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Grana Y Montero S.A.A. (NYSE:GRAM)
Q2 2020 Earnings Call
Aug 10, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Grana y Montero Second 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 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 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, second quarter was as anticipated, slow, complicated and difficult. As we have stated in our previous conference call, in which we detailed our three-phase plan to overcome this COVID-19 crisis, as you can see in Slide 4, during this last quarter and as part of the second phase of the plan, we focused on the three main goals. One, minimize the impact on the Company's results on 2020. Despite the fact that most of our E&C projects had very little activity during the last three months, the Company used the time wisely to cut costs, catch up with claims and additional works pending approval and discuss the terms in which to relaunch the projects, including the sharing of the costs originated by the COVID-19 as well as the way future costs generated by the new safety and health restrictions will be handled to complete the projects. The results of such efforts have been reflected in the second quarter results as well as in the forecast that I will share later in this call.

Our infrastructure business has suffered less than the other two since it continued to operate fully although with the restrictions during the whole second quarter. But it still had to deal with the lowest oil price in decades, a heavy reduction on traffic and fuel consumption as well as the law that suspended the collection of tolls in our road concessions. The business unit implemented a cost reduction program in all of its operations that allow all segments to operate under these new conditions reaching, for example, a full operating cost in the oil blocks under $30 per barrel and being able to handle the effect of not having any cash coming from the tolls in Norvial. Also, the oil and gas business is in the process of redefining this Peru-Petro when drilling operations will begin, which we expect to be not early than 2021.

In the case of our real estate business, we were not able to deliver any finalized housing units in quarter. And therefore, we did not record any revenues for the Company in this segment. However, the Company was able to keep selling future units through virtual sales room implemented in the projects. Sales using this mechanism account for 30% of the regular number of units sold before the pandemic. Cost reductions were also implemented in this business unit and this helped to present a nearly null result in the quarter.

As we announced at the end of June, the holding company also underwent a reorganization and implemented a cost reduction plan. We do expect that results of these cost savings and new structure will be reflected in the second semester of this year. 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 returned to execution early in July. And by the end of the month, all projects were gaining speed to what we will have to accept as the new maximum production rate, given the current social distance restrictions and safety protocols linked to COVID-19. The largest challenge to maintain ongoing operations, is the infection rates within projects, which has already been the case in one of the projects. In case of infections, the protocol is to evacuate the project, proceed with a full cleaning of the facilities and restart once permits are clear with the clients. In most of the projects, new contractual terms have been agreed with clients on such negotiations have been recorded in our backlog and forecast, as Dennis will explain later in the presentation.

Two, buy time to face upcoming financial and non-financial deadlines. Since mid-March, the Company implemented a severe discipline to control cash and secure liquidity in all projects under execution or halted during the quarantine. We were successful in securing this situation, thanks to the independent trust funds implemented as part of our operating policy in all E&C projects as well as the collection efforts in all projects and subsidiaries. These efforts allow us to resume operations when needed without additional working capital credit lines. The Company also engaged in refinancing efforts with financial and non-financial suppliers to extend the terms of all non-operating debts that were due during 2020. We have been partially successful, and there are still some pending negotiations.

Access to credit lines or capital market has been limited until the plea agreement has been signed, the event which has been delayed further than the original May 2020 estimate because of the difficulties that our counterparties in the negotiation face to operate. This situation represents a strong challenge in the next month for our cash flows. The Company has been elaborated a financial plan that contemplates several scenarios on the timing of the plea agreement signature, whether it is during 2020 or later. Based on such scenarios, the Company has been contacting different stakeholders in search of a bridge financing that may help the Company to navigate the time until the plea agreement is signed. This is an event that we have defined as necessary to implement the final and definite financial solution defining the plan. As alternate of complementary financing in the plan, the Company may initiate process to divest assets to secure liquidity and search to avoid any potential distress situation. As of today, the Company is searching to preserve its business strategy and all defined core assets. If plea agreement delays further than 2020, and/or the Company is not able to secure a bridge in a reasonable time to pay the payments due or contingencies that may materialize during the next two quarters, then the Company may be forced to change such strategy.

