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AZIA: A Worthwhile Investment Despite Challenges For Central Asia Ahead

Summary Although the economic outlook is not entirely favorable in Central Asia, the current valuation of the Global X Central Asia & Mongolia ETF presents a buy opportunity. While falling commodity prices have slowed economic growth in Central Asia, and will still present challenges ahead, it still has a favorable investment climate. The fund is trading extremely close to its 52-week low, is trading below its book value, and has a P/E of 11.34. Countries that are currently suffering from low commodity prices actually present excellent buy opportunities. Global X Central Asia & Mongolia ETF (NYSEARCA: AZIA ) is at a very strategic buy point, as it is trading near its 52-week low and has extremely low valuation. It invests into high-growth countries in Central Asia that have had an economic downturn due to falling commodity prices. The fund’s price drop to 9.53, far from its 52-week high of 14.45, has provided very favorable valuation . P/E Ratio: 11.34 P/B Ratio: 0.98 P/S Ratio: 1.28 A combined look at the macroeconomic outlook for Central Asia and the performance of the individual fund holdings shows that while economic growth will be slower and some companies have had setbacks in financial performance, the impact on the fund’s price has been sensationalized. Many companies were not drastically impacted by the decline of commodity prices, and have a favorable future outlook. This shock in the fund price has created opportunities for investors to invest in a fund trading below its book value, and that has room for growth amidst the economic challenges that Central Asia has ahead of it. Macroeconomic Outlook GDP growth has most recently been substantial, and is impressive to note given the fund’s sharp drop in price. While the GDP growth forecast for 2016 is less favorable overall, the growth is still impressive for Asia and a favorable climate for investment. The IMF has projected a 2% decrease in growth in Central Asia, due to lower commodity prices and the economic downturn in Russia. Inflation is another issue this region will continue to face, as inflation is projected to increase from 4.82% to 5.45% in 2016. As seen by an assessment of the fund’s holdings later in this article, commodity prices have had a mixed effect on the companies while companies with operations in Russia have witnessed a threat to financial performance. While Central Asia may not be the best environment for investment, the key opportunity presented here is within the fund, rather than the region. Moreover, the majority of the fund’s holdings are listed on US exchanges, providing investors with the opportunity to cherry pick the most favorable options, and to potentially avoid waiting long term for Central Asia’s holistic recovery. Top Exports As many of these countries rely on revenue from exports, the declining price of commodities has resulted in slowed economic growth. The fund’s performance is therefore correlated with the successful outlook for commodity exports and price recovery of commodities, with oil prices having the largest overall effect on many of these countries. Fund Holdings A closer look at the fund’s top holdings, which comprise 65.8% of the fund’s total holdings, provides a favorable outlook. Although the fund’s price sharply dropped since its high of 14.45 in 2014, financial performance of the fund’s holdings has not been poor enough to make this sharp drop in price justifiable. Dragon Oil ( OTCPK:DRAGF ) increased its net income from $512.6 million to $650.5 million in 2014. Although Highlands Bancorp ( OTCPK:HSBK ) was able to drastically increase net revenue, it still witnessed a sharp decline in net income in 2014 from $2.3 million to $0.7 million. The company has a P/E of 14. KMG Chemicals (NYSE: KMG ) increased its net income from $9.3 million to $13.8 million in 2014, and its net revenue from $263.3 million to $353.4 million. KCell JSC GDR’s net income decreased from 63,392 KZT Million to 58,271 KZT Million in 2014. Nostrum Oil and Gas’s net income fell from $220 million to $146 million. Turquoise Hill Resources (NYSE: TRQ ) has consistently been increasing its bottom line since 2010, resulting in the beginning of profitable operations in 2014. Vimpelcom ( OTC:VMPLY ) operated at a loss of $903 million in 2014, and its revenue continues to be threatened due to its operations in Russia . MIE Holdings ‘ net income fell from $45.6 million to $9.4 million in 2014. Mongolian Mining Corporation ( OTC:MOGLY ) had a substantial drop in net income and net revenue, and is being threatened by increased operations costs and the declining price of coal. Conclusion Overall, the financial performance of the fund’s holdings was exceptional, and the sharp drop in the fund’s price during this year is not entirely befitting. A buy opportunity has thus emerged, either directly into this fund, or into some of the individual holdings. Low commodity prices and economic adversity in Russia have been negative drivers for this fund, although they have not completely deterred the fund’s performance. While the fund is overall a favorable endeavor, Dragon Oil stands out the most at first glance, due to its lower valuation and growth in 2014. The level of growth projected for the future in Central Asia is still acceptable, and the valuation of this fund is certainly superior, when compared to other alternatives in Asia. While the threat of commodity prices poses an exceptional risk, the fund’s superior valuation and the buy opportunity that has thus emerged makes it a worthwhile endeavor. Central Asia is merely one of many destinations that is currently suffering from the drop in commodity prices; I have previously mentioned Peru , Chile , and Brazil as having similar opportunities. This current economic situation has created global buy opportunities, and Central Asia is surely one destination with ample potential for a rebound. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Akastor’s (AKKVF) CEO Frank Reite on Q2 2015 Results – Earnings Call Transcript

Executives Tore Langballe – Head of Corporate Communications and Investor Relations Frank Reite – Chief Executive Officer Leif Borge – Chief Financial Officer Analysts Frederik Lunde – Carnegie Eirik Mathisen – DNB Eivind Tønnessen – Swedbank Haakon Amundsen – ABG Akastor ASA ( OTCPK:AKKVF ) Q2 2015 Earnings Conference Call July 15, 2015 3:00 AM ET Tore Langballe Good morning, everyone. Welcome to the presentation of the Second Quarter Results and the First-Half Results of Akastor ASA. My name is Tore Langballe, I am responsible for Corporate Communications and Investor Relations in Akastor. The presentation this morning is being webcasted and we also have a conference call running in parallel. You are free to submit questions online on the webcast and of course ask questions on the conference call. We cannot guarantee that we’re going to be able to answer all the questions though. [Operator Instructions]. For the audience present in the auditorium here, I’d like you to use the microphone and state your name and company when asking questions please. The presentation this morning will be given by CEO, Frank Reite and Leif Borge, CEO and CFO respectively. And then we’re ready to start. I’ll give the floor to Frank Reite. Frank Reite Thank you Tore and good morning, everyone. As you probably have seen from a separate release this morning Kristian Røkke will take over