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Grana Y Montero S.A.A. (NYSE:GRAM)
Q4 2019 Earnings Call
Feb 4, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Grana Y Montero Fourth Quarter of 2019 Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Luis Diaz Olivero, CEO. Please go ahead, sir.

Luis Francisco Diaz Olivero -- Chief 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 fourth quarter, 2019. Then, Monica Miloslavich, our CFO will expand on the financial results. We will open up Q&A session. Ladies and gentlemen, we have had a very intense past few months.

In October, the Company, exercising its rights as creator of Gasoducto Sur Peruano, filed a claim against the Peruvian government to recover the equity invested and the debt assumed after the cancellation of the concession through ICSID or as known in the Spanish, CIADI, which we will then withdrew [Phonetic] in December.

The same month, we signed a preliminary plea agreement with the Peruvian authorities in search of closing all open legal matters linked to the Lavajato and Club de la Construccion. Yesterday, we held an Extraordinary Shareholder Meeting, which ratified those actions with 72.3% of votes in favor.

We presented financial statements for 2019, which show a significant loss as a result of the above mentioned decision. Last Friday, January 31st, we took down the Grana Y Montero main logos from both buildings in Lima. And last night, we took a bold and final step on the Company's transformation journey, which will take us toward a new identity.

We offer our workers and all Peruvians a public apology for the damages and wrong doings performed by former executives and provided a firm promise, never to allow them to happen again.

Three years ago, the Company entered into a long and complicated crisis, which forced us to take swift and decisive actions in many fronts: Finance, governance, legal, commercial and reputation, among others. We have to appoint a new Board as well as a new management. We have to sell assets to pay debts and to stay afloat. We will review and strengthen our risk and compliance processes, and they are now a key element of the way we do business. We streamlined our business strategy into three core lines with a regional vision.

We secured new contracts and have a solid backlog, which will take us well into 2021. And we changed the shareholder composition with a successful capital raise, which brought in new shareholders and diluted the original family position. We converted the crisis into an opportunity for renewal and transformation.

With the Board's commitment to truth, transparency and integrity at the core of our actions, we continue to search for evidence of wrongdoing and upon finding it, we presented the evidence to the authorities in order to pursue a collaboration deal that would allow the Company to turn the page around its legal issues and enable it to move forward.

We might not be there yet, but it is clear that we are getting closer every day. The transformation process also includes our renewed purpose and aspiration in order to ensure that the organisation's culture aligns with the new businesses strategy. The transformation is almost complete. And after a reflective period without the logos, we will announce a new identity.

I will not dive into the details of the financial statements, as Monica will explain the numbers and results when she takes over next. However, I would like to say that the resulting impact on the financial statements goes beyond the numbers and the heavy loss. It is significant, as it will allow us to close the chapter of the crisis with potential reparations, settlements and provisions of accounts receivable taking as included and provisioned in the last year record. 2019 has been a difficult year, but we are now at the process of closing the chapter of a crisis, which has been much longer than we have anticipated or wanted.

In spite of the losses, I would like to highlight that revenues, EBITDA and debt were in line with forecasted figures, despite external factors that we were unable to foresee such as the economical slowdown in both Chile and Peru. There is still significant effort to be made during the first quarter of 2020, to close a collaboration agreement with the authorities. But we are confident that we will reach an agreement in the next 90 days.

We believe we are now closing a chapter of a process that has been hard and sometimes painful, but that has transformed the Company. We closed the past year and now begin a new one with optimism. Thanks to current backlog, we can anticipate by year of 2020 with at least at the same level of revenues of 2018 [Phonetic].

EBITDA should improve based on the results of the executed investments, and better margins in our E&C business, which we clearly understand is our pending issue to attend, while we will work to keep improving our financial structure and providing less expensive financial resources to our operation. After being able to reduce our legal risks, we should be able to cut costs in several fronts that we expect to benefit our P&L by the third and fourth quarters.

Thank you for your continued support and confidence in our Company. I now leave you with Monica for the detailed explanation of 2019 financial results.

Monica Miloslavich Hart -- Chief Financial Officer

Thank you, Luis. On December 27, 2019, the Company announced a relevant information communication, the signing of our preliminary plea agreement with the Peruvian authorities for the cases under investigation, Club de la Construccion and Lava Jato. In compliance with these agreements, the Company has withdrawn its arbitration application for the recovery of the investment in Gasoducto Sur Peruano.

Consequently, the results as of 2019 include accounting adjustments mainly due to additional impairment of the investment and accounts receivable of GSP and additional provisions for civil damages according to Law 30737. Revenues for 2019 reached PEN4,000 million, higher than the figure reported at the end of 2018.

