Grana Y Montero S.A.A. (GRAM) Q3 2020 Earnings Call Transcript

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Grana Y Montero S.A.A. (NYSE:GRAM)
Q3 2020 Earnings Call
Nov 7, 2020, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Grana y Montero Third Quarter of 2020 Earnings Conference Call. [Operator Instructions]

Presenting today on behalf of the Company are Luis Diaz Olivero, CEO and Dennis Gray, CFO. I would now like to turn the conference over to Luis Diaz Olivero, Chief Executive Officer. Please go ahead, sir.

Luis Diaz OliveroChief Executive Officer

Thank you very much. Good afternoon to all attending this conference call. As we usually do, I will make a brief summary of the relevant highlights of the second quarter of 2020. Then, Dennis Gray, our CFO, will expand on the financial results. We will finally open a Q&A session.

Ladies and gentlemen, third quarter was as expected one showing the first signs of recovery after the impact of COVID-19. Based on our three page plan, we get the focus on our three main goals. One, minimize the impact on companies results on 2020. Despite the fact that most of our E&C projects have lower activity than the one we anticipated for this quarter. The company was able to negotiate the additional costs incurred during the second quarter, as well as the new health and operational standards for the remaining backlog, and therefore was able to sustain forecasted margins estimated for this quarter.

The situation should remain stable next quarter. Our infrastructure business presented a recovery in most of its indicators, weather traffic, fuel consumption or oil price. This situation helped the company to present a profit the quarter as expected in this line of business.

In the case of our real estate business, from units and local income units began to be delivered during the life. However, the deliveries have not picked up yet. Consequently, they have been in this low quarter for this business unit. With the exception of one E&C project that will not resume operations until the last quarter.

As of today, all projects in the company are in execution and implementing all the new safety standards. Most of the projects have gained momentum to what we will accept as a new maximum production rate given the current social distance restrictions and safety festivals linked to COVID-19.

The market challenge is still to maintain ongoing operations, especially in a second wave of COVID-19 comes into place. Two, buy time to face upcoming financial and non-financial deadlines. Access to new credit lines of money from the capital markets remain restricted until the plea agreement has been signed. This event is delayed by a few possible to happen before year end. The situation will represent a strong challenge in the next month for our cash flow.

The shareholder meeting held on November 2, approved the financial plan submitted that contemplates several scenarios based on the timing of the plea agreement signature, where it is in last quarter or later in 2021. Based on such scenarios, the company will seek to execute the bridge loan portion of the month during the next 75 days. This is an event that we have defined a key to avoid the ultimate scenario of selling core assets.

Three, retain an assured credit card resources and talent to be able to relaunch the company in 2021. During third quarter as most of the companies we have operated remotely, our organization has changed and adapted. In the process, we have reduced 10% to 15% of our staff. However, we’ve been careful to identify, or retain the new the new talent needed. As well as we are defining our succession plans on contingency plans for any undesired impact of the situation.

In respect to the later, we regret to report the loss of 18 members of our team, because of this pandemic. As of today, more than 3,400 persons have been confirmed positive to COVID-19 in the organization. This represents close to 20% of our total population. We are taking all necessary precautions and implementing safety protocols in all our projects to prevent the expansion of the situation, which unfortunately, due to the public transport, transportation exposure, and the reality of our countries makes it very hard to control.

In all cases, we have secure medical and economical support for our world’s workers in the event they got infected regarding risks that may affect our plan. As we mentioned, we have classified risks in three categories, as you can see in the next slide, external risks the return to the lockdown due to a second wave of the undead political and social instability in the countries where we operate, such as the ones that have happened in Peru or Chile lately, and financial sales of clients and suppliers are the most identifiable risks project execution.

We have agreed with most of our clients new conditions in the backlog for EMC conference. However, there are a couple of projects where capital is complicated and pending on approval of new conditions and payments related to such events that can jeopardize the future events that need to be resolved during this quarter.

Project assumptions, we have improved the reliability of our forecasts and predictions after this quarter. However, production rate and certain other weeks may affect our revenues and the third into the future, affecting consequently our gross profit. We will maintain our last quarter forecast for 2020, a mix of like estimated revenues are close to $1 billion. EBITDA will be in the neighborhood of $150 million.