as CEO in Akastor from August. I will move on to Aker as their new CFO. Aker will then propose to the nomination committee that I should be elected as the Chairman of Akastor. So I will be quite involved in Akastor also going forward. Then let’s focus on Akastor today. The second quarter for Akastor can be summarized as followed. We see a challenging market environment for the oil services sector. However there are also interesting opportunities in the market. And I am very proud that most of our portfolio companies are delivering quite good performance through first-half of 2015. However, we see that MHWirth is significantly impacted by the rig market. But I can assure you that we are taking necessary actions in all our portfolio companies to adapt to the current market situation and that we go after all opportunities that is out there. If we look into second quarter, from a perspective at Akastor as an investment company, we have taken actions to focus on our operational improvements and have done a lot of cost savings and unfortunately we have to reduce the workforce. We expect that reduction to be around 1,500 people by the end of the year. As an investment company, one of our duties is to make sure that we have the right management teams in our portfolio companies. We have used first-half of 2015 to strengthen the teams and add necessary resources to attack the market and environment we are operating in. We’re going to continue to focus on long-term value creation for our shareholders and going to develop our current portfolio, we’re going to explore the opportunities we see in the market and we’re going to keep our financial flexibility. After the close of second quarter we have divested one property in Norway for around 28 million equal to book value. If we look into the numbers, if we add back one-offs to our EBITDA, we arrive at 173 million that’s in line with first quarter. However revenues are down with approximately 20% and activity in MHWirth explains basically also of the decline in the revenues. The net capital employed is stable, and MHWirth and AKOFS makes up close to 80% of the capital employed. The working capital has stabilized around 3.1 billion and if you summarize the remaining portfolio companies except MHWirth those are zero. Our order backlog is 18.7 billion; it’s down 1.3 during the quarter. Net interest bearing debt 6.1 basically at the same level as first quarter. If we look into the floater market, the utilization is around 87%, it’s the lowest level in more than 10 years. There are supply and demand gap around 39 floaters with additional 84 in the order book. However, we don’t expect that all the floaters that are in the order book will be delivered. The good thing here is that the market mechanism are working, so we have seen no new orders for floaters signed in first-half of 2015. And so far in the current down cycle there being announced removal scrapping of 36 floaters as of end of June and as yesterday there was one more announced. We see that rig owners are delaying deliveries of rigs and the yards are postponing the completion of the rigs. That is impacting us through our revenues or getting moved out in time and also require of more working capital than they like. The good thing at MHWirth is that lifecycle business and aftermarket the service business is performing very well. Revenues of 1.4 billion first-half is exactly the same as last year. And it continues to deliver a good margin with a slight decline compared to last year, but it’s still about 20% margin on the lifecycle. And as you all know the lifecycle business is very important going forward. We have initiated significant cost improvements program and we expect the workforce to be reduced with at least a 1,000 people by the end of the year. Definitely we’ll have a contract with Jurong for delivering of seven complete drill packages for drill ships going to Brazil. The progress has been we have slowdown the progress in agreement with Jurong and we are awaiting the final outcome of the refinancing of certain. However, the signals are quite clear that all the seven units from Jurong will be completed. However the timing is a bit uncertain. Based on this we also expect weak results for MHWirth in second half of 2015. If we look into MHWirth going forward, with short-term they need to execute on the backlog continue to secure the lifecycle business. The lifecycle business is basically their license to operate and it’s also what’s bringing us closer to our customers. The feedback I am getting from MHWirth customers is that they are more and more happy with the lifecycle services from MHWirth. Continue to run after all the costs, cut costs and do operational improvements. They need to bring down their CapEx and going to complete the plant in Brazil when that one is completed we’ll bring down CapEx to bear minimum and we need to reduce the working capital level. Going forward we need to be willing to invest into the future. We could probably cut cost more than what we are doing, but we will like to keep the competence in MHWirth. We will the company to be ready, to sit around the table and compete when the new drilling contract will be signed in the future. So therefore, we are willing to invest in resources and technology throughout this down cycle. If we take a look at AKOFS Offshore, Skandi Santos is back in operation after five years classing was back in mid of April, has performed very well, AKOFS was back in operation and also in April it started on its second five years agreement with Petrobras. The Wayfarer have had excellent operation, a 100% utilization in first-half and we were able to extend the contract of vessel around throughout October this year. Then it will go to the West Coast or Norway and be prepared for a five years contract in Brazil starting second half of 2016. The Seafarer was idle during the quarter. We are continuing to cut cost and we’ll cut the cost to a bare minimum when it’s at the dock. There are challenging market situation, but AKOFS are running at after whatever opportunities there are in the market. So for AKOFS going forward, we can divide the business into two, there is the long-term business in Brazil, we will have two vessels on good contracts on five year terms in Brazil and AKOFS need to secure work for the Seafarer. If you look into our remaining portfolio companies and the second quarter highlights for them Frontica has steady operation. They have been performing very well to adjust their cost base towards that activity and they’re delivering a decent margin and the really good thing is that they won two strategic important niche contracts during the quarter. These contracts are not significant when it comes to revenues but this will important customers and that it shows that Frontica are competitive in their business landscape. Fjords process secured three different contracts related to the U.S. oil field; it’s really good to show that they’re competitive in the international market. The management team of Fjords has done a great job to adjust their operating model and they’re improving their competitive position. There are solid prospect list for Fjords, they are involved in quite significant bids but the timing of awards are uncertain. Then I need to congratulate Gordon and his team in Singapore, they’re delivering a record margin of 23% in the quarter. They have taken a lot of actions, they have increased efficiency as it plan significantly, they have been able to cut raw material