Graña y Montero's (GRAM) CEO Mario Alvarado Pflucker on Q1 2016 Results - Earnings Call Transcript

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Graña y Montero (NYSE:GRAM)

Q1 2016 Earnings Conference Call

April 29, 2016 1:00 PM ET

Executives

Mario Alvarado Pflucker - Chief Executive Officer

Luis Díaz Olivero - Chief Operating Officer

Analysts

Jasmine Helme - Credicorp Capital

Operator

Good afternoon, and welcome to Grupo Graña y Montero First Quarter 2016 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions. At that time instructions will be given as to the procedure to follow, if you would like to ask a question. This afternoon, the senior management team of Grupo Graña y Montero will discuss the company’s first quarter 2016 consolidated results for the press release distributed on Thursday, April 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 the 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; and Mr. Luis Díaz Olivero, Chief Operating 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 Pflucker

Thank you very much. Good afternoon, everybody and welcome to Grupo Graña y Montero’s first quarter 2016 conference call. Thanks for joining us and your interest in the company. I will start by management’s most important remarks of this quarter.

First, the political environment from a total 130 elected congressmen, only 20 of them has strongly opposed to the current and economic model that has been in use for the last 20 years. This is very positive news, which we must see a strong support to the way Peru has been doing business. The two candidates who will go to the second round elections in June 5, support infrastructure investments and the southern gas pipeline project.

Now I will make a reference to this important project, a Southern Gas Pipeline. As you may remember, in September 2015, we acquired 20% of this Southern Gas Pipeline project and assume a commitment to invest up to $250 million, and we are also participating. We have 29% of the EPC contract, which are 1 billion to our E&C backlog.

Up to today, we have executed a $107 million from that backlog. On March 8, due to the sentence of Marcelo Odebrecht, we agreed within the point that Odebrecht has to sell his total participation in that concessionary. As a consequence, Enagás appointed CEO and we appointed CFO of that company.

On April 8, the US$600 million bridge loan entered into a [indiscernible] process for 90 days to allow Adexus to sell the stake in the project. Adexus has mandate two investment banks to sell its 55% stake in the project in a fast track process expected to be concluded in next 75 days.

There are several entities interested in acquiring this participation. Grana y Montero has not entered into any agreement with Adexus in order to buy such stake nor has expressed any interest in – its participation in the project. As a consequence of the situation and our new shareholder is incorporated into the project, the sponsors of the project have decided to slow down the construction. It is important to mention that this decision has been properly communicated to the different stakeholders.

With respect to the backlog, it has remained stable due to addition of contracts mainly in the technical services area for a total amount of $211 million. In concurrent, two quarter has been incorporated to the backlog, the first for an amount of $40 million and second contract for an amount of $59 million.

On the other hand, in CAM Colombia, -- service contracts for Electricaribe for 60 million together, we have comprehensive service contract for -- of $48 million. On March 31, we signed a sales purchase agreement to transfer to Angus International, our remaining shares in the Talara regarding Peru, where a total amount of $1.9 million.

Now I will turn to Luis, Chief Operating Officer to discuss financial results.

Luis Díaz Olivero

Thank you, Mario. The decrease in 15.9% in consolidated revenues is explained mainly by lower revenues in the engineering and constructions area due to the fact that there were fewer projects under execution in GyM, Vial y Vives-DSD and Morelco. On the other hand, revenues increased in the infrastructure area due to an increase in the revenues of Norvial, Line 1 of the. Lima Metro and an increase in the level of the daily barrels per day produced in GMP.

Also revenues in the real estate area increased due to the sale of a piece of land of Almonte in Lurin and even considering that the delivered housing units were less than the first quarter of 2015. Finally, the technical area registered an increase of 6.3%.

Gross margin maintained a stable at 10%, similar to the first quarter of 2015. This is mainly explained by the increase of gross margin in the real estate area due to the sale of a piece of land of Almonte despite of the margin reduction – in the E&C area and in the technical area. In the infrastructure area, gross profit was similar to the one registered in the first quarter of this part of 2015, in despite of the increase in revenues mainly due to decline in dollars price.

General expenses reduced 13.6% compared to the first quarter of 2015. Other operation and expenses line reflects the profit from the sale of machinery and equipment as well as the liability reversal in Morelco. In the profit from sale of investment in subsidiary line, the profit from the sale of our 1.64% the stake in Transportadora de gas del Perú is registered, which also has an impact in the income tax due to the reversal of the deferred income tax.

As a consequence, the operating income was PEN87 million, representing increase of 44.3%. The increase in financial expenses is a consequence of the increase in the debt assumed to finance our capital contribution in the Southern Gas Pipeline project.

The participation in associates account refers the profit generated in projects where our subsidiaries have a minority stake and are not consolidated. These numbers includes mainly the Southern Gas Pipeline’s stake and Guyana Project as well as other minority investments such as COGA, Chavimochic and Adexus.