Three, retain and assure critical resources and talent to be able to relaunch the Company in 2021. After 100 days in quarantine, as most companies, we have learned to operate in a different way. Our organization is changing, adapting and new positions with different skills are being created. In this process, we have been careful to identify and retain the new talent needed as well as we are defining our succession plans and contingency plans for any undesired impact of this situation.

With respect to the latter, I regret to report the loss of 14 members of our team because of this pandemic. As of today, more than 1,800 persons have been confirmed positive to COVID-19, which represents close to 15% of our total population. We are taking all necessary precautions and implementing safety protocols in all our projects to prevent the expansion of this situation, which unfortunately, due to the public transportation exposure and the reality of our countries, makes it very hard to control. In all cases, we have secured medical and economical support for our workers in the event they got infected.

Regarding risks that may affect our plan, as we mentioned, we have classified risk in three categories as you can see in Slide 7. External risks, the return to the lockdown, a deeper macroeconomic impact, political and social instability in the countries where we operate, potential volatility of public and private investments, financial health of clients and financial providers as the one we suffered with Bioenergy last quarter in Colombia. Project execution, we have most of the risks mapped in our projects under control. However, some of them such as the fear to return to operation in certain cities as well as the availability of suppliers and subcontractors, are two that are still jeopardizing our operations. Project assumptions, we have improved the reliability of our forecast and projections after this quarter. However, production rates are still uncertain and certain other risks may affect our revenues and defer them to the future affecting, consequently, our gross profit in 2020.

We have updated our forecast for 2020 in Slide 8. New estimated revenues are close to $1 billion, EBITDA will be in the neighborhood of $115 million, net profit will improve from its current loss in around $7 million to $8 million during the second semester, and financial debt levels will close near $460 million. To complete the full depth of the Company, there's a need to have non-financial debt related to the completion of the plea agreement, the settlement of the class action and some other debts disclosed in our audited financial statements, 20-F reports and notes to both reports.

There is a wide variety of assumptions in order to achieve the above-mentioned figures. Among them, E&C is only executing current backlog with already agreed additional costs, oil price at $36 per barrel, at least for the rest of the year, new estimates of traffic for road concessions, and only 65% of the original budgeted real estate units delivered in the year. Consequently, there are a few potential opportunities to improve this forecast. New E&C contracts incorporated during the second semester that increased revenues in the year, additional trips for the metro line due to social distancing and further recovery in oil prices and an increase in storage occupation and fuel consumption in Terminales del Peru.

In Slide 9, I will mention the critical milestones for the third quarter. The Company needs to achieve certain goals during next quarter. Some may be critical and some other important to start 2021 with the right foot. Among them, the following are key goals Company wants to achieve during this quarter: one, secure a bridge loan not shorter than $45 million as defined in our financial plan to face different potential scenarios of such plan; conclude negotiations to lock amounts and terms of payments to be included in the plea agreement; incorporate at least $75 million into the E&C backlog; define the timing to resume mandatory investment plans for Blocks III and IV; and conclude an understanding regarding Via Expresa Sur concession with the Lima municipality.

Regarding the next phase of our plan and looking into next year, we have been working on the definition of the renewed company purpose as well as the purpose of each of the three business units as part of our transformation and providing also [Indecipherable] to our new strategic plan. We expect to complete this plan before defining our budget for 2021. We are also in the final stages of completing the new company brand, which we are considering to launch before year end. This will complete the new company identity. We will continue to uphold the values of truth, transparency and integrity, which have guided all of our actions with a renewed purpose and aspiration. We will relaunch the company with a culture aligned to our values and to our business strategy with ethics at the core.

We keep working hard as a company to overcome the new challenges brought by this sanitary and economic crisis, and we expect to not only survive, but also to prove that all the experience gained during this extended crisis has been incorporated into our process and culture.

Thank you all for your time and your continued support. I now leave you with Dennis for the financial analysis.

Dennis Gray Febres -- Chief Financial Officer

Thank you, Luis.