Net profit will improve from its current loss to $2 million to $3 million during the final quarter, and financial debt levels will close near to $460 million. To complete the full understanding of the financial and non financial debt of the company, there is a need to have non financial debt related to the completion of the settlement of the class action and some other debts disclosed in the last shareholder meeting, who announced a total of $720 million, out of which $360 million required to be refinanced to match our future cash flow generation.

In slide nine you mentioned the critical milestones for the last quarter of 2020. The company needs to achieve certain goals during next quarter. Some may be critical and some other important to start 2021 with the right group, among them, the following are the key goals company wants to achieve. Secure victory long not shorter than $50 million as defined in our financial plan in the next 75 days. To face different potential scenarios discussing the plan. Conclude negotiations to lock amounts and terms of payments to be included in the agreement and sign it if possible, require the company to assume mandatory investments plan for blocks three and four with no experiment new money during 2021.

Looking into next year, after the approval of the shareholders meeting, the new identity purpose and operation of the company has been revealed. We will continue to reveal identity and purposes in the relevant subsidiaries that will complete identity renewal of the company. With a total backlog of close to 1.9 billion, we’re almost 900 million will be executed in 2021. The company outlook for 2021 is positive with no commercial risks complete, our estimated preliminary budget. Therefore, the commercial efforts to be deployed in future months will be oriented to better margins on the increase backlog for 2022.

I now leave you with Ben for the financial analysis.

Dennis GrayChief Financial Officer

Thank you. On March 15 of the year due to the outbreak of the COVID-19 pandemic, the Peruvian government declared a national emergency state and decreed a mandatory social mobilization until June 30 of this year. This restrictions have been that have been gradually relaxed since July to the date of this consolidated report has generated a situation in which the government measures had a significant impact on the economic activity in the countries where the company operates and has affected the operations of the group with a particular emphasis during the second quarter of this year.

After the mandatory shut down operations since July of 2020 our engineering structure and real estate projects are developing their activities on a normalized basis with the established health safety protocols. And on the other side, the infrastructure business was declared as a key sector for the economy and continued separations during the period of the mandatory social mobilization.

For example, our norvel highway concession, although was affected by a decrease in traffic has substantially recovered the activity level of 2019. On the other hand, GMP, our oil and gas company was affected by the substantial reduction in oil and gas prices between the month of March and May. Prices that have recovered at the close of this earnings report.

Going to slide 12, we can see that the revenues for the accumulated nine months of order or the accumulated third quarter of this year have reached $2002 billion, or $2.2 billion, which is 26.7% lower than the figure that was reported at the end of the first nine months of 2019. Revenues of the EMC business decreased mainly due to a lower production volume in the ongoing projects, which was a result of the restrictions established by COVID-19, mainly in Peru, a situation that was partially offset by an increase in revenue have led us in Chile.

Likewise, the reduction in revenues in the infrastructure area was mainly explained by lower revenue in GMP related to the oil price reduction and fewer wells drilled chance lower production. On the other sites, the substantial decrease in traffic in the context of social immobilization, and local revenues in conquer due to live maintenance work performed.

Finally, the results of the nine months ended in September of 2020 versus the similar period last year is also explained by the comparative effect of activities or store activities done during 2019, such as the completion of the expansion of line one of the metro and the works of the second roadway of Norway and both were completed in 2019 and have a statistical effect. As a result of the gradual normalization of activities since unite, the results of the three months period between July and September 2020 show a significant recovery in activity.

On the consolidated gross profit side, our gross profit decreased 44% year on year, mainly due to the reduction in margins in the ANC area due to the suspension of works, and also as a result of an arbitration initiated by a supplier of the several Nagila project, which was completed in the first quarter of 2020. And the right of an account receivable is the norelco in Colombia with the client the bioenergy, a subsidiary of the Livewire

Likewise our gross profit was impacted by the reduction in oil prices and the number of worlds Ville and the reduction of maintenance work and traffic at Noria, reducing the margin from 12.5% in the first nine months of 2019 to 9.6% in the first nine months of 2020.