cost, they have reduced a number of employees at the factory of around 100, and even with that they have increased the capacity of the factory. And they have renewed a very important strategic contract and they’re going into new markets. And then we divested a property as I said, in the beginning of the presentation. So, what are we doing, well, we are attacking the challenges. We see oil, we see a weak oil price, reduced spending and we started the year with cost base that reflects that higher activity level than what the current situation could support. So, we have taken immediate cost cutting actions and we are continuing to ramming after costs. We are maintaining our financial flexibilities with increased financing lines. We are strengthening the teams and the management teams in the portfolio companies. We are continuing to focus on long-term value creation for our shareholders and we are pursuing opportunities that we see in the market, both for our portfolio of companies but also for cost store as an investment of company. Then Leif will walk through the numbers for you. Leif Borge Good morning. As you have probably already seen from the figures of revenues 3.7 billion in the second quarter dropped to 39% compared with last year. However, the second quarter last year was — especially strong quarter with regards to revenue, so year-to-date revenues went down 25% compared with last year. It’s especially the revenues and MHWirth that has declined and we expect now revenue level to level out going forward. The EBITDA are 141 million, it’s impacted by around 20 million on restructuring cost in MHWirth and 12 million in negative result from hedges not qualifying for hedging accounting. So the more recurring EBITDA in the quarter was around 173 million. Net financial items negative 183 million includes 100 million negative effects from the impairment of the extra shares due to the drop in the share price during the quarter. Pure interest cost was around 44 million in the quarter and the financial lease on the vessel Wayfarer was 72 million in the quarter. The tax rates was only 8%, but this is explained by some of the losses like extra shares in did not have tax effect. So based on these figures the net result ended on minus 298 million in the second quarter. Also as we have seen in the net capital employed, how the investment portfolio remain on same level as seen in the first quarter, just below 15 billion. And net working capital increase slightly and we invested around 270 million in the quarter, mainly in MHWrith and AKOFS offshore. With regards to the capital structure, net interest bearing debt increase is around 200 million to 6.1 billion in the quarter. Cash flow from operations was around zero, while as mentioned investments are around 270 million. The liquidity reserve at the end of June was around NOK1.35 billion including cash of 850 million and undrawn credit facilities of 500 million. Then let’s have a look at the portfolio companies, starting with MHWrith revenue level went down to 1.6 billion in the second quarter. For the first-half of the year service revenues are more or less spot-on the level of 2014. So the decline in revenue comes from the projects and single equipment. The explanation is of course low order intake during last year. However it’s also due to the reduced progress on the year on contracts which is in line with what we’ve agreed with the clients. There are no further cancellation of contracts in the second quarter of this year. The EBITDA of 3 million then is impacted by another 20 million our restructuring costs these cost relates to the second round layoffs that was executed in the second quarter which will impact around 250 people. The implemented workforce adjustments will reduce the total workforce in MHWirth during the year with close to 1,000 people. We see some effect of this in the second quarter numbers, but we will not have full effect of the cost cutting before the end of the year. Thus we expect weak results in MHWirth also in the second half of the year. Order intake in MHWirth was 932 million and backlog ended on 7.1 billion. AKOFS Offshore had revenues of 186 million; Santos was in full operation from mid April after the five year classing. Wayfarer was into operation through the quarter, while AKOFS Seafarer was idle for the total quarter. In the third quarter both Santos and Wayfarer will be in full operation as the contract for Wayfarer was extended throughout October. In regards to AKOFS Seafarer, we hope to get some work but the market for stock work is very challenging. AKOFS is not taking down the burn rate on AKOFS Seafarer from around $50,000 a day to roughly half that level by the end of this year. This is the standby OpEx rate for the vessel being ready to operate as a third vessel, but it will take longer than to mobilize divestment to do deep water well intervention services. Frontica business solutions have the revenues of 1.3 billion, declining 12% compared with the second quarter last year. This reflects lower activity level of the key clients especially then Aker Solutions, Kvaerner, MHWirth. This also impact margins on what the EBITDA margin was 4.5% in the second quarter. During the quarter, Frontica has implemented downsizing around 130 staff which will have somewhat positive effect on the margin going forward. The order intake was relatively weak with 804 million in the quarter. However this is explained by the reassessment of expected volume from the existing frame agreements for the next 12 months. Fjords Processing had revenues of 475 million in the second quarter with an EBITDA of 16 million. The margin is still not on an acceptable level, however at least we’re now further losses from the project that destroy the numbers in 2014. So that has been stable on last two quarters. Order intake of 500 million brings the backlog up to 1.2 billion. KOP had a strong quarter profit wise, revenue actually dropped around 7% in real terms because this is a U.S. dollar business. However due to the fact that this or the translation effect and the U.S. dollar has strengthened compared to Norwegian crowns the reported revenues in our numbers show some increase of 17%. KOP delivered a record high margin as presented by Frank 23%. This is explained by favorable product mix, strong aftermarket services with high margin in the second quarter. But management of KOP has also done a good job working on the cost specs. During the quarter, around 100 people they are laid off that plant in Burton. The order intake was weak with 138 million reflecting a weak market in Asia and the key clients are reducing their inventories rather than ordering new surface for the time being. This will of course also impact the revenue level going forward. In regards to the margin, you should not expect the second quarter level going forward, but we hope that KOP can maintain a relatively good margin also in the coming quarters even with somewhat lower revenue levels. Finally real-estates and other holdings, negative EBITDA of 25 million of which 12 million is the negative effect from hedges, not qualifying for hedging accounting. The real-estate portfolio delivered 15 million in a quarter, while the two portfolio companies First Geo and Step Oiltools had total EBITDA of 5 million, slightly better than previous quarters and the rest of the result is in this segment comes from corporate and some separation cost of the IT infrastructure. And so that concludes my presentation and I guess