Graña y Montero S.A.A. (NYSE:GRAM) Q1 2019 Results Conference Call May 3, 2019 1:00 PM ET
Luis Díaz Olivero - Chief Executive Officer
Mónica Miloslavich - Chief Financial Officer
Conference Call Participants
Francisco Suarez - Scotiabank
Jorge Opaso - KJK Investments
Andre Hartva - Megeve
Enrique Grau - CrediCorp Capital
Adrian Huerta – JPMorgan
Good afternoon, and welcome to the Graña y Montero First Quarter of 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Luis Díaz Olivero, Chief Executive Officer. Please go ahead, sir.
Luis Díaz Olivero
Thank you. Good afternoon, everyone. Thank you for attending this conference call. As we usually do, I will make a brief summary of the relevant highlights of the first quarter 2019. Then Mónica Miloslavich, our CFO, will expand on the financial results. We will finally open a Q&A session.
Ladies and gentlemen, first quarter of 2019 has been very positive in terms of financial consolidation as well as for new business for Graña y Montero. After a long and challenging process, we successfully completed the equity increase launched in October 2018 for a goal of $ 130 million. We believe there is renewed interest from the market in the company expressed in the $35 million over-subscription at the end of the transaction. Completing this process secures financial stability with our renewed shareholder structure.
The new shareholder structure after the capital increase is the following: Peruvian pension funds, 19.84%, Original Family, 19.14%, Pacifico Corp, 10%, Fratelli or Megeve 9.94%, Aberdeen, 4.97%, and all others, 36.1%. This new shareholder structure will have an impact on the composition of the Board when a new Board is elected in March 2020. Today, there are 8 members in duty and 1 backend seat. In the Board meeting that took place yesterday, the ninth Board member was appointed and this Board should remain in duty until the end of its term in March 2020. Current backlog and recurring business is at $2.54 billion, which represents a ratio of backlog plus recurring business to sales of 2.16 years, the highest ratio the company had since the third quarter of 2016.
The new business acquired has a strong focus on new mining projects. We signed 2 contracts with Anglo American for the Quellaveco mine, $42 million for the construction of a tunnel and the main contract for $370 million for the construction of the concentration plant. In Chile, we signed a $250 million contract with Teck for the civil works and electromechanical assembly of the concentrator plant for the Quebrada Blanca Phase 2 project.
We went through a strict process of due diligence, managed by Bechtel Chile, according to the highest international standards. We also renewed our engineering contract with Goldfields for $ 25 million this quarter and signed a $ 11 million contract with Vives Hotels to build a new property in Lima. The sale of Adexus, our last plant after divestments, is still pending after Advent announced it would not proceed the purchase. We estimate the sale to take place during the last quarter of 2019. Despite a slow first quarter in terms of sales, the company remains on budget in terms of net income, debt levels and backlog.
Current forecast for 2019 amounts for revenues in the neighborhood of $1.35 billion, EBITDA from operations close to $195 million, net income of $40 million and debt levels under $500 million. All figures expressed in U.S. dollars. Mónica will provide further information on detailed results of the quarter.
Concerning ongoing business. Metro Line 1 transported above 500,000 passengers per day since April 1, which marks a significant milestone for the operation of the transport system. We completed the infrastructure expansion project, which included the stations, parking, access points and interchanges ahead of the schedule and the operation has received praise from OSITRAN, the supervising body for infrastructure projects. The Metro celebrated passenger 600 million in February.
GMP continued with the preparation campaign for Block IV. It has scheduled 51 wells for the year with an investment of $38 million, taking production to 4,500 barrels per day at the end of the year. Viva GyM, through its subsidiary Almonte, closed a sale for $9.2 million to LatAm Logistic Properties that will be recorded during second quarter. Also, it has sold 627 housing units in the quarter, which represents 27% of the annual target.
The new structure of the Engineering and Construction division is now in place, and its execution is going according to plan. Julia Perea has been appointed General Manager of Peru Regional Office, replacing Renato Rojas, who resigned from his position.
The Infrastructure business continued to perform according to plans and budgets and its strategy in evaluating new projects. The Housing Division is on target for unit sales and continues to explore new avenues with a special emphasis on sustainable housing.
Marlene Negreiros has joined the company as the new Corporate HR Head. She has a vast experience in Peru and the region and brings crucial expertise to the organization. With this hire, the corporate team is only missing 1 additional position, with an active search in place.
On the Lava Jato legal front, Barata made additional unexpected final declarations last week to the prosecution team in Curitiba. His statements do not change the current legal status of the company. We remain in the same position of third responsible party in the tran-lexico and IIRSA contracts.