Our administrative expenses at the end of the same period decreased 26.1% compared to the same period last year, reaching 5.5% of sales compared to 5.4% of sales at the end of the third quarter of 2019. This was our results or the results of a very a substantial cost saving measures taken by the company in the context of COVID and the preservation of liquidity during this year.

Other income and expenses may include an additional impairment at the V Express su project and an increase we have included in the provision for civil damages with a burger gone post one to our conversations and negotiations with the judicial authorities in the context of the theory. Additionally, as a result of negotiations with the buyer of Camp Chile, a company we sold in 2018. Regarding certain items included in the escrow accounts, we have recorded an impairment in that account as well. As the result, operating income decreased 78.6% in the first nine months of this year compared to the same period last year, with a operating margin of 8.5% in the first nine months of last year versus 2.5%.

In the first nine months this year. The net financial expenses or the consolidated net financial expenses were similar to the first nine months of last year. However, financial income was 12.9 million compared to 54 million in the same period last year. There is the this is a consequence of the fact that no financial income was recorded this year compared to the previous period last year, where we recorded financial revenue and extraordinary financial revenue related to the sale of the car powers of line one.

In the holding company, the increasing financial expenses was mainly due to the increase in interest rates and commissions of the financing with CSX infrastructural calling offset by the recording of extraordinary financial income due to the change of the of the rate the depth with BCI related to the transaction of transfer of economic price in area.

Consolidated net loss in the first nine months of 2020 what 65.1 million and the net margin went from 1.2% in the first nine months of last year to minus 2.5% in the first nine months of 2020 explained by results described above, adjusted EBITDA in the third quarter or as of the third quarter of 2020, decreased 42% compared to the same period last year, going from 528.4 million to 306.3 million.

In the next page in slide 12 sorry slide 13. We can see the consolidated backlog, which stands at $1.4 billion plus the recurrent businesses of $485 million, which in our total amount of 1.9 billion at the end of the third quarter of 2020. This number represents 1.9 years of revenue for 1.99 year revenue to be precise.

During the third quarter of this year, our EMC business was awarded with a contract with Lima port partners for the construction of the second one way at the hospitality International Airport and an EPC contract with gases and not available for the construction of the pura gas pipeline, the latter for an amount of $58 million. In the infrastructure area the decrease in the recurrent businesses was mainly due to the new sales estimate in GNP including the newest practice.

Going to slide 14. The total amount of consolidated financial depth as of the end of the third quarter of this year, stands up $499 million of this amount $121.9 million for response working capital appreciation associated with clients account receivables and listings for the acquisition of machinery and equipment.

A total of $289.6 million relates to infrastructure, project finance, which is debt without recourse with guarantees and cash flows from the project itself. On the other hand, $28.3 million corresponds to the financing from CS Lewis structural holdings for the $41.8 million correspond to the depth from the dividend monetization at Norwell and $17.8 million correspond to hissing according to IFRS 16.

The debt at the end of the third quarter of this year, from which 59% are related to the ENC business unit 39% to prospective projects, and 2% to two real estate. From this amount 82% are related to performance bonds within the ENC and infrastructure business unit, 12% to advance payments, mainly in the ENC unit, and 2% for a finished works performance bonds and the ENC business units.

Let’s go — I’ll lead up to Louis risk a in order to start the Q&A session. Thank you.

Luis Diaz OliveroChief Executive Officer

Thank you very much. We’re going to start the Q&A session.

Questions and Answers:

Operator

Ladies and gentlemen, at this time, we will conduct a question and answer session. [Operator Instructions] Our first question is from Sebastiaan Mundoya from Con Group. Go ahead.

Sebastiaan MundoyaCon Group — Analyst

Hello, Lisa, thank you for a question. The third quarter quarterly report explains that there was an increase in the provision for civil damage with the state. Can you explain this increase and what is the new expected figure for the civil reparation payment as a result of this? And the second one is if you can explain the reasons why ENC does swing into positive territory for the year of the third quarter and while full year revenue and EBITDA figures should we expect for this division?