we open up for the Q&A session. Tore Langballe Then we open up for questions both from the audience here and we’ll later take questions from the conference call and from the web. Do you have any questions here to kick off? Question-and-Answer Session Q – Frederik Lunde Frederik Lunde, Carnegie. You mentioned that you expect some of these floaters and the construction not to be delivered, is that a reference to contrast in your backlog or more for competitors? Frank Reite Through this opposite ratio, there are 29 of sectors in the backlog worldwide. We expect all the seven, but we’re going to deliver equipment to be deliver, but I think the indication from Brazil, is that there on 15 of the 29 will be concluded. So, that’s some more — it seems like our backlog is pretty robust, but there will be delays or postponement. But at end of the day, I expect them, to be delivered. Frederik Lunde Do you expect any contracts for new projects in MSWrith for the next year to? Frank Reite Yes, all of these speculative projects out there and they’ve been there, for a while and none of them materialized, but suddenly there will be something. But I don’t think, we expect — just have a look on that, there might be one or two, time we saw. Frederik Lunde But no equity investment from your side in those projects? Frank Reite I think, we’re willing to participate with favorable terms to facilitate some projects. But I don’t see us as a significant equity investment into any of the projects. But we might be willing to be flexible in payment terms, especially on amounts of to our margin in these kind of projects. Eirik Mathisen Eirik Mathisen, DNB. When should we expect working capital in MHWrith to come downwards again and what is the risk for impairments to the working capital in MHWrith? Frank Reite The working capital there is two folded, approximately 1.5 billion is tied up into the service in after market. And that’s an investment into that business. I think you will see a reduction of the working capital when we start to release some of the projects and we have finance deliveries from the project execution. Eirik Mathisen Then on Brazil, is there any risk for lower day rates on the vessels, you have on long-term charter contracts in Brazil? Frank Reite Well, I think we have received same lesser stuff a lot of other players but as long as Santos is some performing as well at it is. I think we have a — I think, we’ll basically maintain the same level. Eivind Tønnessen Eivind Tønnessen, Swedbank. Obviously you’re talking about MSWrith being soft in second half. Would you elaborate a bit on the numbers in terms of EBITDA? I mean, you had a break even first half, could we see this type of similar level in second half or should we see some improvements, any color? Frank Reite We expect to see gradual improvements in the numbers as the cost savings comes through. I mean, we have now concluded two rounds of layoffs. We’re up to 1,000 people, around 600 people of those have left the company by June and the remaining will leave during the second half of the year. So as I said, gradually improvement in the results. And revenue level was 1.6 billion are in the second quarter, most likely we will also see a revenue level, on that level going forward, little bit depend on what happens for the year on projects? Eivind Tønnessen And just follow up on the Songa and Cat D rigs, I mean there seems some turmoil between Songa and DSME now recently. Can you just describe your potential exposure with MHWrith with the remaining key packages and how much working capital is tied to those three? Frank Reite I think Leif can go more into the details but the first Cat D rig was delivered right before end of second quarter and first week of July we received significant payments from DSME on that one. Leif Borge I mean that we have delivered all the equipments on those rigs, what remains of cost for MHWirth is on the final commissioning on the last three ones. There typically remains 10% to 15% of the contract value in the late phase like that. So yes there is some remaining payments and some working capital still in the Cat D rigs. So far the client has paid say as planned, but as in all projects, at all of this discussions on variation orders that at the end of the project. So that will also probably be the case for some of the remaining rigs here. Eivind Tønnessen Just the final from me, do you have any leads now on long-term contract for the Seafarer or are you focusing on spot working to serve marketplaces only? Frank Reite Realistically we’re focused on the spot market. However, there are dialogues with oil companies also more long-term projects. But I don’t expect any of those to materialize this year. Unidentified Analyst This is [indiscernible]. Is it possible to get some more split on the Brazilian, what went through as revenues in the quarter from MH? Frank Reite Revenues from the Brazilian — from the Jurong project? I mean in the slide on MHWirth we have shown the split of the revenue on services, on projects and on products. And you can easily calculate that revenues from the projects around 500 million, 600 million in the quarter roughly 50% of that comes from the Jurong project and roughly 50% of it comes from other projects as a guideline. Unidentified Analyst And then you’re able to hold capital relatively stable due to some offsetting from the other projects instead how we should view that? Frank Reite The working capital in MHWirth was quite stable from first quarter to the second quarter. There has been progress on the Jurong project; there I spent money on the project. We’ve also received money from Jurong from the client, but not everything that we should ever see according to the regional contract. So there has been some of the increase in working capital tied up in those projects. However, the Jurong project is still cash positive meaning that the working capital on the project is negative. So of course the working capital has increased somewhat on that project, it has reduced on some of other projects. Unidentified Analyst [Indiscernible] Securities. I was just wondering could we expect any further restructuring charges in the second half of the year? And can you provide some guidance on that? Frank Reite No or to put it this way, you shouldn’t expect any further restructuring costs linked to the initiatives that we have already made. We may of course see that we have to do further cost adjustments in some of the portfolio companies and that could trigger researching cost. Unidentified Analyst And then just on the second question on AKOFS, on the Wayfarer, on the extension has the day rate come down to what you guided at your CMD? Frank Reite No, it’s a same day rate. Tore Langballe Then I think we open up for — we have one more question here before we take questions from the conference call. One more question. Haakon Amundsen Haakon Amundsen from ABG. Just a question on the aftermarket in MH it’s holding off in H1 despite quite big cost reductions announced by the drillers. Can you put some color on that maybe on the profitability and the outlook for H2? Frank Reite I think we are chasing cost as well. So I think basically we have seen some reduction in the prices towards the driller, but MHWirth has been able basically to push it such supplier and I think we also have a more efficient operation than we had last year. Haakon Amundsen And H2 any indications? Frank Reite Currently it seems like it’s going very well. Haakon Amundsen And just