I'm interested in two projects of Grana y Montero, I'd like to know what plans you have for the financing of these projects. This is the Via Expresa Sur Toll Road in Lima, we understand that you're looking for long-term financing for the project having funded the early stages with capital and the other project is the transmission line project Riohacha-Maicao and Riohacha-Cuestecitas in Colombia and we're wondering what plans you have for the long-term financing of those projects?

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Luis Diaz Olivero, Grana y Montero SAA - CEO [8]

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First of all, the second project that you mentioned in Colombia, it's just (multiple speakers). We have been hired for the construction only. Therefore, we don't need to provide any financing to that project. We are not the owners of the project. Therefore, we are just a construction company and we will support that with the working capital lines that we have in Colombia to perform through our subsidiary called Morelco. In the case of Via Expresa Sur, the project currently is delayed. There are some pending expropriations coming from the government, excuse me, from the municipality of Lima. So we expect some delays coming to the project and we will probably defer the project for the remaining portion of the year. Financing for that will come during the year.

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Jonathan Comotti, InfraLatinAmerica - Analyst [9]

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Okay, so before the end of 2017.

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Luis Diaz Olivero, Grana y Montero SAA - CEO [10]

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[Yes].

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Operator [11]

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(Operator Instructions) Flor Felices, Inteligo.

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Flor Felices, Inteligo - Analyst [12]

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My question is regarding the COGS. If we subtract the amount of the sale from Cuartel San Martin project, the COGS represent nearly 96% of the revenue. So I wanted to know if is there is any COGS related to this sale?

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Monica Miloslavich, Grana y Montero SAA - CFO [13]

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Your question is, if there is any cost related to the sale of Cuartel San Martin?

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Flor Felices, Inteligo - Analyst [14]

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Yes.

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Monica Miloslavich, Grana y Montero SAA - CFO [15]

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Yes, the book value of the asset that we had registered plus all the pre-operating costs that we have been doing during this last seven years since we acquired (multiple speakers).

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Flor Felices, Inteligo - Analyst [16]

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And if you have any amount for the book value of the asset?

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Monica Miloslavich, Grana y Montero SAA - CFO [17]

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It's not public, but do you want to know the net profit of that sale?

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Flor Felices, Inteligo - Analyst [18]

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Yes.

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Monica Miloslavich, Grana y Montero SAA - CFO [19]

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[$17 million] was the net profit.

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Operator [20]

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(Operator Instructions) If there is no more questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Luis Diaz Olivero for any closing remarks.

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Luis Diaz Olivero, Grana y Montero SAA - CEO [21]

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No, just a few -- I think you have a question.

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Monica Miloslavich, Grana y Montero SAA - CFO [22]

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We have one more asking a question.

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Operator [23]

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Marco Aleman, Kallpa Securities.

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Marco Aleman, Kallpa Securities - Analyst [24]

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I have two questions. The first one is regarding the gross profit line. In the notes to the financial statements, the gross profit of construction activities was negative revenues of [around 500 and cost of goods sales was around 600]. Can you give us more color on the reasons of this negative margin and what should we expect for the next quarters?

And the second one is about administrative fixed expenses line, I see that they have remained stable. However, if we don't consider the revenues from Cuartel San Martin, the administrative expenses as a percentage of sales [will be higher], what can we expect for the following quarters?

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Monica Miloslavich, Grana y Montero SAA - CFO [25]

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Okay, let me rephrase your first question, you said that in the E&C segment, the margins are negative, gross margin you mean?

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Marco Aleman, Kallpa Securities - Analyst [26]

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Only construction activities.

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Monica Miloslavich, Grana y Montero SAA - CFO [27]

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Only construction activities, no, margins were not negative. Maybe in the interest of time, we can review those numbers with you afterwards so that we can have a detailed explanation on that, but there is no negative results in the construction business. And then the other question was related to the general expenses, they have increased because we are comparing a quarter, the 2017 quarter with the 2016 quarter in which we didn't have at that moment, the consolidation of Adexus. So that's part of the or one of the main reasons of the increase in general expenses and also considering that the construction business in terms of revenues have been lower than in the previous quarter in terms of percentage, of course, the amount of general expenses in that area also have increased.

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Monica Miloslavich, Grana y Montero SAA - CFO [28]

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Okay, was that the two questions you asked?

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Marco Aleman, Kallpa Securities - Analyst [29]

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Yes.

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Operator [30]

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This conclude our question-and-answer session. I would like to turn the conference back over to Luis Diaz Olivero, our CEO, for any closing remarks.

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Luis Diaz Olivero, Grana y Montero SAA - CEO [31]

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Thank you. As we have been doing during this last month, we intend to keep the market informed with the news coming out of our ongoing business and our asset sales. So we offer that we will make sure that the market has as much information as we can provide and besides that, I just want to thank everyone in the line for attending this conference call. Thank you very much.

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Operator [32]

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