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Empresas ICA S.A. DE C.V. (NYSE:ICA)

Q4 2012 Earnings Call

March 1, 2013 10:00 AM ET

Executives

Víctor Bravo – CFO

Alonso Quintana Kawage – CEO

Analysts

Carlos Pereylongue – Merrill Lynch

Javier Cayol – GBN

Lillian Starky – Morgan Stanley

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Empresas ICA’s Fourth Quarter 2012 Earnings Conference Call.

(Operator Instructions) This conference call is being recorded today, March 1, 2013.

I would now like to turn the conference over to our host, Victor Bravo, Chief Financial Officer. Please go ahead, sir.

Víctor Bravo

Thank you very much and good morning to everyone and thank you for joining us for ICA’s Fourth Quarter 2012 Conference Call. Joining me, Gabriel de la Concha, our Chief Investment Officer and Head of Investor Relations, Luz Montemayor and Luciana García from Investor Relations.

I will go over each of fourth quarter and full year accomplishments, our financial results and the year-on-debt position and financial strategy. I also want to highlight some IFRS accounting that has been affected in 2013. After this we will open the call to your questions.

The fourth quarter demonstrates our continuing transformation as a company and highlights our efforts to create value at all points of the life cycle of long-live infrastructure. This is what we call a critical analysis. I want to highlight four major operating accomplishments in the quarter. First, we will need to fully execute the strong backing.

We guided more than 18 billion pesos to outlook in fourth quarter. The year-end total was more than 42 billion pesos, and this does not include two additional concessions that were awarded in fourth quarter with fiscal year. Our year-end backlog was four times larger than it was the last time there was a change in federal government, in December 2006. That’s when our backlog has decreased by 33% compared to the average of the prior eight quarters.

In contrast the December 2012 backlog is actually 7% higher than the average of the last eight quarters, and was up 3% from the end of 2011. We have also more than 8 million pesos in mining and other services contracts from our subsidiaries from our teams in Peru. These contracts are not included in backlog. This high level of backlog of services contract will help protect our revenue generated and cash flow until the new government parts for now need insurance.

Second, we completed a number of major multi-year projects. This required massive effort across the company, and in many different regions of Mexico. It is another demonstration of free cash commitments or planning, and for the people who are the ultimate beneficiaries of our deployment. We delivered the La Getza Survine after five years of work and received payment for more than $1 million. We delivered the net alliance portfolio after four years of construction. We also delivered five new contracts. This includes the Alto Rio Run Asus, the La Piedad Bypass and the Rió Verde-Cuidad Valles highway. I will speak, then opening of additional custom in this segment of the year, (inaudible).

Third, we opened up new services revenue and cash flow generation with the startup operations of the five concessions I just read. These made a modest contribution to fourth quarter results, and their contribution will start to grow in first quarter 2013. The SEC were only operational for part of the quarter. The highway projects only just started at the end of the quarter. There’s profits which is ramping up, and not all open segments were collection points.

Seven years ago, ICA had three concessions. Today, we have 11 operating concessions, over 13 NIA airports plus another seven under construction. This is a dramatic change in the competition of our business.

Fourth, we already signed out participation in the affordable housing sector in Mexico by managing our housing efforts with interest. We just received gross profit in Mexico proposition agents. This was the principal of military approval required. We expect the transactions to close readily in the second quarter of 2013.

Merging inflations were harder. The numbers do come from the INFONAVIT in Mexico, where the most impending our grade value from our 10 billion assets, of course with a full operating content.

In Empresas ICA, we concentrate on our core construction and with our total businesses. This accomplishment, along with acquisition of San Martin in Peru and the concessions we were awarded earlier made 2012 a landmark year of ICA.

Looking at the report of our business segment, city concessions revenue decreased 8% in the quarter as expected because of the completion of (inaudible). Bringing this to conclusion we are as I mentioned one of our main priorities. We started some provisions for the regional costs incurred in the metro. Given the dynamics in the city construction, operating loss in the fourth quarter. Like most large projects, this cost of the land sales included multiple same quarter and execution challenges. We are in constant discussions with clients on this issue. ICA and…

Operator

Ladies and gentlemen, please stand by.

Víctor Bravo

Hello, again, and sorry for this technical problem.

We were discussing this year’s Construction results and concluding that actually Construction has just at EBITDA decreased 10% for the year, largely because of the provisions from the Metro authorities.

Electro construction revenues grew 13% with most of the growth coming from the clean fuels released for Pemex, Alda and Vies Voreno Tempers Petrochemical Company. Margins nica flur made good for the quarter and the full year because of the mix of projects. The rise you see there, also included the recognition of some costs increases by our clients we have boosted margins.

Consistent revenues increased 66% compared to fourth quarter 2011. With revenue from operating concessions jumping 145%. These factors was the start of operations of the two SBC total infrastructure project. One of them was operational for two months in the quarter and the other for one month. Our consolidated highway concessions rose to 50% including the start of operation of the La Piedad Bypass and the Río Verde-Ciudad Valles highway plus increased stop in the Rio de los Remedios in highway.

