Grupo Argos S.A. (GRUPOARGOS) Earnings Call Transcript & Summary

Good morning to you all. I want to thank you for your presence today. It's a very important day for us. This page will be focused on the alliance between Grupo Argos and Macquarie Asset Management for development of road concessions in the Andean region. With me, we have Jorge Mario Velasquez, President of Grupo Argos; Alejandro Piedrahita, Vice President of Finances and Corporate Strategy of Grupo Argos; Rafael Olivella, Vice President of Talent and Corporate Matters for Grupo Argos; Felipe Aristizabal, Strategy Manager and M&A; Mauricio Ossa, President of Odinsa; Pablo Arroyave Rodale, President of Corporate Finance for Odinsa; Gustavo Ordoñez, Vice President of Road Concessions for Odinsa; and Eduardo Bettin, Vice President of Legal Matters -- Institutional Matters in Odinsa. I want to remind you that this teleconference is being translated into English simultaneously. And in addition, we have also placed available in our presentation that will be going -- we'll be going over on our website. That way, you can access the reports, presentations and afterwards in the section corporate presentations. I invite you now to move on to Slide #3, so we can start the teleconference, and I want to give the word Jorge Mario Velasquez, President of Grupo Argos.

Thank you, Natalia. Thank you, all those that are with us today. Our colleagues from Grupo Argos and Odinsa, good morning to you all, and thank you for being with us. As we announced yesterday, Odinsa and Macquarie Asset Management stand an alliance for the creation of an investment platform that will be administrating the road assets that Odinsa has in Colombia, in which we have a concession Pacifico 2, Oriente Tunnel, Autopistas del Café and Meta, which consolidated value reaches COP 4.3 trillion. This new platform consolidates as one of the most important in the country and in the region, and we'll keep exploring additional opportunities in value creation through the development of new initiatives and projects that might demand jointly around COP 4.5 trillion, which is a very relevant investment in terms of the infrastructure for Colombia and for the region. First, the creation of this platform. We will constitute a capital fund. It's going to be a private capital fund where Odinsa would be the professional manager, which economic rights will be distributed 50% for Odinsa and 50% for Macquarie. And this last institution, besides the contributed capital, will also contribute with a broad experience in more than 50 road [ grids ] around the world, strengthening processes and services that will be rendering in our current and future assets. Now I want to share with you all a little bit about the strategic rationale behind the pillars of this transformation, a little bit about our history -- our strategic history in the last years for Grupo Argos and how this transaction fits in the long-term view under the strategy we follow. So I will begin by sharing certain reflections around the pillars of our transaction. The announcement represents, as Natalia said, a very important milestone in the consolidation of Grupo Argos strategy. And I'd like to start by introducing the 4 main strategic elements that we define within the company for the execution of this new alliance. First of all, I want to highlight the strengthening of Grupo Argos through Odinsa in its role as infrastructure manager in order to achieve the attraction of global institutional capital -- first level global institutional capital and keep on investing in projects that attend the needs and opportunities that the region presents in terms of infrastructure. It's because of this that the platform will be operated under a private capital fund that will be administrated by the Argos business group, which will be remunerated via administration concessions and asymmetric performances. From another side, the constituted platform under this exercise will service a vehicle in order to empower the growth. And thanks to the affiliation of Macquarie, we'll be able to accelerate our investment plan, while we improve our profitability profile within the road concession business. Both business partners share the same profitable growth vision, and we have a very strong emphasis around sustainability, which will help us in the consolidation process for this platform as one -- as the main vehicles in order to calculate these growth opportunities that we find in Colombia and in the Andean region. In addition, this transaction is aligned with the strategic objectives that Grupo Argos follows in terms of properly remunerating its capital. As we'll be seeing further on in a bit more detail, the creation of this platform as well as the affiliation of MAM will allow us to materialize an internal return rate of that invested capital close to 33% yearly since 2015 until today. It's a year where we incorporated several of these assets through the acquisition that we did in Odinsa. Lastly, I wanted to highlight the value of partnering with first-level global players MAM. And actually, this business partner is going to be the main asset infrastructure asset administration in the world, administrating close to $450 billion, from which $107 billion are exclusively dedicated to the infrastructure business. Yesterday, we were speaking, this was 1.5x more than the Colombian GDP. The assets that Macquarie administrates are 1.5x larger than Colombian GDP. So I just wanted to go briefly over the recent history and the strategy that we have followed within Grupo Argos in the following slide. We can see this recap based on the main milestones of our main -- our recent history. All of them are related and framed under the strategic vision of the company follows, keeps consolidating itself with this example, of this alliance in the road concessions, road constructions. Since the spin-off of the noncement assets back in 2012, Grupo Argos has consolidated