Let's go to Slide Number 12. In terms of revenue, the Group reached revenues for the second quarter of 2020 of PEN1.3 billion. This is a 16.2% lower figure than the one that we reported at the end of the first semester of 2019. The revenues of the Engineering and Construction business unit decreased mainly because to the reduction of the volume of projects under execution in GyM and GMI in Peru, which was partially offset by the increase in sales at Vial y Vives-DSD in Chile. On the other hand, the reduction in revenues in our Infrastructure business unit was mainly explained by lower revenue in GMP as a consequence of reducted or reduced oil prices, especially in the second quarter of the year and a lower volume storage and dispatch at our terminal business units also in GMP.

On the other hand, in Norvial, as a consequence of the social immobilization, the amount of vehicles going through the highway was lower than the one that we reported in the first semester of 2019. Finally, as a consequence also of the measures taken by the government in the second quarter of the year, revenues in Concar were lower because of limited maintenance works executed. Finally, in terms of Line 1 revenues, although operation wise, there was no expectation, revenues are lower than those compared to the second half -- or the second quarter of 2019 because of the absence of works related to the expansion works of Line 1 of the metro, which were concluded last year.

In terms of gross profit, the consolidated number decreased 58.6% mainly due to the reduction in margins at the Engineering and Construction business unit due to the suspension of works related to COVID-19 pandemic and also a provision for the outcome of an arbitration initiated by the supplier of the Cerro del Aguila project, which was announced in the first quarter of this year. And a write-off of an account receivable in Morelco with a client, Bioenergy, a subsidiary of Ecopetrol, because of or due to the initiation of such company's liquidation process. Likewise, gross profit was impacted by the reduction in oil prices and by the reduction in traffic at Norvial, reducing the gross margin from 13.9% in the first semester of last year to 6.9% in this year. Administrative expenses at the end of this semester decreased 23.8% compared to the similar period in last year, reaching a percentage of 5.3% of the sales compared to 5.8% at the end of the second quarter of last year. This decrease is mainly explained for the reduction of expectation of the recovery of non-core expenses and also by the reduction of cost plans that were announced last quarter.

As a result, the consolidated operating income decreased 92.5% in the first semester of this year compared to the similar period last year with an operating margin of 10.9% last year, reducing to 1% this year. In terms of financial expenses, in this semester, we recorded higher net financial expenses, which were mainly explained by a statistical effect because last year, our Infrastructure business unit reported an extraordinary revenue related to the sale of CRPAOS related to the Line 1 of the metro expansion. In this sense, in this semester, financial income was 6.7% compared to 44 -- sorry, PEN6.7 million compared to PEN44.4 million last year. Consolidated net loss in the first semester of this year was 69.8%. The net margin went from 1.7% in the first semester of 2019 to minus 5.1% in the first semester of this year, explained by the results described above.

Adjusted EBITDA in the first semester of this year decreased 51% compared to the same period last year, going from PEN320.9 million to PEN157.1 million. In Slide 13, in terms of backlog, our consolidated backlog stands at $1.3 billion plus recurrent businesses of $523 million, reaching a total amount of $1.8 billion at the end of the second quarter of 2020. This number represents 1.64 years of revenues. Due to the situation caused by COVID-19 pandemic, the scope of the Chichimene contract in Colombia were reduced by $9 million. On the other hand, in Vial y Vives-DSD, the increase in backlog was due to Quebrada Blanca and MAPA projects for the extension of the term of such projects.

Likewise, in GyM, the increase in backlog was related to Marcobre, the modernization project of the Talara refinery and the construction of the Quellaveco tunnel, among other projects in relation to higher costs related to those projects. In the Infrastructure business unit, the increase in recurrent businesses was mainly due to a updated sales estimate for GMP with the newer prices.

In Slide 14, the total amount of consolidated financial debt as of the end of the second quarter of 2020 is $486 million. On the total debt, $98.6 million corresponds to working capital associated to client account receivables and leasings for the acquisition of machinery and equipment. The amount of $294.2 million corresponds to the infrastructure projects, all of them, which are non-recourse-allocated financings for the long term. On the other hand, we have $28.1 million [Phonetic] corresponding to a financing from CS Peru Infrastructure Holdings and $44.1 million for the debt dividend monetization at Norvial and $20.6 million corresponding to the leasing of one of our corporate buildings according to IFRS 16.