Revenues of Engineering and Construction increased, mainly due to the increase in the volume of projects under execution like Quebrada Blanca, MAPA and the Quellaveco. On the other hand, revenues in Infrastructure decreased due to the completion of the expansion works of the Lima Metro partially offset by the increase in the amount of kilometers traveled due to the new trains under operation and by the reduction in Concar's revenues due to lower maintenance works executed in the period.

In addition, the execution of Norvial expansion works increased revenues, while in the oil and gas business, revenues were similar to the previous years due to the increase in the production of barrels per day even though the oil price was lower than previous year. Finally, revenues in Real Estate decreased compared to 2018 [Phonetic] explained by the reduction of units delivered of traditional housing and the sale of Almonte land during 2018.

Consolidated gross profit decreased by 34.5%, and the margin decreased from 17.3% to 17.8% in 2019. These lower results are partially explained by the Real Estate areas that sold Almonte land during 2018. Additionally 2019 includes the effects of the provision for the Tecnicas Reunidas project and the discount of long-term accounts receivable, as well as a negative results of the Sexto Peralte project in Chile.

Administrative expenses at the end of 2019 reached 5.2% of sales compared to 7.1% at the end of 2018. This decrease is mainly explained by the reduction related to third party services, legal expenses and the reduction of expenses from the sale of assets. On Page 8 of the presentation, we present the adjustments associated to the plea agreements and the withdrawal of the arbitration application another adjustment according to IFRS rule.

First, in the additional impairment of the investment and of the account receivable of GSP for PEN501.7 million. Second, the amount of PEN77.4 million corresponds to the present value of the possible additional damages according to Law 30737 to be paid in the case of GSP and Concar, in addition to adjustments of the amount registered in the previous year.

Provision of PEN49.8 million as a result of the estimate of the possible exposure of the claim in New York, the Class Action. Four, update of the GSP accounts receivable based on the estimated time for the collection and the reversal of the account, discount applied provision of civil damages of the previous year for a total of PEN44.5 million.

Five, reversal of deferred income tax as a result of the impairments described above for PEN154.7 million. Six, the impairment of accounts receivables and update of other long-term account receivables for PEN6.7 million. Seven, the provision of cost in the project with Tecnicas Reunidas and the present value of account receivables based on the collection period which generated by the arbitration process, which mainly corresponds to the same project for a total of PEN79.4 million.

In -- Eight, impairment of Morelco's Goodwill, by PEN33 million due to the reduction of contract awarded during the last year that impacts the volume of the Company's backlog and as a consequence, the value of the Goodwill. And the revaluation of the Vial y Vives brand by PEN20.6 million as a consequence of the increase of backlog during the year.

Nine, the impairment of the investment in Larco Mar Hotel project, due to the impossibility of developing this project in the short term, and the impairment of the investment in Vesur due to the suspension of the concession contract agreed with the Municipality for a total amount of PEN35.2 million.

10, reversal of impairment of the investment in the Ancon project registered at the end of 2018 for PEN19.4 million because of the judicial process initiated by the Company. 11, impairment of unused intangibles for PEN1.8 million. 12, the present value of the account receivable of the Ancon project according to the collection period estimated for the judicial process for an amount of PEN26.1 million. 13, the impairment of the balance of Adexus' investment due to the restructuring process in which the company is involved for PEN14 million.

Excluding the adjustments mentioned, the operational income of the company would have been PEN427.9 million instead of a loss of PEN317.1 million. Lower financial expenses in 2019 are mainly explained by the reduction of debt associated with GSP and the cancellation of working capital debt for the expansion of Line 1 of the Lima Metro, as well as by the financial discount of GSP long-term accounts receivable. The income tax expense in 2019 is higher than in 2018, because 2019 includes the reversal of the deferred income tax as a result of GSP's impairment of PEN154.7 million.

The line of profit from discontinued operations shows a loss of PEN43 million from the results of Adexus operation and the impairment of the investment in that subsidiary. The net profit would have been PEN15 million instead of a loss of PEN880.4 million, if we exclude all these adjustments mentioned above.

Excluding the non-cash adjustments accounted in 2019, the EBITDA was PEN640.6 million, in line with company's estimates. It is important to mention that some of those non-cash adjustments will have an impact in the cash flow of the company during 2020 and in future years. The consolidated backlog of $1.4 billion, plus the recurring businesses of $697 million, reached a total amount of $2.1 billion by the end of 2019, which represents 1.7 years of revenues for the company.