to put you on the spot on H2 for MH is the underlying result for Q1 with slight improvement, what we should expect? Frank Reite Yes. Tore Langballe Then we have one more questions from the conference call. Operator can you please assist us . Operator Thank you. [Operator Instructions]. At the moment, we have no questions in the queue. I’d like to turn the call back to you for additional comments. Tore Langballe If there are any additional — I have one additional question in conference room. Eivind Tønnessen Yes, Eivind Tønnessen, Swedbank again. Just on your interest coverage ratio covenant of above 4, do you see any risk of that being breached by year-end and if so do you see any problems renegotiating or receiving waivers from your banks should that be the case? Frank Reite I think, it’s fair to say that yes, it’s a risk that we could be in breach by the end of this year or beginning of this year of course depending on how the results end up in the third and fourth quarter, that’s of course something that the people have a dialogue with the banks, I will be surprised if it will not get the waiver but it’s probably always price discussion. Tore Langballe Then we thank you all for participating at this morning and have a nice summer going forward. Thank you. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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Companhia Energetica de Minas Gerais Cemig’ (CIG) CEO Mauro Borges Lemos on Q1 2015 Results – Earnings Call Transcript

Companhia Energetica de Minas Gerais Cemig (NYSE: CIG ) Q1 2015 Earnings Conference Call May 19, 2015 01:00 PM ET Executives Antonio Carlos Vélez Braga – Investor Relations Officer Luiz Fernando Rolla – Chief Institutional Relations and Communication Office Mauro Borges Lemos – Chief Executive Officer Fabiano Maia Pereira – Chief Officer for Finance Analysts Vinicius Canheu – Crédit Suisse Paulo Ferreira – Bradesco Vinicius Tsubone – UBS Antonio Carlos Vélez Braga Good afternoon to all of you. My name is Antonio Carlos Vélez Braga, Investor Relations Officer of Cemig. We’ll now start the transmission of our webcast and results of Cemig related to the First Quarter 2015 with the presence of Dr. Mauro Borges Lemos, Chief Executive Officer; Dr. Fabiano Maia Pereira, Chief Officer for Finance, Investor Relations and Dr. Luiz Fernando Rolla, Chief Institutional Relations and Communication Officer. This transmission is broadcast maybe follow-up by means of telephone 55-11-21-88-0155 or 55-11-21-88-0188, and also through our Web site. To start-up this presentation, we hand it over to our Chief Institutional Relations and Communication Officer, Dr. Luiz Fernando Rolla. Luiz Fernando Rolla Good afternoon to all. It’s always a renewed pleasure to conduct this video conference with you gentlemen and ladies for disclosing our quarterly results. Some 1.5 months ago we disclosed our last year’s results and this is the first quarter of this current office and administration and I invite you to read the disclaimer because we will touch on very strategic points here, our indicators were rather positive and they do reflect the strategy that has been adopted by current administration. Mauro, our CEO, what would you say, this first quarter of our management? Mauro Borges Lemos Good afternoon to all of you. The assessment we make is that in fact our results have been pretty positive, as made very clear from the point of view of net income EBITDA and net profits, our position is very solid and that’s what we have to present to you investors. We are highly pleased with these results and my personal commitment and of the entire executive board of Cemig is in the sense that we should pursue consolidate result for this year that will be true to the first good results in 2015. We will discuss the results in detail during our presentation. But to sum up what happened during this first quarter, we had a maximization of our results as a function of our trade policy that has been implemented for some time already and have brought up major results in addition to some very relevant factors happening in the first quarter and that not only impacted the quarter’s results but they always bring benefits into the future. One of them the consortium made up by Cemig and Light which won the Itaocara auction which had been dragging for over 10 years and we granted the concession for the next 30 years using these methods. Also the tariff adjustments occurred in April with general impact of 7% on our distribution business, this means transfer of costs that have been incurred over the past 12 months. In addition Aliança, our alliance, is bringing the first results with substantial accounting profit that we will discuss to you in detail in a few moments. That reflects the capacity of the company to restrict itself, to reorganize itself, having viewed as rather complicated project and we could make a very attractive design of this effort to our shareholders, yes, indeed you are, all right. This project we have been pursuing for a long time and now very successfully winning the auction and the competitor that would really go into this project brings a very positive result. We have a buildup of resources for this project. We are very optimistic about these results. I do believe also that this signal, very importantly that Cemig, while this is consortium made up of Cemig and Light which is an associated company to us, that signal that we are back to auction, that’s important because as long as these auctions are attractive and made feasible to gain returns to our associates, so the participation in greenfield projects for generation of Cemig is part of our DNA and if it’s part of our DNA and if we do that so patently we consider that this is a very important route to be pursued by the Group, we are convinced of that. We are strongly working on the formatting of these auctions, attracting interested investors and Federal Government and the Union of Brazil is interested in attracting such investors. We must work to make these auctions to be solid in bringing undisputable returns to investors and Cemig’s associates and shareholders. So this is our commitment and we are strongly pursuing this target, this goal and this auction includes public consultation and audit. On the one hand we are presenting our competence and will be the part of the Group to participate and on the other side the participation on the designing of the format of these auctions, they can become a long-term investment, this is our characteristic but we don’t work on short-term speculative power market, what we know and what we do is to enter partnerships for long-term projects and this auction perfectly reflects this idea, the auction good in itself also is a sign that our Board is mobilizing to make our Group evermore competitive into future auctions. We reduced and mitigated substantially the risk involved in the hydroelectric investment and project with investments made in recent years we got to the point that we are familiar with virtually all the aspects of the project and then we managed to reduce the risk in such a way that we’ll be able to ensure attractive returns to our shareholders. So this balance of risk and return in Itaocara case was important for the company. Yes, first there was an intense debate in house. We have been discussing this project for over 10 years if I’m not mistaken and we finally arrived at a design under which the return of this project to Cemig reaches two decimal figures and with the participation