Graña y Montero's (GRAM) CEO Mario Alvarado on Q4 2015 Results - Earnings Call Transcript

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Graña y Montero S.A.A. (NYSE:GRAM)

Q4 2015 Results Earnings Conference Call

February 1, 2016 12:00 PM ET

Executives

Mario Alvarado - CEO

Luis Diaz Olivero - COO

Monica Miloslavich - CFO

Analysts

Dario Valdizan - Onyx

Jasmine Helme - Credicorp Capital

Paul Figueroa - Scotiabank

Operator

Good afternoon, and welcome to Grupo Graña y Montero's Fourth Quarter 2015 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions. [Operator Instructions].

This afternoon, the senior management team of Grupo Graña y Montero will discuss the company's fourth quarter 2015 consolidated results for the press release distributed on Thursday, January 28. For a copy of the earnings release and more information available on the company, we ask that you visit the company's website at www.granaymontero.com.pe in Investor Relations section, where there is also a webcast presentation to accompany the discussion during this call. I would like to remind you that this call is for investors and analysts only. Therefore, questions from the media will not be taken.

I will now introduce our speakers. Presenting on behalf of Grupo Graña y Montero are Mr. Mario Alvarado Pflucker, Chief Executive Officer; Mr. Luis Diaz Olivero, Chief Operating Officer; Mrs. Monica Miloslavich Hart, Chief Financial Officer; and Mr. Dennis Gray Febres, Corporate Finance and Investor Relations Officer. During this call, management’s comments may include forward-looking statements, which are subject to various conditions that may differ materially. We ask that you refer to the disclaimer as guidance on those matters.

It's now my pleasure to introduce Mr. Mario Alvarado, Chief Executive Officer of Grupo Graña y Montero for his presentation. Mr. Alvarado, please go ahead, sir.

Mario Alvarado

Thank you very much. Good afternoon, everyone and welcome to Grupo Graña y Montero's fourth quarter 2015 conference call. Thanks for joining us and for your interest in the company. I will start by management’s most important remarks of the year. We have to highlight that this has been a difficult year with the roll down of our main markets that began in private and public investments, the currency devaluations in Peru, Chile and Colombia, into the working capital pressures generated by the delay in the client’s change of payments. Additionally, last year [indiscernible] the decline in this year’s result as a consequence of the whole, in oil price, as well as a lower margins of engineering and construction projects and the losses from Inmaculada.

After the first quarter, we implemented an action plan whose results has been reflected in the fourth quarter of 2015 and which I will explain. In the fourth quarter we reached revenues for S/.2.215 billion and EBITDA of S/,300 million which is 2.3 times the one of the previous quarter and reduced general expenses to 5.1% of sales. While the loss of S/.50 million was registered in the third quarter turned into a net profit of S/.82 million in the fourth quarter. Also we achieved a reduction of S/.353 million in the working capital debt. It is important to mention that our 2015 reached a backlog of $4.486 billion in spite of the reduction that we just had due to the currency devaluation of the countries where we operate.

The results aforementioned show a new positive tendency that we will do a more best effort in order to maintain the discipline and reward in the gross operations. This was mentioned in that during this year we've seen a depression of 20% in the Southern Gas Pipeline per unit with S/.250 million enabled investment, with a very good perspective of value generation. Without taking in account the fact that we accomplished the largest construction contract in the history of the Graña y Montero for $1 billion.

The Southern Gas Pipeline project is being executed at a good pace and regarding the financial closing, we can mention that the approvals from several banks have already started. From that $250 million we are required to contribute continue with, with have an approved of $200 million credit line with Credit Suisse and actually we have contributed with $130 million without using this facility.

Now I will turn the call over to Monica Miloslavich, CFO of Grupo Graña y Montero who will review key financial highlights. Monica, please go ahead.

Monica Miloslavich

Thank you, Mario. Let's go Page 3, the revenue growth is explained mainly by the increase in revenues due to addition of revenues from Morelco, the Colombian company acquired at the end of 2014. Revenues increased in infrastructure segments is due mainly to increase in revenues of Norvial, Line 1 of the Lima Metro and an increase in the level of daily barrels per day produced.

Finally revenues in the Real Estate segment decreased even thought the delivered housing units were the same as last year. This is explained by the fact that in 2015, 45% of these units are from a program called Techo Propio and these housing units have lower price. The decrease in gross profit in the E&C Segment is explained by lower results as a consequence of the loss reported in Inmaculada Project throughout the first three quarters of 2015. However, a recovery can be seen in the fourth quarter of 2015.