Dennis GrayChief Financial Officer

Regarding this the plea agreement under civil reparation, I cannot reveal much of the information of the purpose of the transaction. However, it is true that we have introduced an additional provision based on what is our current expectations of our outcome of the negotiations. But the only thing that I can tell you right now, we keep negotiating the amounts and the progress is substantial up to date, but I cannot provide you in any additional information on that.

Regarding the EBITDA of ENC, if I understand correctly, you were wondering why the third quarter has an important impact on the EBITDA. The reason behind that is that we have mentioned we have completed a lot of negotiations with certain a client where we were very cautious. We were in second quarter and first quarter based on the estimates we have for the cost that we will have on the provisions coming from COVID. So once we have certainty of what was the outcome of the future, we have amended the margins in — accordingly the projects and that’s the result that you’re seeing for not only the margin, but also the EBITDA of the business. And I think, that was a record — idea of your question, but let me know — if that’s — that’s not the answering the problem?

Sebastiaan MundoyaCon Group — Analyst

Yes. Thank you. Thank you very much. I have two, quickly, follow ups. The first one toward the cash balance at payer mix. Why did this account about payer mix decreased so much between the second quarter and a third quarter of 2020? And if you can explain what were the uses? The concern here is that — you guys have been convert into cash. And I would — then we would like to understand why.

And my final question is about the backlog. I would like to know, of the current backlog figure, how much of this pertains to claims or potential rebalances under negotiation, as opposed to signed contracts? And what are the main ones? Thank you very much.

Luis Diaz OliveroChief Executive Officer

Regarding the backlog, the figures as we’re seeing are backlog, are the ones that we are certain of. There is very little introducer of claims or potential negotiations. We are not allowed to record that as revenues. Okay. And, as I have said, before, we have already cleared most of the negotiations that we have out of the topic, so you should feel certain of the amount of the backlog and fee, as well as the rest of the backlog for record business as we are recording.

I didn’t get clear understanding of your previous question. Dennis, I don’t know, I think there was something regarding one of the accounts. I don’t know if you got it better and do you have an answer for that.

Dennis GrayChief Financial Officer

If I understood correctly, you’re referring at the cash balance a quarter to quarter.

Sebastiaan MundoyaCon Group — Analyst

Payer mix.

Dennis GrayChief Financial Officer

Leniency.

Sebastiaan MundoyaCon Group — Analyst

Yes.

Dennis GrayChief Financial Officer

What what, GE or leniency. Compared to — but you’re comparing the end of second quarter to third quarter or year-on-year.

Sebastiaan MundoyaCon Group — Analyst

Quarter to quarter.

Dennis GrayChief Financial Officer

Quarter to quarter. Yeah, basically, going through your first question, the cash balance at DYM or in general, leniency is mainly comprised by client advances that the dark a structured in trusts, basically all individual trusts for each of the projects we are executing, as per the financial structure that was agreed with a bank. The local bank in 2013.

This amount is — has had basically a destiny, an orientation, and as the projects are being executed that that amount is called and incorporated in the amount of works. The reduction you’re seeing quarter-to-quarter, conceptually speaking this is related to the fact that if you’re looking at the second quarter of this year, we were basically almost non-executing project and the cash was difficult, let’s say, or in mobile life.

And following the process of returning to normalized operations, basically, the cash costs for each of the projects execution is being called basically. On the other hand, due — this amount of advantage is the result of the cash you are calling to execute the products you’re already contracted, versus the project you are getting, which usually develop an advanced payment.

And bear in mind that during the second quarter of this year, the backlog in terms of new contracts at DYM was very was almost non-commercially moved. For instance, following the start of advances in — related to new project, the cash amount is expected to increase, but again cash really, basically, assigned to the execution of each of the project that is being awarded.

Sebastiaan MundoyaCon Group — Analyst

Okay, very clear. Thank you very much.

Unidentified Participant

Hey, Good afternoon, Luis and Dennis. Thank you for taking my question. My first one is a following-up on the on the margins on the E&C business. And, you know, given this negotiations about with clients about COVID provisions, and this push for higher profitability in that line of business, it what’s the reasonable a range of gross margin expectation for next year?