The Concession segment adjustment EBITDA increased 69% for the year. ON a reported year adjusted EBITDA increased 37%. Concessions adjusted EBITDA margin was 55.5% for the year. Airports had an another strong quarter largely driven by a 7% increase in passenger costs. Turning in diversification activities continue to show positive results. Non-aeronautical revenues rose 19%. Also, sales in the fourth includes a more detailed analysis of the report and I encourage you to consult it.

Turning to housing. The first item to note is that the assets in the company were justified at the difference discontinued operation in prior period results have be restated. For the remainder, revenue grew 15% that largely reflected the performance of the assets. For the year housing revenue grew 39%.

Line items over income in the P&L include the effect of the rollers of land interest. This property recently received incremental development which accounts for increased evaluation. Because of the small type of the remaining business, income will stop reporting houses, have a separate segments and in results will be included in the other accounts. Looking at our consolidated results, I am pleased to report that full year results were in line with our guidance. Consolidated fourth quarter revenues grew 3% to 12.5 billion pesos. For the year, revenues growth 18% for the record of 48 million pesos.

Operating income grew to over 900 billion pesos in the quarter and adjusted EBITDA was 2 billion pesos with a margin of 15.8%. Adjusted EBITDA grew 23% in the fourth quarter of 2012. For the full year, operating income grew 7%. Adjusted EBITDA increased 13% for more than 7 billion pesos in the adjusted EBITDA margins was 14.7%. Comprehensive financial cost increased 6% in first part of 2012. The increase in interest expenses was basically the result of repatriation of interest expense from the new operating concessions during the construction phase due to expenses capitalized in the value of the assets and the prevailing cost of sales.

Comprehensive financial costs decreased 70% for this year. We obtained the same from the amortization of (inaudible) more than offset the increase in interest expense. Processing both 2011 and 2012 periods reflect the effects of the balance transactions at fixed rates in both periods.

The line item discontinued operations includes the operating results and fair value write-downs of the housing assets in the Haver transaction for both the 2011 and 2012 periods. It also includes the results of the results of the construction actives in 2011. Consolidated net income for the fourth quarter 2012 decreased 66% principally because of the write-down adjustments.

For the full year, consolidated net income decreased 2%. Considering that 2011 included the gains on the sale of the assets and the two PPP highways, this is a good sign. The net income attributable to the noncontrolled interest increased significantly and this is a result of the fair value adjustment for the Haver transaction assets. It has resulted in a loss for the controlling interest for the quarter. Full year EPS as a result decreased 17% to 1.95 pesos per share.

Operator

Ladies and gentlemen, Please continue to stand by. Please do not disconnect. Ladies and gentlemen, please continue to stand by.

Alonso Quintana Kawage

Hello again and sorry for this new disconnection. It’s very annoying. But we’re returning to debt. Total debt as of December 31, 2012 was $61 million pesos debt, more than $7 million pesos below the third quarter level. This deduction will take the payment of $1 billion in Jalisco debt which was partially offset by both for the concession. The principal financing transaction per quarter was the refinancing of the savings bond.

We also took working capital debt accelerated completion of the many projects I discussed. For the full year net debt increased 2%. This is both in line with the indication we provided after the end of 2012.

In summary 52% of our debt as of December 31, 2012 was fully finance related including the net income. 36% of our sales comes from mainly the five year and 10 year corporate bonds. And 22% was for including working capital in civil construction, industrial construction, airport and housing segments. Our debt ratios improved compared to this in third quarter 2012.

Now I want to disclose this morning are the idea for some accounting changes that went into effect on January 1 in our outlook. IFRS 2011 on the arrangement we’ll expect a consolidation of entities for (inaudible) was issued with proportional conciliation network. As a result, when we publish our 2013 results including the interim quarterly report, the segment financial will be restated under the new rules. We are still analyzing the effect of the accounting change and we expect to be able to provide some additional information before we release our first quarter 2013 results.

In terms of our outlook for 2013, Victor will provide some specific targets or ranges at the time of the first quarter report. I want to say that in general, we believe that Empresas ICA for the year is relatively clear because of our backlog and management is cautiously optimistic. I will glad to elaborate more on the outlook for the next quarter.

This concludes our prepared remarks, and we will now be pleased to answer your questions. Operator, could you please open the call for questions?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) And our first question comes from the line of Carlos Pereylongue with Merrill Lynch. Please go ahead.

Carlos Pereylongue – Merrill Lynch

Thank you. Good morning, Victor and Gabriel. Thank you for the call. My question is related to some of the losses that you registered. Some of them were one-offs, but affected your return on equity which came relatively low, around 7%. Can you first explain, provide some more visibility on the negative fair value adjustment of 256 million related to the housing asset being transferred to Haver ? And the second one, could you give us an idea of what was the size of the provision for doubtful accounts related to the Metro Line 12 of the subway in Mexico City, please? Thank you.