In the infrastructure area, the gross profit has suffered an impact of a decrease in the oil side. Finally in the technical service area, there is a recovery in gross profit compared to previous year due to the recovery in the result of Concar after the cancellation of a maintenance contract with the Regional Government of Cusco in 2014. General expenses reduced 2.5% compared to last year going from 6% to 5.2% of revenues. This reflects the efforts deployed through all companies during the year. Other operational expenses account the update of the option of Morelco's acquisition as well as the liabilities reversal for the purchase of CAM, the dividends received from TGP, and the sale of machinery and equipment.

Financial expenses; the increase in financial expense is a consequence of the increase in the working capital debt in the Engineering and Construction area throughout the year. The participation in associates account the profit generated in projects where Vial y Vives DSD, Viva GyM and CAM have minority participation and are not consolidated as well as the Southern Gas Pipeline participation. During 2015, the Sol depreciated 14% against the U.S. dollar generating a greater impact on accounts in exchange rate differences due to net liabilities in U.S. dollars including debt. It should be noted that debt conversions will always be related to the accuracy of the rate burdens. As a consequence of the result explained before, the net profit of the year was 70% lower than last year and the EBITDA decreased 14%.

Let's go to next page to explain the backlog. The consolidated backlog and recurrent businesses reached a total amount of $4.486 billion in 2016, which represents [1.95 million] [sic] [1.95 times] of revenues. The main contracts added during the year were the construction of the Southern Gas Pipeline, the contract mining in Colombia for Red Eagle and in the telecom service segment, two new contracts in the telecommunication sector. And as you may see in the backlog by end market, let's turn to next page.

The proportion of oil and gas has increased due to the contracts awarded for Blocks III and IV, [indiscernible] of Morelco with most of its contract in oil and gas sector and finally the Southern Gas Pipeline. On the other hand, there is only 1% of mining projects due to a reduction in mining investments in the country. Two, the majority of the backlog is private and located in Peru.

Now let's go to the investment. The total amount of CapEx for the year was $277 million, the most amount of relevant investments were the expansion of Norvial toll road, the equity contribution to Southern Gas Pipeline for $170 million and as well as the acquisition of Adexus.

Go to the next page, where I can explain the debt composition. Consolidated financial debt for 2015 amounted $754 million. From that total debt, $421 million corresponds to working capital debt associated to the client's account receivables and leasings for the acquisition of machinery and equipment. $302 million correspond to the debt of infrastructure projects and $30 million correspond to the financing of the contribution of equity of the Southern Gas Pipeline. As you may see in the chart, the working capital debt increased until the third quarter of 2015 achieving a reduction in the fourth quarter of 2015 of $103 million reducing the debt to EBITDA ratio from 3.96 to 2.97.

On the other hand, the project debt related to the certain businesses increased during the year mainly due to the bond issuance for the Line 1 of the Lima Metro and Norvial. This type of debt is non-recourse with guarantees and cash flows from the project themselves. It's important to mention that this type of debt will continue growing in line with the investments in the construction segment. For the total amount of debt, 67% is denominated in soles in the next page please and 32% in U.S. dollar. The flexibility of the debt is related between the businesses -- the revenues of the businesses or projects.

Thank you for your attention. Now we can start with Q&A.

Question-and-Answer Session

Operator

Excuse me ladies and gentlemen; we will now begin the question-and-answer session for investors and analysts. [Operator Instructions] Our first question comes from Dario Valdizan with Onyx.

Dario Valdizan

Thank you for the call Mario, Monica and Luis. Just quick question regarding E&C. Could you give us a little bit more -- a little more color regarding the projects and how things are looking now? Now that we are past Inmaculada is what we saw in the four quarters something more sustainable going forward and what are your views regarding future contracts with these electoral year?

Mario Alvarado

I am surprised that you have not asked me [indiscernible]. About the contracts, now you have to remember that we are in E&C [indiscernible] different companies. Again, so this is all to summarize in each one. Let's take apart that this mining operation is tends to be very stable the same type of contract that we have had and even this is getting a little bit more difficult to negotiate with the clients because of -- of course they have a lot more pressure. From that view, think like [indiscernible] of the contracts. Then you have Chile with low volume and Morelco also with lower volume because they are reducing expenses because of the [middle] price. Now mainly our mainstream market Peru, important part in Peru is -- very important part is [indiscernible] and we're advancing at a very good pace and it looks that [indiscernible] that is fixed. We're saving in terms of the amount of the year. Now, you heard that the market and it has -- I cannot explain you why, since December, it has started moving and nearly started in Peru that in Chile and in Colombia and we got some new contracts on that. It is strange because elections are coming but it has to say probably more -- I think of more cause so it seems moving into the market, okay?