as an important base of alternative assets focused in the infrastructure sector. The experience through more than 85 years in the cement business operation allowed us to consolidate in less than 15 years a very important asset base in the road infrastructure segments, airport infrastructure, electric generation, electric transmission, electric distribution, energy commercialization, real estate and ports. Within this main milestones, we, first of all, want to highlight flying back in time the purchase of Compas. It was a support platform that came from the spinoff of the grain ports -- sorry, the cement ports that didn't have any more direct operations within. And Grupo Argos operated and developed with a business partner in order to create a logistics network under Compas brand. And 5 years after was disinvested in order to reach internal return rate higher than 26% here. We started in the energy business back in 2008 with the acquisition of Colinversiones in its moment. This was -- it was a holding company accounted with different types of assets such as hotel, industrial and energy assets between others. From Grupo Argos, we decided to reorganize this portfolio and focus it towards the energy sector. This was a process that in 2012 became stronger with the birth of Celsia. That's the current energy company within the group. Afterwards and with the end of strengthening this business line, we acquired in 2019, this has actually been one of our more recent milestone, the distribution and operation of Energia del Tolima. We also focused on nonrenewable conventional energies. We disinvested also in a thermal plant in Termoflores in order to reach a much more balanced energy metrics. And we organized the company in order to enable Epsa's larger growth. That's known as Celsia Colombia nowadays. And recently, we closed with Cubico, as an institutional investor -- international institutional investor in order to leverage the growth and profitability through a platform created for energy transformation and another platform created for solar energy generation or probably wind generation in the future. Now this business comes to life. That's the profitability of Celsia as a manager of these assets, together with the strategic international business partner that accelerated this growth. This model in a certain way, as what we've seen further on, broadens and comes into a reality today with the operations that we are doing with Macquarie. So real estate business, we account with assets to build a private capital fund that was known as Pactia. This was in 2016. We also teamed up with builder and developer of the city. And we also affiliated Protección in order to leverage the growth and profitability of the fund as managers -- as equal managers for. And lastly, for the transportation infrastructure segment, we defined a focus on the road and airport concessions. And we started making this true with the purchase of Odinsa in the Colombian Stock Exchange in 2015. Back in those days, Odinsa's portfolio was disarticulated and was very diversified. It had different types of investments in ports, energy, minority participations in road and airport concessions. After the purchase of Odinsa, Grupo Argos decided to focus this transportation infrastructure portfolio, disinvesting in assets that were not associated to the strategy, acquiring control positions in more strategic assets. Between others, I would like to highlight the purchase of -- the majority participation purchase in Pacifico 2 that we -- the one that we performed also in Eldorado Airport, the acquisition of Oriente Tunnel, the consolidation of control of Autopistas del Nordeste and Boulevard Turístico del Atlántico in the Dominican Republic in between other several strategic operations. So with this reorganization and strengthening process in terms of airport and road concessions, we signed this agreement with Macquarie that becomes a fundamental milestone in the company's strategy, and that allows us to conform a road concession platform that attracts institutional capital -- first-level institutional capital and that will allow to potentialize and accelerate the future growth of the organization. All these instances are a proof of the management transformation and value creation capacity supported by this platform and supported by relevant business partners that contribute with capacity, not just capital. Moving on to Slide #7. We want to present that according to our judgment, it has been the recipe of Grupo Argos in order to create, transform and consolidate successful asset platforms around the infrastructure world. During the last 10 years, we have created verticals similar to the ones that we are mentioning today around certain businesses, following closely a very strategic line that incorporates the following elements that I would like to highlight because this was a very reflective, rigorous and structural process in order to reach to these transactions that we have announced, including today's. First of all, we identify business opportunities. Second, we define the strategic focus of the portfolio, which was the reorganization required by this portfolio according to this focus that we have. Third, we consolidated a controlling participation in important assets and fundamental assets within the sector. Fourth, we have the administration of these assets under defined cultural framework, such as Grupo Argos' culture. Fifth, the operational strengthening based on maximizing the profitability and improvement of service -- products and services that are being offered. And sixth, the affiliation of a business partner once we've organized this portfolio in order to accelerate our growth. I would also like to highlight this last point, that's the one that brings us all together in this call, the affiliation of a business partner and the materialization of Grupo Argos vision being an infrastructure manager, leader within the region in order