Alonso Quintana Kawage

Thank you, Carlos. We’ll just go on the question – on the first question you’re asking about the real estate asset or where in the housing, this is basically the what we believe are the beginning and since the merger developed as a sale of the assets, which have to adjust in to the fair value, and that’s has to – that impacted not some of the lands which have grouped saying they were transferred for sale to Haver, and that’s what they are being those 256 million assets. We do not expect full time adjustments to those assets in the real estate area. As for the land sale, the provision was talking of 202 million pesos. We made that based on our estimates and we expect to come out of the litigation and the still payments that we have to receive. This point in time we would like to not disclose the total amount of the return but we did that following our accounting policies initially.

Carlos Pereylongue – Merrill Lynch

Okay, all right. Thank you.

Alonso Quintana Kawage

Welcome, Carlos.

Operator

And our next question comes from the line of Javier Cayol with GBN. Please go ahead.

Javier Cayol – GBN

Hi. Thank you for the call, Alonso. I have two questions. My first question is if I understand correctly the financial income you post on your concession division and I know that something I have asked before and actually have spoken to you guys offline about it, but it’s unclear to me. Is this related to – I thought this was related to the construction penitentiaries and some of the computation of this. So am I correct in that assumption or what does it related? Could you please give me some color in that line?

Alonso Quintana Kawage

Well just let me maybe if I understood your question correctly but you are asking is where the financial income from?

Javier Cayol – GBN

Yes. My question is where did it come from, the financial income? Because I thought it was weighted to the computation from the penitentiaries or some kind of an accounting policy that you had to go through your results and there was what you did. So and I thought that if the construction has already ended or was badly ended by the end of last quarter that we will see a very low level here and we witness a – had practically 5% or 6%, I don’t know, perhaps an increase on this line. So I just want to grab a little more color here.

Alonso Quintana Kawage

Well most of it came from the interest of the social but there’s of course the component in the fourth quarter plus the national highway that aren’t any particular line item. Specifically that is related to financing the freight under construction but it was not only the percentage of the freight now we have the import component.

Javier Cayol – GBN

Okay. And just to clarify, this is a non-cash item, right?

Alonso Quintana Kawage

That is correct. That is correct, Javier.

Javier Cayol – GBN

As well as the EBITDA that you registered from the – it’s on non-cash, yes? That’s very clear now. And just maybe if you – I came in a bit later in the conference call and probably you already talked about it but could you provide a bit of guidance, what kind of debt levels could we expect for 2013 year end? What kind of debt to EBITDA ratios or net debt? Thanks.

Alonso Quintana Kawage

Certainly. Well we will provide you some more guidance on the third quarter results as when we typically provide guidance. In general what I can say is that we experience in the concession to continue increasing as we are optimistic and we are planning to start at this place by the end of this first quarter. The other things that there’s a number of this increase that was related to working capital as long as we start collecting from those projects by the first six months of the year will start to repay that debt. So we don’t expect some massive changes in this ratio and I guess we will because it’s again within the next quarter.

Javier Cayol – GBN

Okay. Thank you, Victor. Again thank you.

Alonso Quintana Kawage

Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Lillian Starky with Morgan Stanley. Please go ahead.

Lillian Starky – Morgan Stanley

Hi, Victor. Good morning. I just have two questions on housing and concessions if I may. With regards to the concessions could you provide some detail on what these are non-cash component in the concessions EBITDA? And on housing, could you give us some color on what were the use of the 668 million pesos in housing CapEx? Thank you.

Víctor Bravo

Okay. Thank you, Lillian. At the concession the component of cash in the EBITDA concessions was 34% for 2012. And the second one you were asking me about the...

Lillian Starky – Morgan Stanley

The CapEx on housing.

Víctor Bravo

The housing CapEx is reflecting the assets that are going to be around the transfer of assets into Haver. If we’re moving them from the line items while we’re having a continued operations over to discontinued operations and those assets that you have there are the assets that are going to be in the remaining in our group until we do something with them and we are probably thinking of selling those into the next quarter.

Lillian Starky – Morgan Stanley

Okay. As far as I’m getting this right, it’s 608 million. Part of it is going to the assets that are going to be transferred to Haver ?

Víctor Bravo

Yes, part of it and the rest is I’m going to stay in our group.

Lillian Starky – Morgan Stanley

Around what conversion can we say that it’s going to be used for – or on the Haver assets of this 668...

Víctor Bravo

It’s been more than. The majority is going to stay in our group.

Lillian Starky – Morgan Stanley

Okay. Thank you.

Víctor Bravo

Thank you.

Operator

(Operator Instructions) And I am showing no further questions. I would like to turn the call back over to Mr. Bravo for any closing remarks.

Víctor Martín

Well thank you very much to all for the interest in ICA and for participating in this call. Please contact us if you have additional questions that we did not address during this call. Gabriel, Luz, Luciana and myself look forward to seeing you in the near future and have a good day.

Operator

Ladies and gentlemen, this concludes the Empresas ICA’s fourth quarter 2012 earnings conference call. We’d like to thank you for your participation. You may now disconnect.

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