Dario Valdizan

Okay.

Luis Diaz Olivero

That was public sector, but private is a little bit slow right.

Mario Alvarado

Yes.

Dario Valdizan

Okay. And regarding what we've not seen in terms now let's go to the [quicker] for the oil, if it helps to assist the discussion about the suspension of royalties to help the current situation? I have seen some in the press saying that there is opposed to royalty and have you taken that into consideration, what will the impact would there be for you guys, is that happens?

Mario Alvarado

Look there is -- that is really -- there is nothing of moderate concern. We are already in same discussions, but in our case as we still discuss our royalty changes according to prices.

Dario Valdizan

Correct.

Mario Alvarado

So, our impact is lower. Anyhow what is very important for us is that for this price and we still can maintain profitable operations. We're not going to profitable if we invest in new wells. So, that's the key, the key part that we've to focus. [indiscernible].

Dario Valdizan

That was the -- where I was going with my question because if I remember correctly your rate in with royalties is about $40 a barrel, right? So, it would mean below $40 per barrel?

Mario Alvarado

That's including the amount of CapEx now and [indiscernible]. We are focusing this on making sure that our commitment instead of the royalties as we have already discussed is delayed and we have in that contracts some elements then allow that.

Dario Valdizan

Okay. Thank you.

Luis Diaz Olivero

Dario, if I may complement what Mario was saying, we have in mind some free dollars but that was when we have an oil price very close to $45, you have to remember what Mario says that our royalty keeps declining if oil prices lower down. So really, you have to differentiate two things, if we want to operate without any drills then our OpEx plus royalties I'll say, it's still positive in terms of cash with the lowest price that we have today. The problem as Mario says, is if we enter into drilling and that's why the company focus in using the contractual networks in order to defer the investments.

Dario Valdizan

Okay. And then you see that still not an issue for you guys in international regions in terms of [indiscernible] to you, there is a commitment for drilling and you need to fulfill it despite the prices.

Luis Diaz Olivero

Well, that is a risk.

Dario Valdizan

I understand that, I was just wondering, if they're accommodating in terms of reallocating the joint campaigns?

Mario Alvarado

We're waiting, we are already late. We have put down some contracts, [toll fees] that allow us to drill and we're using them.

Dario Valdizan

Okay. Perfect, got it. Thank you.

Operator

[Operator Instructions] Our next question is comes from Jasmine Helme with Credicorp Capital.

Jasmine Helme

Hi. Good afternoon. Would you mind telling us a little more about how you manage to bring down the working capital quarter on quarter?

Mario Alvarado

Quarter on quarter. We actually as we have already paid all the clients because we have a cash flow, they actually pulling down the line their working capital needs. For us it was very difficult to do that because our [supra rates] are always smaller and we can put them in a very high risk. So that we took the hit until 2013 -- sorry, third quarter of this year, 2015 and we start talking and discussing with each one and we’ll make a completely and over the [mining] years of the goods we decided to talk to the clients and we really improved that by just doing what we have to do, collect our [transition role]. It was a big effort and we will continue doing the same this year.

Jasmine Helme

So do you have a target for working capital for 2016?

Mario Alvarado

Yes, we have a target in each one of the lines, management have specific target and it's going to [indiscernible] it's related to that target but we always mentioned we cannot give any forecast or target.

Operator

Our next question comes from Paul Figueroa with Scotiabank.

Paul Figueroa

Could you please give us a little more color on the real estate division, we were surprised by the positive results of this quarter. And we want to know what we should expect for the next quarter? Thank you.

Mario Alvarado

You have to be careful with the numbers, always of the real estate division, because we account when deliver. So, it's difficult to use this number to foresee other quarters, but it is very important to see when we deliver. Now you are positive about the margins, and let me explain you what happened. This year we’ve started delivering a project that had been delayed. And since we have our numbers in the real estate, especially by the value of the land as a historic number and cost, we wrote down the cost. Actually it has been delayed for a while, it is start with good sales and the project Comas is the project. It is a big project of 10,000 units and we start delivering and the margins for that reason are greater, that’s the main reason.

Operator

[Operator Instructions] There appears to be no further questions at this time. I’d like to turn the floor back over to Mr. Mario Alvarado for any closing remarks.

Mario Alvarado

Thank you. As final remark, we want to emphasize that this has been a challenging year for all three countries where we have a permanent presence and as a consequence the result of operations has been affected. However, the recovery results for this first quarter show a positive tendency from which we will continue to work hard with this risk and improving operations. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect. Thank you.

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