The declarations he made in a reserved audience leaked to the media, which reported them incorrectly, causing significant impact and harmful media coverage. The company's public position has not changed. However, the company clarified the erroneous information leaked through a press release this past Monday, April 29.
Lima Mayor, Jorge Muñoz, who took office on January 1, called the company in March to restart the dormant Via Expresa Sur project. We publicly announced the intention to retake this project together with the Mayor on April 5 through the signing of a mutual letter of intent. The financial and business community mostly received the announcement with positive response.
However, after Barata's declaration and the media fall-out after them, the Mayor announced his retreat to retake the Via Expresa Sur project with the company. His declaration has no impact on the real situation of the contract, which will go back into effect in June 2019. We are working to find a solution based on the contract, which we hope will allow the project to take place.
We finished this first quarter of 2019 with a positive outlook for the company. We successfully closed the capital increase process and have revitalized the shareholder structure with backing from new important investors. Backlog is also better with 2 significant contracts signed with world-class companies, which show that that markets are once again trusting us.
We are confident that the restructuring of the Engineering and Construction business with the consolidated commercial unit, we will be able to secure additional contracts in the region while maintaining the right size. While there will still be some additional turbulence from the Lava Jato and Club de la Construcción legal fronts, we have the right legal strategy in place and continue to believe that being transparent and truthful are the best course of action.
We are also addressing communications issues in order to be more proactive and clearer to address issues and respond quickly. I believe that today, the company is in a much better position to restart growth. However, focus of the year is to deliver results and project on time and with the excellence our clients deserve. We will continue to work tirelessly to regain our position and the trust of citizens of Peru and of the region. Now I hand over to Mónica for the explanations of the first quarter results.
Thank you, Luis. As we mentioned on the last report, as a consequence of the sale of Stracon and CAM, according to IFRS rules, the results as well as the profit from the sale of investments are presented as discontinued operations in our financial statements. Therefore, the results of 2018 have been reclassified accordingly. This effect is presented only in the income statement, not on the balance sheet. Also the subsidiary Adexus has been reclassified as an asset held for sale. Therefore, results of the period are also shown in the discontinued operations line item. For more information, please see Note 37 of our annual financial statements.
Revenue for the first quarter of 2019 decreased 15.6%, explained by the reduction of revenues in the E&C area due to less projects under execution, the reduction of revenues due to the finalization of the expansion work in the Metro Line 1 and the reduction of revenues in the Real Estate area as a consequence of less units delivered and units delivered of lower prices than previous year.
Consolidated gross profit decreased 14%, in line with the reduction of revenues, and the margin increased from 15% to 15.3% in the first quarter of 2019. These results are explained by the increase in profit in the E&C area because of projects under execution with better margins, offset by the reduction of profits in the Infrastructure area due to an increase in cost of productions in the oil and gas business and the finalization of the expansion works of Metro Line 1, additionally, in the Real Estate area, the units delivered during the first quarter of 2019 for a lower price.
Administrative expenses as for the first quarter of 2019 decreased 24.2% compared to the first quarter of 2018. Also, all the areas have increased their administrative expenses with respect to the first quarter of 2019 as the holding-level administrative expenses decreased as a result of the reduction of extraordinary legal expenses. Therefore, operational income decreased 10% in the first quarter of 2019 compared to the first quarter of 2018, with margins of 9.4% and 10%, respectively, because of the results explained above.
In the first quarter of 2019, the reduction of financial expenses compared to the first quarter of 2018 is explained by the reduction of debt with the proceeds of the asset sale and partially with the proceeds of the capital increase.
In addition, it also includes the actualization of the discount of the long-term accounts receivable with GSP. The line of Participation in Associates reflects the results from the minority investments held by the group.
Net profit for discontinued operations shows a loss of PEN 6.4 million from the results of Adexus and assets held for sale compared to a loss of PEN 9.8 million from the previous discontinued operations, CAM Chile, CAM Servicios, Stracon GyM and Adexus, as an asset held for sale. Consolidated net income in the first quarter of 2019 was a loss of PEN 1.1 million, lower than the first quarter of 2018. The net margin went from minus 1.8% in the first quarter of 2018 to minus 0.2% in the first quarter of 2019, explained by the results described above.
The total amount of consolidated debt is $595 million, of the total debt, $118.5 million corresponds to the financing of working capital of the different businesses of the group and leasing for the acquisition of machinery and equipment. On the other hand, $357 million corresponds to the project's financed debt for the infrastructure project.
In addition, there is a $6.6 million corresponds to the debt for the equity financing of Gasoducto del Sur with a portion of part of the bridge loan of the GSP project, and $43.4 million corresponds to the debt from dividends monetization of Norvial.