to administrate these assets, a contact with a broad asset base with a very ambitious pipeline in our growth, in our businesses that we want to link with the affiliation of this new business partner. That besides contributing with capital, also contribute with their knowledge and besides that they are also open to remunerate the growth in capital of this organization. We have a historic opportunity of being -- that link between the abundancy of global liquidity and the infrastructure means that the region has. And we've been preparing ourselves to approach this challenge with the best in the region and leverage with the proven capacities that we have within our human team -- coordinated and committed human group for this purpose. Now I want to invite you to go over on Slide #8 on that presentation you're following, the evidence of the transactional structure and some of its main characteristics. In the first moment -- because there are several moments in this execution. The first moment, road concessions and project pipelines, firm Odinsa will be contributed to a private capital fund where Odinsa will keep a participation over those economic rights of a 50%. Macquarie Asset Management will have the other 50%. Odinsa and Grupo Argos will administrate these assets. And for this management, there would be an administration commission that will be recognized. In addition, there is going to be a performance commission component that the platform will pay to Odinsa after reaching a certain objective profitability levels. After exceeding the objective profitability, Odinsa under its manager role will receive an asymmetric compensation that will allow and reward a successful task in asset administration, accelerating the profitability in an asymmetric way over the capital structure that the organization has done. As we previously mentioned, this platform has certain growth ambitions that are relevant in which the initial commitment of the business partners is concentrated in the materialization of the projects that we have within our pipeline as well as in the interest of consolidating through M&As controlled position or co-controlled positions in new road concessions -- road concession assets in Colombia, Peru and Chile. Now I want to invite you to move on to Slide #10. We will be able to look at the detail that we have briefly mentioned about the main milestones of Grupo Argos investment in the road concessions segment. That begins with Odinsa acquisition between 2015 and 2016 and proceeds with a series of transformations in order to reorganize and optimize the capital structure. Currently, Odinsa's portfolio has a consolidated value of COP 4.3 trillion. And this constituted platform will seek to double at least this value with the execution of a certain investment pipeline that currently exceeds COP 4.5 trillion. It's also important to mention that even though the consolidated value of Odinsa reaches COP 4.3 trillion, this rate transaction in terms of equity participations for Odinsa is around COP 1 trillion given that we need to consider the debt that each asset has and the participation of its business partners in such. This transaction added to the distribution to shareholders that have been made over this asset since 2015 represent, as I previously mentioned, an internal return rate -- annual internal return rate of 33%. In the last 6 years, we have invested COP 984 billion in Odinsa assets. And the same assets have distributed COP 863 billion between dividends and cash at operations. In other words, the assets by themselves have returned almost 90% of the invested capital in just 6 years and still keep a value of COP 1 trillion. From this [ permanent ] value at the moment of the closure with Macquarie Asset Management will generate a payment of COP 500 billion for 50% we will keep, and the other 50% for the same value. So in summary, the net economic value of the generated investments up-to-date exceed COP 880 billion, even these are higher if we consider the present value of the commissions that we'll be receiving as remuneration of management and of that intellectual capital that I have mentioned before. Before closing and opening it up to questions, that your queries that you might have, I want to highlight once again the importance of closing this alliance with the business partners such as Macquarie that not just shares our integral vision of value generation and sustainability in the long term but will also bring lots of experience to the operation and expansion of this business. With a global presence of more than $400 billion under administrative assets, Macquarie is the main infrastructure administrator in the world, employs more than 280,000 contractors within its assets, mobilizes more than 1 million vehicles daily in its roads and has important investments in other global infrastructure sectors. We look at this with a great optimism, this new alliance that will lead the development of the region. With your trust, we'll keep on driving the private sector as an essential agent in the shared value generation through employment opportunities, economy dynamization, construction of solutions that can contribute to improving the life of millions of people. This operation is also a proof of trust in the organization in Grupo Argos in its policies, in its practices, in its capacities, but it's also a vote of trust in long term of the country and the opportunities that come from in this industry, not just in Colombia, but within the region. I want to thank you once again for being with us today. And as Natalia mentioned earlier, we are enthusiastic and we are hopeful in the capacity that this business has in order to accelerate the presence of Grupo Argos in the concession business. Because of this, I want to give the word to Natalia so we could listen to your doubts, questions or queries. So we're more than open to any comments or questions or queries or doubts you might have.