of the other managers and managing entities. Another important aspect of the first quarter early in April we could see the annual adjustment, common ordinary adjustment of tariff that’s just a transfer of costs incurred over the previous 12 months, this has mitigated a lot the risks of our operations, the regulatory body took on costs that were before shouldered by distributors and also future costs had reached a very high threshold and this ensures subsidies to low income consumers and also the purchase of additional power energy by the distributors. The cost of distribution therefore was stable, remained stable without any transfer of cost to consumers not even of inflation, this will get to the benefit of our consumers. Yes indeed this is a concern of ours, a commitment and we believe that in fact we should go for these tariffs that are affordable that can expand the capacity of our consumers to use the energy that’s very strong distance you’re taking, tariff adjustment included flags and included extraordinary adjustments because we had had non-ordinary aspects that would justify that, but in real fact in the longer run we see affordable tariffs as means to expand our consumer base and to make feasible economic growth of Brazil in contrast with most distributors in Brazil Cemig has cooperated industrial consumers with a heavy weight which we negotiate with both in the free market and regulated market and captive market. So this brings very differentiated portfolio, residential, consumer, commerce and industry consumers. This varied portfolio is one of the most important assets of Cemig and this is important for all consumers and this is the way we work anyway. I believe that we are in fact pretty much concerned with this huge effort we’re making to reduce cost and increase productivity in Cemig distribution sector; this is something that we should pursue further into the longer run. Unfortunately, this is not reflected yet in the first quarter, the increases are not 100% reflected in the first quarter but in the upcoming quarters we should see even higher impact on our revenue, positive impact that will also reflect on the results of Cemig distribution most of the costs that made up are CVA are now being transferred through the flags. Another important impact on our results was the recognition in the first quarter of the fair value as our President already mentioned as we had an alliance with valley measured mostly relevant project for Cemig and there is stockholding reorganization is bringing 735 million in accounting impact but it goes far beyond it, yes indeed. The other thing is our main drive to growth in generation; we have high levels of confidence in engineering and if you add to that private vehicle for growth, this brings us extreme robust structure to increase our capacity for generation in Brazil. We have seen already huge increases in development and now with this new vehicle we have all the ingredients for an ever wider participation in the power sector in Brazil for cash generation that’s generation of electricity does bring us predictability to our cash flow which is much to the satisfaction of our financial directories in it. Yes, positively in very short-term, we believe that if we already bring satisfactory results and payment of dividend to Cemig, I should remind you that our leverage is almost zero, so our capacity to growth is enormous. Another aspect that should be stressed here is that our partner is not just companion on our voyage, but it’s a long-term strategic partners namely Valley, it will be our partner in the growth of our alliance and it’s a major consumer of our power. So CVAs that are very much consolidated and brings a lot of insurance also guarantee for performance. These are two partners one look for the other. They get along very well with a long tradition of cooperation, mutual cooperation, and my colleagues here have had many opportunities to talk to them and we are mutually satisfied to see this alliance that in fact both on Valley and significant sites. This is a partnership that came to state that’s a perfect scenario Valley wins Cemig wins and all those who invest with us in this new resource will win as well. We have major concern with the sustainability of the company’s results not only from the point of view of finance and economy, but also the communities we serve so operating performance carried a standard these are major concerns and constant concerns of Cemig. It’s a corporate principle for us to watch for the three aspects of sustainability financial results respect for community views of resources into the future for the new generation and protection of environment. This is corporate principle for us and we have been recognized for that among the communities we work with and we are at par with the companies that have the highest spenders of concern in these aspects. So in this first part, we talked a little bit about our vision, our views on the results and what we should expect having view the wins of the first quarter and now we will provide more figures to view, the figures so far have been very positive, net income have grown 24% reflecting all that environment reflecting the strategy that has been adopted and this allowed for these results, we had seasonal effect and we are going along the same actions as other companies in the sector having view the reduction of risks, seasonal risks and we had this natural hedge by buying energy. This brings stability to our revenues and our future results, this is a guideline we are following up very closely despite the fact that the context was not too favorable, GSF was pretty low in this first period. We believe that efficiency in managing the trade, the commercialization having viewed the hydro prices the adverse hydrology and we adopted this hedge that was built accordingly and it was extremely relevant so that we could cross this dessert so to say 2015 which is extremely hard period for the electrical sector as all investors know, from the point view of hydrology and we could view that as some of these hedges and the commercialization is major highlight in these results and this will happen also in coming quarters. The strategy was very well developed and the results are there, so how we participate very significantly in the Brazilian market. Also the impact coming from the consolidation of Gasmig acquisition almost 100% of Gasmig is ours now, this reflects in the revenues with an additional R$426 million, as a result of incorporation of Gasmig. Operating expenses also grew from 50%, but our slide shows the reason for that that has to do with amount of energy purchased. This has been very high in recent years due to the dispatch of thermal plants the GSF is lower and this purchased electricity compounded through our hedge which is not necessarily a negative value although into a substantially increased the expenses and as a percentage terms as well, but it brought positive effect where aspects are pretty much under control even that Dr. Fabiano and nothing that would be a reason for concern, gas bought for reselling reflects the impact of the acquisition of 5% of Eletrobras, EBITDA showed an increase of some 22% and if our President is willing to explain to what happened to our EBITDA. We had a major performance 2.5 billion and that was an important indicator for the remainder of the year. Yet an increase of 22.3% as compared to the quarter in 2014. This was partially a result of our alliance within the other