The debt at the end of the second quarter of this year decreased 6% compared to the end of 2019, mainly due to the amortization of the debt with CS Infrastructure Holdings in the first quarter of this year. What it is important to mention is that from the amount of debt outstanding, 61% corresponds to debt associated with infrastructure projects, and only 20% is related to working capital debt at the Engineering and Construction and Real Estate businesses.

Going to Slide 15, the Group has a consolidated amount with surety bonds of $431 million at the end of the second quarter of this year, from which 59% corresponds to the Engineering and Construction business, 39% corresponds to the Infrastructure business unit and 2% to the Real Estate business. 83% of the total stock of surety bonds are related to performance bonds for the execution or construction projects or a performance bond for our concession of contracts, basically in our Infrastructure business unit. A smaller amount corresponds to surety bonds for advanced payments, mainly at the E&C business and a smaller percentage is related to finished works performance bonds and other types of surety bonds.

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

Questions and Answers:

Operator

[Operator Instructions] This will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Luis Francisco Diaz Olivero -- Chief Executive Officer

You have a question in there.

Operator

Oh, apologies.

Luis Francisco Diaz Olivero -- Chief Executive Officer

I see it right now.

Operator

Yes. We do have one question and that will come from Canio Corbo with Capital. Please go ahead.

Canio Corbo -- CHL Capital -- Analyst

Yes. Hello. So, my question is, what is the situation going forward with the virus in Peru and how will you be able to manage your current operations? You mentioned it a little bit, but I saw the number of cases today getting high. So, can you give us a little more comment on that?

Luis Francisco Diaz Olivero -- Chief Executive Officer

Sure. Well, most of the projects, as I mentioned in the case of our E&C business are working right now with the proper protocols. Okay. We cannot anticipate right now that any of the projects will need to be halted because of the health situation in particular. We anticipated that we may face punctual infections within the projects. And as it happened, for instance -- and this is public information, it happened with Quellaveco. There was a particular situation, not with us, but with the other subcontractors that got a number -- an important number of persons with the infection. So we have to halt the project. We moved all the people out of the operation. We cleaned the site. We tested all the people again and we restarted all operations or we'll restart all operations next week. So, I think that the Company will have to face a situation in our E&C business, where we will have to be allowed to stop when needed and restart.

In most of these cases, what is going to happen is that, we will have to agree new terms with our customers and we will have to deal with the costs that in this particular case, for instance, since it was a decision of our client to stop the project, he will assume all the costs. So, what is uncertain in the E&C business is probably the amount of revenue that we are going to be able to execute during the second semester because we will have this particular situation jeopardizing the ongoing process of production. In the concessions in particular, we haven't had any problems during the quarantine, and we have designed a particular contingency plan that allows us that most of critical people to operate the concession have backups. And in the event people got infected, then we will get them out of the project and substitute them partially while they will get better.

So, we do not anticipate having any particular problems in such operations. So, it is a complicated situation, yes. But I would like to think positively in the terms that despite the situation that we will have to live with in the next months, we will have to -- we will be able to handle starting and stopping the projects whenever it's needed. But I don't see a situation where everything is being halted again for once. I'm not saying that the government may not decide something like that. But right now, it doesn't seem like that is happening to all the country at the same time. It may happen in a particular region, but not the country all at once as it was in the second quarter.

Canio Corbo -- CHL Capital -- Analyst

Okay. Thanks.

Operator

[Operator Instructions] And this will now conclude the question-and-answer session. I'd like to turn the conference back over to management for closing remarks.

Luis Francisco Diaz Olivero -- Chief Executive Officer

Okay. Well, thank you all for attending this conference call. We hope you stay safe and have a good and safe afternoon. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Luis Francisco Diaz Olivero -- Chief Executive Officer

Dennis Gray Febres -- Chief Financial Officer

Canio Corbo -- CHL Capital -- Analyst

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