During the first three months 2016, the Nuevo Sol appreciated against the U.S. dollar generating a positive impact on a profit of PEN8.5 million. As a consequence of everything explained before, the net profit of the year was significantly higher than the first quarter of 2015, reaching an amount of PEN71 million.

Profit was boosted by the sale of TgP and the profit from our participation in Southern Gas Pipeline, which are registered at the holding level. Therefore the holding company represents 70% of the net profit generated this quarter. The consolidated EBITDA increased 17% to PEN190 million, represented by 38% coming from infrastructure area, 28% from E&C, 13% from the holding company, 11% from technical services and 10% from the real estate area.

The consolidated backlog of 4,034 million, plus the recurring business of $470 million, reached a total of $4.5 billion in the first quarter of 2016, which represent 2.07 years of revenues. The main contracts added during the year were registered in the technical service area. These were for the services of comprehensive operations for a north of – for $48 million, as well as an electrical service contracts for Electricaribe for $63 million.

And finally, two contracts for the service management and road maintenance in the highlands of Peru for 99.6 million. As you may see in the backlog by end markets, the proportion of oil and gas have increased due to the contracts of workers for Blocks III and IV in April 2015, as well as to the Southern Gas Pipeline project. On the other hands, mining projects has reduced from 9% to 1%, due to a reduction in mining investments in Peru.

It is worth mentioning that mining service contracts are still stable, representing 25% – 24% of our backlog. As you know, most of our backlog is concentrated in the private sector and located mainly in Peru. The total CapEx – the total amount of CapEx for the first quarter of 2016 was $68 million, the most relevant investment in the equity contribution to the Southern Gas Pipeline.

Consolidated financial gross debt for the first quarter amounted to $865 million. From the total debt, $427 million correspond to working capital associated to the clients’ accounts receivable and leasing’s for the acquisition of machinery and equipment. $321 million correspond to the depth of infrastructure projects and $116 million correspond to the financing – to financing the contributions of the Southern Gas Pipepline. The increase in the working capital debt is explained mainly by the debt taken for the construction of El Rancho project within the real estate area.

On the other hand, the project debt related to infrastructure area increased during the year, mainly due to the second tranche of the Norvial Bond. This is a structured non-recourse debt with guarantees and cash flows from the project. The debt/EBITDA ratio for the infrastructure area is 4.78 times at the end of first quarter. As a consequence, the consolidated debt/EBITDA ratio for the group is 3.72 times at the end of the first quarter.

From the total amount of debt, 54% is denominated in Soles and 36% in dollars. The currency of the debt is related to the currency of the revenues of the business or the projects where we invest.

Thank you for your attentions. And now we are opening for Q&A.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jasmine Helme with Credicorp Capital.

Jasmine Helme

Hi. Thank you for the call. My question is about the sale of land in Lurin. How much was the value of this transaction?

And secondly, also how much is the working capital debt related to El Rancho, and how long can we expect this to remain on balance sheet? Thank you.

Mario Alvarado Pflucker

The sale of the land in Lurin was $5 million. Let me recall that. We have a big piece of industrial land and we did that, say, was signed last year, but produced this year, because that type of the agreement that we have in the way that we have to deliver their titles. We already have done orders that are in our pipeline, that are not registered yet, because we have to – in the project, we have to deliver the project – the titles.

And we have a – if your question is, if we have a remaining land, there? Yes, we have, I believe land for the next eight years or ten years there to be resolved in that project. And about EL Rancho, EL Rancho is a project that, it wasn’t ours, it’s a project that we were only hire as a, I would say, as a constructor. But that company had financial problems and we have to stop the project.

And we – the clients came to us to – and the banks came to us to, if we’re going to help them to complete the project. And after one year of negotiating with the client, as they really have and the banks are getting into sales and analyzing their running cost. We took over the project and it should be in our balance in the next, but they have two parts. We have to finish.

The important part is going to be in our balance until the end of this year, I believe, and the remaining part to be sold, that is a smaller amount, the next year. But the big part that is, that – because we’re registering the big as a debt, all the debt that this this project has with the customers and that is going to be taking out of the balance when we deliver the units that should be by the end of this year.

Jasmine Helme

And the value – the valuation of that units to be sold, is what, how much?

Luis Díaz Olivero

Current debt associated with our project is around $8 million, okay. We have still $12 million to complete construction in the project. But of course, the total amount of debt that we will have in our balance will depend on the speed of the sales in the project. If we start selling as we expected, we should not increase much of that sale. But as Mario said, we will finish the construction of the project during the year and part of the units will be transferred and monetized during the year. Therefore, the debt should also be reduced.

Jasmine Helme

Great, thank you. And one final question. You had previously guided flat year-on-year revenue for 2016, but obviously, we’ve seen a contraction in the first quarter. Does this flat year-on-year revenue guidance still stand for the rest of the year?