And my second question is regarding, this possibility, this scenario where for the plea agreement negotiations drag into next year and the company is not able to secure the bridge loans? Could you explain to you give us a bit more color? And how would that play out in terms of the size and timing of other details? Thank you.

Luis Diaz OliveroChief Executive Officer

Regarding the first part of your question regarding their future margins of E&C tell you is essentially the same as I said on Monday on the shareholder meeting. Currently, we have an outstanding backlog citizen has close to 950 million all that backlog currently has an average margin of gross margin close to 7% to 8%. Okay. There are some other projects that are finishing that we have certain complaints, but from the 950 million, that we are under execution right now, you can expect 7% to 8% margin. Okay. In the case of the plea agreement, as we said in the in the shareholder meetings, also, we’re looking forward and pushing hard in order to try to settle it during this quarter.

However, that some scenario we can’t control and we can’t compare offer certainly, OK, assuming that we go into the first quarter of 2021, and we are not able to secure the loan that we’re looking according to a financial plan, we will meet essentially the same amount in the value of assets in order to attend our first seven or eight months of the year. I mean, if I am saying you that, I need to receive a bridge for 50 million, with those 50 million as a minimum amount, I am certain that I can keep the company operating under right, under rational standards until July, August of next year. Which are the assets that will be needed to be fill at the time and when that’s a decision that I will have to submit to the Board and undiscovered internally, before we get any potential.

Unidentified Participant

Thank you.

Operator

Our next question is from Lucia Calvo from LarrainVial. Go ahead.

Lucia CalvoLarrainVial — Analyst

Hello, good afternoon, Luis and Dennis, a thank you very much for the call. I have some questions regarding the cash conversion cash conversion cycle of E&C business. Do you think you can clarify the days of payments for the third quarter 2020 in the E&C business and its trend going forward? And how do you make the calculations like do you include salaries, taxes or what else? And if does that include the overview suppliers that are converted into that?

Luis Diaz OliveroChief Executive Officer

Dennis, you will have to take that one. You would like to take that one?

Dennis GrayChief Financial Officer

Yeah. Lucia, please correct me, if I’m understanding is not correct, your first question is related to the calculation of the dates receivable and payable, and which concepts are being included in such calculation, correct?

Lucia CalvoLarrainVial — Analyst

Yes, if you can, if you have like a number you can clarify like the number you have calculated of days of payments and dates of receivables, the trend, and how do you make the calculation, and for days of payment like that include the reduced supplier debt is converted into debt?

Luis Diaz OliveroChief Executive Officer

The supplier with all the receivables especially the company, and DVM have with third parties are included in the calculations of such ratios. I don’t have the ratio with me exactly, but I can follow-up with you — with the components of the calculation, but we are we are applying, I would say the standard ratio calculation without any adjustment. But let me let me follow-up with you with the specific of — how could you — if you are looking to do that to reach a more tailored ratio calculation.

Lucia CalvoLarrainVial — Analyst

Okay. Can I ask you what if you have or maybe and I can also follow-up on this one? What is the big debt of cash conversion of the ENC in the third quarter of this year?

Luis Diaz OliveroChief Executive Officer

Let me check, in ENC, I will talk to go back with you with extra calculation on each of the business in order to solve specifically that question.

Lucia CalvoLarrainVial — Analyst

Okay, perfect. Thank you very much.

Operator

Operator: This concludes our question-and-answer session. I’d like to turn the conference back over to management for closing remarks. Thank you.

Francisco Augusto Baertl MontoriChairman Of The Board

Thank you all for attending the conference call. This has been a very challenging but positive quarter. And we expect to keep the trend and finish the year in the same sense. Thank you very much for your time.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Luis Diaz OliveroChief Executive Officer

Dennis GrayChief Financial Officer

Francisco Augusto Baertl MontoriChairman Of The Board

Sebastiaan MundoyaCon Group — Analyst

Unidentified Participant

Lucia CalvoLarrainVial — Analyst

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