The total amount of new contracts awarded during 2019 was $977 million. The main project awarded were the Quellaveco contract of $318 million, the Quebrada Blanca Phase 2 Project for an amount of up to $250 million, and the MAPA contract with Arauco for $112 million. The total amount of consolidated financial debt is $519.3 million. Of the total debt, $99 million corresponds to working capital, associated to the clients' accounts receivables and leasings for the acquisition of machinery and equipment. The amount of $319.3 million corresponds to infrastructure projects, which is debt without recourse, with guarantees and cash flows from the project itself.

On the other hand, $34 million corresponds to CS Peru Infrastructure Holdings financing. $42.6 million corresponds to the debt from the dividends monetization of Norvial, and $24.2 million corresponds to leasings according to IFRS 16. The debt at the end of 2019 decreased 18% compared to the end of 2019, mainly due to the cancellation of the debt associated to GSP with the capital increase funds, and to the cancellation of the working capital debt of Line 1 of the Lima Metro, due to the completion of the expansion works.

It is important to mention that the amount of debt outstanding, 63% corresponds to debt associated to infrastructure projects and only 19% in the working capital debt of Engineering and Construction and the real estate business.

Thank you for your attention. We can now start with the Q&A session.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Sebastian Montoya from Compass Group. Go ahead.

Sebastian Montoya -- Compass Group -- Analyst

Hello, Luis and Monica. Thank you for taking my question. I have a quick one. What do you think has been the main causes of the share price rebound in last day?

Luis Francisco Diaz Olivero -- Chief Executive Officer

I don't know. Hard to know. The only two events that we have publicly formalized is the approval for the ratification of the decision taken by the Board regarding the plea -- the preliminary plea agreement and the withdrawal of our petition to the CIADI. Those are the two main events that we have announced, besides the results that we published on January 30. So, I have nothing to comment in there.

Sebastian Montoya -- Compass Group -- Analyst

Okay. Thank you.

Operator

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

Lucia Calvo Perez -- LarrainVial -- Analyst

Hi, Luis and Monica. Thank you for taking my questions. Well, I had two questions. The first one is regarding the plea agreement. I was wondering, what have your lawyers commented to you regarding the NRS process with CIADI, the scenario that NRS [Technical Issues] resolution and they're claiming it should be? Would you still be able to recover what corresponds to the stake you have in [Technical Issues] period?

And my second question is regarding the E&C backlog. I know it's very difficult to give guidance on this matter. But do you think you can comment us in what kind of projects or in which countries are you expecting to participate this year to add E&C backlog? Like, any comment on this matter would be helpful.

Luis Francisco Diaz Olivero -- Chief Executive Officer

Okay. Thank you, Lucia. First, regarding the plea agreements and regarding the Enagas trial in CIADI. Those are two separate events but nothing -- there was nothing linking one to the other one. What we have, at least in the preliminary plea agreement is not to pursue any claim against the government through CIADI or through any means in any project where we are accepting responsibility or the damages produced by some other persons in the process, OK.

We haven't quit or declined our possibility of collecting the money of GSP as we have stated in the Shareholders Meeting yesterday. If some creditor board or some payment is received by any means in GSP. So if money comes into GSP because the creditors decided to pursue the law -- the filing in CIADI or simply because the government decides to pay for the assets in GSP, we will then collect the share of the money that it has provided to GSP.

On the other hand, Enagas is pursuing a completely different approach. They are using a bilateral country-to-country agreement and what they are claiming is that they have been -- I don't know, expropriated of their investments. So, they are -- basing on that statement, they are simply defending the right to collect. That process is completely separate to any that -- the guys in GSP may follow. The reason why we pursue ours through GSP is because we believe that that was the most fair approach in this claim, not only for us, but for any party participating as a creditor or co-shareholder in GSP.

Regarding the E&C backlog, we are, let's say optimistic that at least in second quarter and third quarter, we should start seeing some direct investments in Peru. And we hope that the social turmoil that happened in Chile has settled a little bit. And so private investments in the different sectors where we are investing or where we are participating should start promoting offers where we can beat.

I need to make in a statement in there. We know, and as I say during the call, that we know that we have a pending issue in our backlog in our E&C margin. We are working heavily on that matter and we are going to be really selective on how we build our future backlog, as well as how we execute that backlog. Okay. But I don't have any names or projects to name at the time. I can tell you that we are building something in infrastructure, as well as we are building something in mining in Peru. But as far as that, you already know that it's part of our common market mix. There is nothing in particular to comment.

Lucia Calvo Perez -- LarrainVial -- Analyst

Okay thank you very much.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Luis Francisco Diaz Olivero -- Chief Executive Officer

Monica Miloslavich Hart -- Chief Financial Officer

Sebastian Montoya -- Compass Group -- Analyst

Lucia Calvo Perez -- LarrainVial -- Analyst

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