Mario Alvarado Pflucker

Can you repeat, please. I couldn’t hear you.

Jasmine Helme

Previous guidance, revenue in 2016 was for flat growth compared to 2015. Does this still remain even though we saw contraction of revenues in the first quarter?

Mario Alvarado Pflucker

We never have given any guidance. What we do is we – that’s something that the analyst do and…

Jasmine Helme

I think it had been Monica?

Mario Alvarado Pflucker

It’s difficult to hear you. Could you repeat?

Jasmine Helme

I think the guidance had come from Monica?

Mario Alvarado Pflucker

Our expectation is according to our backlog today, that is not – we are not going to have – that is speculation, yes. It’s not the guidance – is that, it cause, it will take time for the numbers to come, because we’re going to change, it’s now going to be with an important year, is going to be, as you say is flat.

Luis Díaz Olivero

The only concrete information that we have is exactly the amount of backlog to be executed during the year, which is disclosed in the report and accounts for $1.2 billion to be executed during the next three quarters.

Jasmine Helme

Okay. Thank you.

Operator

[Operator Instructions] Our next question comes from [indiscernible] Capital.

Unidentified Analyst

Hi. Good afternoon, everyone. I have a quick question, I’d like to understand there what’s happening on E&C margins. I thought that after all the problems with Inmaculada that we should see better margins. Is that because of revenues not being as it was last year and what should we expect for the year? Thank you.

Mario Alvarado Pflucker

Yes. This – what you are seeing with the E&C margins, you need to remember that the E&C margin is the consolidation of the margins of our operations in Peru, in Chile, and in Colombia, okay. Our Peruvian operation has margins up to the level where they should be, they are under the regular numbers.

But in Chile and even in Colombia, we have decreased our activities, our revenues. We have a contraction of the margin and that’s what you are seeing as a consolidated effect on the margins. There is no particular event to be disclosed that affects the margin of either of the companies, okay. So there is no – not an event is more associated to the contraction of the sales of the [indiscernible] in Chile and the contraction of the sales of Morelco.

Unidentified Analyst

Okay. But why should we expect – what needs to happen for it to improve?

Mario Alvarado Pflucker

As long as the revenues will come – will increase, the margins will be improved also. If it’s just a matter of market contraction, okay, whenever the market rebounds in terms of revenue then we should expect to have better markets.

Unidentified Analyst

Okay. And do you have any, when the market comes back, what do you expect for margins? How – what levers can you read out?

Mario Alvarado Pflucker

Peru is – we believe it’s going to come first. Chile is very depressed. We are seeing Chile very low, is the one that we don’t see as coming soon, and Colombia is a little bit in-between. It also has been hurt by oil, of course, but you can see some projects there. Chile is the one that is becoming very slow. I cannot tell you when Chile is going to increase the volume. But what I can tell you that Peru is in – if I have to choose the one that is in a very positive trend.

Unidentified Analyst

Okay, okay. Thank you very much.

Operator

Our next question comes from [indiscernible].

Unidentified Analyst

Hi, thank you for taking my question. Actually it was already answered. It was the same question asked before related to the margins of engineering and construction. But still I wanted to follow-up. You say that margins will recover once activity comes back in Chile and Colombia, you’re not seeing any changes anytime soon. What efforts are you currently making to – I don’t know to be more efficient, or reduce the – if any or any effort that you could do in order to increase margins even though the activity doesn’t recover. If you could give us some color on that area, that would be very helpful. Thank you.

Mario Alvarado Pflucker

What we are doing is reducing in Chile and Colombia the sizes of the company a lot. But we’re doing it very carefully and not to lose our ability to get contract and our trained people. So we have some ways to do it and – but we have reduced the company and that – we’re in that process.

Unidentified Analyst

Okay. Thank you.

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 Pflucker

Well, thank you, and I want to thank everybody to assist us to our conference call. We are very positive in the outcome of Peru. Even though the commodities are in a low price, we are seeing some indicators that are surprising us. As an example, the toll roads last month increased 14% compared to last year. There was maybe the biggest increase that we have seen in many years. In the last, if we take the average of the tolls in the last six months in an increasing around 6% to 7%. So we are starting to see certain signals that the economy is moving again and we believe it’s going to start growing.

And now there in Chile, we are not seeing that. We hope that that will change. And in Colombia, there was the – the last one country as we felt was hit by this change in commodity price is reacting or changing a little bit faster than Chile. And we hope they will start again investing in projects, in different type of projects.

So our main market is the one that we are going to be focused, the orders we are going to be more focused on that cost control and G&A expense is controlled because of that situation. And we hope to continue getting contracts in the service – technical service area that is the one that is growing. And also, and we have some projects that are coming in the infrastructure and we believe it’s going to be very important in the next years to come.

Well, thank you very much for everybody.

Operator

This concludes today’s conference call. Thank you very much for your participation. You may now disconnect.

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