part comes from the management in commercialization and internal efficiency gain of the company. This still remain with the commitment to improve this result and this will be our pursuit during the rest of the year. One point it means our performance is still very positive in comparison with the remainder of the market, in addition if we add that to the measures we are about to discuss, this performance will be even better into the upcoming quarters. As a consequence of revenues and — or EBITDA 18% was the consolidated revenue or net income. It’s a little lower but it’s understandable that last year PLD or spot market had a very expensive price which has now turned in R$88 per megawatt hour in this first quarter. So we have to adjust that considering the gains from Aliança. Still a very positive result, yes one of the best results of this sector in this quarter, again demonstrating our constant pursuit for positive results. And it is good sign for the rest of the year, I have no doubt about it, this result in the first quarter was a very strong focus that our Board had in view and we wanted to achieve and we did achieve this very positive result, we will keep on working strongly to achieve consolidated results comparable with this first quarter, this is the favorite line for Dr. Fabiano that our debt profile consolidated value of R$11.9 billion, some indicators here will be commented on by Dr. Fabiano. As we look at the profile consolidated debt profile of Cemig, we listed as an observation that a good deal of this 2015 debt was rolled over but is not reflected here because debt was started in March. Capital cost of the company, of the debt has increased a little bit over recent months because the long-term interest rate has been increasing but as we see the leverage of the company in itself and we have all indicators under control and that allows us to look ahead with confidence to improve this profile. This will be a pursuit of ours this year and into the next years. It’s important highlight also that the debt although it’s indexed to PC and IPCA we have CDI and it is IPCA, we have a hedge for it and our index is IPCA. And our debt is determined by the Cemig which is the official interest rate — and if we consider these two factors we see an advantage for company of a scale such as Cemig GT also in a very positive position some R$6 billion in debt but the relationship between this and EBITDA is very favorable. We are very much concerned Dr. Fabiano to elongate that profile into the next years, it’s restructuring of this debt and we are doing that beginning in this 2015. Yeah we are looking at the possibility of reducing the debt volume at GT, Cemig GT, this is already in our pipeline and are also working on potentially that index to inflation. This brings more flexibility to the company and to help us drive even further. Distributors as well as Cemig D despite all the tight conditions in 2014 it is still at a very reasonable position in terms of debt profile, of course not all the hedging mechanism and protection mechanism is reflected here, the tariff flags adopted by the regulatory bodies. So we are still to absorb a little bit of this impact in the second quarter but in any event this performance is rather positive and predictable and with our strategy to restrict the debt we will elongate with stretch that for our distributor division, tariff revision and flags have reduced substantially our perception of risk. The perception of risk from our investors was looking at some risks to the cash flow of the companies from the point of view of investors last year. But with our measures we managed to reduce these risks and even so we adopted further measures for protecting our cash flow, restricting execution of our investment program in the first quarter we curved a few of our investors — investments rather is not to say that are not going to make those investments we will recover that over the rest of the year. But for the sake of protection of our cash flow we did that. And if you look at the figures for 2015 and the plan and the executed we restricted a little bit I think in the beginning of the year for regulatory tranquility but we did invest some 25% our plans, so if we look at business just the first water it’s well evenly distributed over the year as compared to last year and it’s a little lowering a bit but it has to do with difference between the two years. Last year, our investment program was pretty robust and in comparison with this year it looks like that there has been reduction that actually what happened was that investments in last year was outstanding. But these next slides bring a very positive indicators generation of cash is pretty positive even having due the pretty complicated situation we went through during the first semester as for context of the economy that reflects the hard work of the company over last month, we have kept track of that very closely and this you can see our capacity to generate cash to meet our commitment. We are rolled over some are part of the debt we liquidated matured debt and we still have good cash to go through the rest of the year without any much concern. Also, if you compare as far as step down markets are concerned if we see a very positive evolution by March we saw their negative performance but as tariff extraordinary tariff adjustment and flag the perception of investor improved pretty much and our shares valued pretty much above the average in the sector that Bovespa and for example still being built they did have also a very positive performance in the capital markets. These were the points that we wanted to bring to you. We’re now open for questions-and-answers and we are ready to approach any other points that may have not been looked upon our presentation. Question-and-Answer Session Operator [Operator Instructions]. Vinicius Canheu from Crédit Suisse. Vinicius Canheu I would like to know if you have any update on the core disputes concerning the three main hydro plants. Apparently there have been no news but we just saw that this has been brought back to the core agenda. Could you anticipate any further developments on that? Unidentified Company Representative What I could advance to you is that as planned we have we have started off our process for negotiating the three plans we defined together with the union — Brazilian union parameters for such negotiations personally evolved in the negotiation with the federal government and Eduardo appointed by our President to conduct negotiations with Cemig, on the part of Cemig I have been conducting dealings with the Minister personally myself and my perspective on that is very positive, I do believe that there are interests, mutual interests the federal government and state government and Cemig control by of course by the state ministers, there is common interest to get the solution where everybody will win, other things we took on the direction of the company, we have been saying that the market that we can transform this gain which look like it’s all or nothing type of gain to a win-win situation. In that direction we are following in the negotiations with the federal union. As you know negotiations of the scale require time, take time and you really need time to wrap up all the aspects not to leave any room for further litigation so that we can get to position where we’ll be comfortable that decision will be to the benefit that of the company. It’s a complex negotiation and that sense we have defined from