The reduction of working capital debt since the first quarter of 2018 came from the proceeds of the sale of the Stracon GyM. Additionally, the reduction of debt associated to GSP came from the proceeds of the asset sales and the capital increase. The balance of this debt will be paid in the second quarter of 2019 with the remaining proceeds of the capital increase. Finally, the reduction of debt in the Infrastructure area is mainly due to the reduction of the working capital facility for the expansion works in the Metro Line 1.
Thank you for your attention, and we can start now with the Q&A session.
We will now begin the question and answer session. [Operator Instructions] And our first question today comes from Francisco Suarez with Scotiabank. Please go ahead.
Thank you, thanks for the call. The question that I have is on the impressive recovery that we saw in gross margins in Engineering and Construction. The question is if that could actually be sustainable for the rest of the year?
And secondly, something that catches my attention is the rise in administrative expenses that you posted on this division as well, even though that the revenues were actually falling. And I have a second question, if I may, linked to the financial stability framework agreement. Now that you are on the bridge on this, on certain ratios that you mentioned on the press release, the question that I have is if your expectations is that you will get a waiver out of those, that facility?
Luis Díaz Olivero
In the case of the E&C margins, you need to understand that a part of the margin recovery comes from the absorption that we had last year in regards to the situation of the modernization of Talara, which has a negative impact on the results of the E&C business. As we have anticipated during the equity increase process, targeted E&C EBITDA margins should go between 6% and 9%, okay?
We should be seeing those types of margins probably next year, not by the end of the year. We should be close to them by the end of the year, but not yet on target. But you should expect the recovery of the E&C margin to keep improving until we get into the targeted margins that we expected. In the case of the sales and administrative expenses of the area, probably the percentage that we currently have is high to the aimed target of 5%, which is where we expected to be also next year. You have to understand that this has been a very particularly slow quarter and therefore, that ratio is particularly high in this particular quarter, okay? But we don't anticipate that to be out of target by year-end. Mónica?
Yes. Answering your question about the syndicated credit line. Is that the facility that you were asking for?
Yes. On the financial stability framework agreement that -- I mean, you have a bridge basically on the ratios between tranche A and tranche B on that.
Yes. In that case, we have already asked for the waiver and it is already granted. I think they are just finalizing the signature of the waiver. But I think it's important to clarify that even though that we are in default in that facility framework. It doesn't trigger a payment until July if we were not able to obtain the waiver. And let me explain you how does how it works.
We have 2 tranches, A and B, and the one that is mandatory to be paid is just tranche B in July 2019. And the other tranche, the tranche A, if we do not comply with the ratios in terms of invoices and provisions, then the amount that is in default should be transferred to tranche B and the obligation to pay that will be on July 2019. And as I mentioned at the beginning of my speech, the waiver has already been granted. So there are no implications for the company in this facility framework.
And the next question comes from Jorge Opaso with KJK Investments. Please go ahead.
Hi, thanks for the call. Thanks Mónica, thanks Luis. I have, I think, a follow-on question of last question. It's mainly regarded to the two [Indiscernible] projects that you won, regarding the EBITDA margins and the gross margin that you expect from those projects with information I mean, for 2020 to 2021 will be in the range, as you said, as between 6% and 9% EBITDA margins more than 6% to 9% EBITDA margin. If you can please give us some color on that.
And the second question is regarding new projects, new visitations or new issues that the company is participating. We should see Graña with the current backlog for 2020, 2021? Or the company is prepared to absorb more projects to its pipeline? Thank you.
Luis Díaz Olivero
Jorge, it was tough to understand your questions, but I'm understanding that you want more analysis on the E&C margin of the new projects in the backlog. That's what I understood.
Luis Díaz Olivero
Please confirm [Indiscernible] Okay. As we, I think, Mónica and I mentioned also during the road show in the equity raise and we have also said last quarter, there is in place a new committee to assess all new projects that come into our pipeline before we tender. That's the instance where all risks linked to the project and the future of the margin is analyzed and all precautions are taken.
We do not proceed with tenders where we don't feel that we have that right comfort and the right assurance for the EBITDA margin. That's the reason why the margins of the new backlog are, in my opinion, more secure than the ones the company used to present in the past.
That's how we feel that this EBITDA margins that you will see on 2020 and 2021 that, of course, will be linked to the execution of the projects that we currently have in the backlog, should be in the targeted range of 6% to 9% of the EBITDA.
So you should see improvement in the E&C margin based on the proper selection of the projects and the proper risk analysis when we present our tenders. That's essentially the reason where we focus the improvement of the E&C markets.