Thank you, Jorge, for your presentation. Here, we have several questions. [Operator Instructions] And I will be moderating this. So we have [ Carlos Giraldo ], asking if we could give them a bit of information about the corporate government agreements in terms of the minority investors of Odinsa's investments. They want to know how the minority shareholders will be affected by this.

Okay. So I could give a mouth opener. And afterwards, I could give the word to Odinsa's team who could drill down in a bit more detail. So as was mentioned in the call, the restructuring of this capital fund has 2 business partners, but the contribution made by Odinsa is its participation in each one of the assets. So when Odinsa, and let me give an example, owns 78% or 80% of Pacifico 2 and the Odinsa's partner has 20%, is contributed to the private capital fund, so this participation, this means that 80% of Pacifico 2. So the economic rights and commitments of the project specifically speaking about Pacifico 2 in this example I'm saying, keep the same according to the conditions as simply. The participation of this equity percentage, in this case, 80% enters into a private capital fund that has 2 business partners, Macquarie and Odinsa. So it replaces Odinsa as 80% owner as the private capital owner. But besides this, there's no changes within minority shareholders. And I would actually say that for minority shareholders, this is a collateral not just in terms of how solid we are, but also in terms of best practice opportunities that we'll have when Macquarie comes and becomes a player within this creation.

Just wanted to complement -- just complementing, Jorge. Yesterday, within the agreements that we signed, we have an investment agreement. That's the one that relate -- Odinsa's relation in its quality of investor in this capital fund as well as from Macquarie. But as well as Odinsa as a manager of that private capital fund and its quality of manager, Odinsa is the one that will keep making decisions around the share future within its governance units. So to be clear, it will be Odinsa who will determine who are those that will represent them within the different boards of the concessions. Question specifically speaks about Oriente Tunnel. This also applies to Pacifico 2, out to Pacifico 3 and Malla Vial del Meta. And Odinsa, under the quality of manager would do so consulting a leading team that's the Investment Committee. The Investment Committee will have 2 persons from Odinsa, 2 persons from Macquarie and a fifth individual with -- as independent. So to round up the question, in terms of concessions, there shouldn't be any direct effect of that new business parter we're bringing in to the platform. The changes within the governance of concessions will come from the decisions that Odinsa makes instructed by this Investment Committee.

Well, thank you, Pablo. We have a series of questions coming from analysts. I'll try to group them, but all of them have the same -- and let me start by questions as an what's going to be the use of the resources coming from the partial cash out from that road concession business?

Well, this business for Odinsa implies receiving the amount of money that was Jorge was mentioning earlier, but at the same time, implies renouncing to 50% of that flows coming from the equity that will be granted before the transaction, dividends even coming from this. So given this, Odinsa's capital structure needs to be modified in such a way that the debt that Odinsa supports is aligned with this new equity flow that's coming in. So mainly the use of the resources coming from this transaction will be used to -- as amortization or for debt payment of Odinsa in order to have a capital structure that's coherent with that new flow -- equity flow that we'll be having.

Perfect. Here's another question from Daniel. He asked if we could give him more detail about this 33% of the road assets? And what's the profitability -- deleverage profitability of the concessions?

Let me give the word to Felipe.

Yes. First of all, Daniel and everyone that's listening to the presentation that we'll be sharing, you'll find the detail of the internal return that we are mentioning. I would say that further than this number, further than this 33%, what we're doing in this transaction is performing a profitability part in cash and part the marketing portfolio for around COP 100 billion. It has to do with the assets. It have to do with the perimeter of this operation.

Well, thank you, Felipe. Just wanted to remind you all that presentation that you have, there's attachments, where you will be able to see how the internal return rate was calculated. We're asked what's going to be the cost of the transactions for the LPs? And what -- and variable commissions, what do they depend on? And we're also asked what's the percentage of that variable commission, if we could speak a bit more about this.

Yes. Answering the first question, administration commission represents initially a bit more than 1% of the assets administrated by the platform. And reference to the performance commissions, what we have established is that once we reach certain returns over the assets of the platform, Odinsa will have the right to receive certain distributions that are higher than their economic participation within the platform. So it's via these 2 mechanisms, periodic administration commissions plus the performance commissions after reaching a certain thresholds is when we get the remuneration.

Why don't we specify the thresholds -- the asymmetry, Felipe.