the impact of this negotiation that the time variable shouldn’t be the most important variable, one solution this year as everybody knows is exceptionally restricted here as for water resources and this is an external factor that pervades little bit the process of seeking a negotiated solution. We know that we have knowledge that foreign market from beginning we’ve mentioned that — and we have no deadline or final date to define the end of negotiations. We believe that the more time — if we have a little more time, we can arrive at beneficial solution by the second semester this year that will be good for Brazil and for all concerned. Operator Our next question comes from Paulo Ferreira, Bradesco. Paulo Ferreira I would like to ask if there is any concern on the part of the company or the market in general as regards to leverage. One the perspective for distributing dividends in 2015 will it be 50% as before or will it be anything below that? Unidentified Company Representative I’ll request our financial officer to reply. Fabiano Maia Pereira First I would like to make it very clear that the commitment on the part of company remains strong, the statutory dividends are 50% of the profit. What we have done at this moment was just prudential move and last month assembly meeting approved 25% and that we reserve 25% for future dividend and this will be paid as soon as the scenario of uncertainties is overcome. To add a little bit to this, the issue of indebtedness as mentioned our conviction is that our indebtedness level is pretty low. If you look at all the relevant indicators it’s a fact that the distributor going through period of increased indebtedness, due to that happened last year and early this year, but with this new policy of our [translated] costs especially non-convertible costs and this will by the end of the year and improve substantially our performance. Operator [Operator Instructions]. Our next question comes from Vinicius from UBS. Vinicius Tsubone Perhaps you could give us more colorful description of what’s happened with Allianz? Are you going to focus on more known assets existing assets or what? Unidentified Company Representative Our strategy as we have commented during our presentation is to make it into our vehicle for growth in generation from mid to big Gemini and Greenfield project some of them already defined two turn our alliance into companies that will be much more have much more capacity than the initial 1,200 megawatt. This will enable accelerating this growth and our goal is to grow very strongly into the next five years in five years it will probably become one of the most important generating companies in the country. Operator [Operator Instructions]. We now close our Q&A session. I would like now to hand over the floor to Dr. Fernando Rolla for his final remarks. Luiz Fernando Rolla Before I would like to hand it over to our CEO I should remind you that on the 20th annual meeting with analysts in expressing the views, it’s a traditional event in the market and for Cemig I extend invitation to all of you if you can’t be present you can follow the event through the telecommunication media we will put at your disposal, we will discuss the strategy of Cemig for the next years. And now for final remarks and to close the meeting our Chief Executive Officer, Mauro Borges Lemos. Mauro Borges Lemos I would like to close this session by saying first that we restate firmly our commitment taken when we took office in this new administration. Our shareholders, our investors, our fundamental to us we will seek, consolidated results consistent with what we have already achieved in the first quarter and reaffirming the commitment is important to me and to us, and how do we plan to deliver these results that is always a question that we should revisit first we believe that competence Cemig’s competence as the company involved in generating transmission and distribution of energy involves major gains in operational synergy and then operating at low cost at these three specialized dimensions at Cemig is extremely important. And secondly we are working on a growth strategy of Cemig as a group. We today are a group relevant group we have private vehicles in dimensions that we consider the most significant for our growth involving generations, creating this private vehicle which is Allianz Energy with [Vali] and consolidation of Hanover as company generating renewable energy. Hanover is going to see that this recent operation with a Cemex Group aims at extending capacity to invest. We are not selling any of our assets. We are rather establishing long-term partnership with the leading U.S. company in renewables so that we can have assets for generation in Hanover. We have backlogs with PPAs already structured and auctions already done. We have already guarantee on long-term contracts and we want to speed up investments for cash generation by operating these assets that are now in our backlog. Our pipeline is of high quality and that’s what we want to press ahead. Our strategy is to have this financial instrument for speeding up our renewables. We are already a leading company in renewables in Brazil. We will go on with this with the participation of Cemig and Cemig’s Group in transmission. Our orientation is that our capacity in engineering should be added to this private vehicle which is tied, which will extend our participation in the transmission market of Brazil. And then operation and maintenance in transmission, we can operate at very low cost. So we must use our competence in engineering to press on with the growth of the factor in Brazil. As far as the distribution is concerned, we have Cemig distributor which holds the largest market of distribution in Brazil. This company is a major asset of ours and together with that we have Light as a private participant and we by that by means of these actions we will take important steps towards growing together, Cemig and Light. These are the instruments we have with a big capacity for synergy and this can be put at a service of further growth. This is commitment of the Board and we should deliver by the end of the year results to the shareholders that’s compatible to the size and scale of the company we lead. And as a public utility company we must also deliver affordable quality services. This is a commitment that we are restating at every opportunity and I do it again right now. These are not incomparable profits and returns are not incomparable with the public utility role of Cemig. On the contrary the more we deliver services affordable services, quality services, the more we would be able to grow. One side reinforces the other, quality affordable services means greater returns to our investors. So this strategic view will be reflected in our economic financial projection to be submitted on the 25th during our event. We will be transforming this strategic view into figures but also into results for the future. To wrap up our conference, I would like to thank you all for your attention. I should mention that our investors department, investor relations department are here and Mr. Fabio is here, you probably reserve him, offered questions for him and he is available 24×7 to you and share our strategy for relationship with investors. Thank you. Operator So the video webcast is now closed. We thank you for your participation and have a nice afternoon. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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