In the case of the new bids that we are tendering right now, there are two things that we need, that need to be said. As I said during my speech, we are targeting for a size of the company for this year close to $1.35 billion. If you check our backlog and you check what we have currently reported in the quarter, we are very close to that figure already and therefore, we are not eager to take new contracts or we are not urged to take new contracts.
So we are going to be very selective in how we complete our pipeline of commercial bids in order to achieve that size of the company for this year. We are also having a healthy backlog for 2020. Therefore, for us securing new contracts with proper margin will be the target.
Despite that, you need to understand that because of company decision and not because any restriction, we are more focusing right now on the private sector, okay?
You should not see any bids from the company going into the public work per se. Of course, we will analyze, based on our financial capabilities, the possibilities to participate in the concession business, which we are still interested to have, but you should see focus on the private sector, you should see focus on concessions, but nothing coming from the public sector, okay?
[Operator Instructions]. And our next question comes from [Andrew Harva] with [Mageve]
First, I would like to know if you have any news about the sale of Adexus. And then I just would like to confirm that the backlog associated to Via Expresa Sur is not considered in the numbers published yesterday.
Luis Díaz Olivero
Yes. In the case of Via Expresa Sur, we have already written off the backlog. So the figures that you received for the quarter already deleted the execution of such backlog. That backlog was reported under our E&C segment, okay? There was nothing in concessions coming off of that backlog, okay? In the case of the sale of Adexus, we have already relaunched the project in the hands of Landmark, which is the investment banking in charge of the process.
The process have just restarted, and we should see expressions of interest during the third quarter. And based on those expressions of interest, we should have a closing if everything goes on target by year-end. That's the current status of the sale of the company. Meanwhile, we are of course running the company with all the capabilities that we have and providing all the support as any other subsidiary that we have in the group.
And our next question comes from [Indiscernible].
We had in mind the remaining lands of Almonte before the last sale were worth $40 million. But after the sale of this quarter of 113 square kilometers for $9.2 million, I was wondering if it is okay to assume that those remaining lands are worth $30 million. That's the first question I have. And the second question I have is, do you still think that Adexus is worth $30 million after the negative net income of the last quarters?
Luis Díaz Olivero
Okay. In the case of Almonte, I will have to double check on the figures that you highlighted, okay? I believe that we said that the portion that was linked to the company was worth $40 million, not exactly that the whole asset value of the lands are that amount, okay? But I prefer that [Paola] which is here with us in the conference, digs a little bit deeper and provides you with that exact information, okay?
I believe that the numbers that you have are wrong and the value of the lands of Almonte are higher than the ones that you have mentioned, but I prefer that to confirm that, written on a separate e-mail and Paola will do it so as soon as we finish the call, okay?
In the case of Adexus, the assessment and the value of the company is based on the EBITDA forecast, not on the net income. Adexus still has certain things to overcome coming from its current contracts, but we are certain that the backlog that we have right now is healthy and that it will provide enough EBITDA that will be repaid in the value of the asset sale.
In any event, if $30 million is not the proper amount, it should not be something substantially different, okay? And it should not compromise the financial plan that is linked to that sale.
Is it higher or lower than $30 million?
Luis Díaz Olivero
I think it should be in the middle.
And our next question comes from Adrian Huerta with JPMorgan.
Thank you for taking my questions. Two questions just number one on Norvial, if you can just explain why the strong revenues, if that's just related to the works being done on the toll road or if it's just or if it's related to traffic.
And the second question is expectations for the Real Estate business for the rest of the year. It was a weak quarter. What can we expect for the rest of the year?
Luis Díaz Olivero
Give me one second, okay?
In the case of Norvial, the reduction of revenues is not associated to traffic. It's only because there were less additional works under execution in the first quarter of 2019.
Luis Díaz Olivero
Okay. And in the case of Real Estate, yes, it was a slow quarter. You have to understand that last year, it was quite impacted by the sales of these lands of Almonte. There is a portion of those sales that, as I mentioned, will be recorded during second quarter, but we do not expect that amount of sales.
Forecasted revenues for Viva are in the neighborhood of the 90 million, between 80 million and 90 million for the year. And that should be mostly the delivery of projects in low house income where we have the projects under execution.
And this will conclude our question and answer session. I'd like to turn the conference back to Mr. Luis Díaz Olivero for any closing remarks.
Luis Díaz Olivero
Thank you very much. I would like to thank everybody for the support to the company and for the patience to the company in order to achieve for the milestones that we have accomplished during this last quarter.
We have, as we say, a positive outlook on the future of the company, and we hope that we will be delivering a pleasant and more comforting news in the future. Thank you very much.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.