The return rates that we have established, that we have estimated are of 10%. And once we reach these levels, Odinsa has right to receive 100% -- what equals to 120% of its participation within the fund. In this moment, initially, Odinsa's participation is 50%. And if we would keep that participation in time, Odinsa, having a 50% participation would have right to 60% of distribution of the assets that might reach this return.

Daniel asks and it seems that Grupo Argos strategy is going towards becoming an asset manager. What additional steps do you see towards the future if you really want to become an asset manager?

Yes, let me take this question. Thank you. Daniel, for the question. First thing I'd say that the business composition of Grupo Argos has 2 main blocks, a very relevant participation in industrial business such the cement businesses that has an internationalization strategy, with time has become more focused on construction material that mainly in the North American market. And it's from here where we derived 55% of our revenue. There's a huge opportunity growth from strategic architect point of view. So that industrial segment deserves a particular chapter because of the dynamics of this business. When you look at the rest of the assets that we have within our portfolio, the assets that the group has today through its different society structures are assets related with infrastructure. For example, roads in this case, such as airports, such as real estate, such as energy generation and such as transmission and distribution. And this last 5, there's a common denominator, which is asset class, assets in terms of infrastructure that have a different intensity in terms of its regional platform. One of the clear signals that we are developing and that we have been implementing for some years now, as I previously mentioned, is the structuring of roads such as Pactia that's a private capital fund or the partnership with Cubico. It's focused on energy distribution at a lower level but also in power generation and more specifically on roads. But we are seeing that there's a great value within the management capacity and within the intellectual capacity and the capacity of value construction that this organization has. And when they come together as a bridge and connector, abundant capital access and attracting players that are ready to match these needs with the capital in order to bring together the infrastructure opportunities that we have in Latin America, we believe that there's a very interesting and important path to follow. And besides this, it makes lots of sense due to the capital cost that we are accessing, it makes lots of sense due to the remuneration of the intellectual capital. But besides that, as Felipe explained, because of the promote mechanisms within the asset management where we have break holdings, profit -- break holdings that we are sure that we can generate. So for the shareholders of Grupo Argos under that path as investment holding in a strategic architect in its businesses, this mechanism has lots of sense. So we do see a very interesting path in expanding the profitability of return for investors through global capitals and adequately remunerate the management capacity of Grupo Argos teams and directly in the holding or in the energy real estate or concession businesses.

Thank you, Jorge. We're asked, what's the geographical scope, but more specifically sectorial scope, is it just road or do we include any other infrastructure projects?

Mauricio, this would be a question for you.

Thank you, Jorge. The geographic reach that we have in this association is Colombia, Peru and Chile, and specifically for roads. And of the stages so that we work on, structuring, construction, operation, maintenance are eventually opportunities in the secondary market.

We've also been asked if we have considered declaring extraordinary dividends. I guess we already spoke about the use of proceeds, but I don't know if you want to broaden this topic a bit more, speak a bit more about this.

I would say Natalia that, yes, with Pablo's explanation, this would be clear enough, we are not thinking of that path yet.

Perfect. We also have the question, when are we expecting to receive economic payments or has to do with the closure and authorization?

But let me give the word to Eduardo. Eduardo, if you like to step in and speak a little bit about the schedule that we have upfront.

Well, thank you, Jorge. The idea is that after signing this document, we need to comply with a series of conditions. These conditions are in terms of authorities such as [ ARNI ], such as the financial superintendency, industry and commerce superintendency, also shareholders assemblies, bondholders. So it's long paperwork. We are thinking that it will take about 6 months.

We are being asked for the new projects that society will be presenting. Would we do this by ourselves? Or would we be looking for additional business partners?

Mauricio?

Thank you, Jorge. This platform has been structured where we created a fund, where we have 50% us and 50% Macquarie, and we are the professional manager in charge of managing of this, has the possibility of incorporating certain shareholders, a third party and has been a specific project. So this would allow us to add competencies or capacities in case of needing so or in the case of the revision we do of the Investment Committee. This is an org that Pablo already discussed. So there is a possibility in terms of the assets.

Thank you, Mauricio. We're also being asked if we could give them a bit more information of hurdle rate for the performance fee. And how was the valuation process for the projects in terms of participations within the vehicle?

Pablo, would you like to take this?

Well, as we were mentioning this, it's 10% for the effect of calculating the promote. And in terms of the question of the valuation, well, the exercise that we developed was a valuation due to free cash flow towards the shareholders. So for each of these projects, we made an estimation of other distributions that would be done in time. And then based on these values was that we determined the intrinsic value of each one of these participations.