Cementos Pacasmayo Saa Q2 FY2021 Earnings Call

Good day, everyone, and welcome to the Cementos Pacasmayo Second Quarter 2021 Earnings Conference Call. At this time, I am pleased to hand it over to your host, Claudia Bustamante. Claudia, please proceed.

Thank you, operator. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer, and Mr. Manuel Ferreyros, our Chief Financial Officer. Mr. Nadal will begin our call with an overview of the quarter, focusing primarily on our strategic outlook for the short term and medium term. Mr. Ferreyros will then follow with additional commentary on our financial results. We'll then turn the call over to your questions. Please note that this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, strength, and other matters that are not historical facts and are therefore subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's regulatory filings. With that, I'd now like to turn the call over to Mr. Humberto Nadal.

Thank you, Claudia. Welcome, everyone, to today's conference call and thank you for joining us. This quarter, Cementos volume continued strong despite political uncertainty, proving our resiliency once again. After a very tired runoff for the entire election on June 6, yesterday, Mr. Castillo was proclaimed the next President of the country. There are claims of fraud from Keiko Fujimori and her supporters, which have brought people to the streets to protest against the way the elections were conducted. On the other hand, Mr. Castillo showed mixed signals of moderation and radicalization, so there's no clarity on how the next government will conduct itself. Despite this uncertainty, we are confident that cement sales will continue strong this year, mainly because our current customer base is not very dependent on macro factors. On the one hand, the self-construction segment continues to be our most relevant source of income and has historically had minimal correlation with high-level macro factors at least in the short term. On the other hand, the demand coming from the public sector is primarily related to the government-to-government agreement between Peru and the UK for reconstruction post-El Niño, and some from government bodies established to offset the effects of COVID-19. We strongly and firmly believe that neither of these policies should be affected by changes in government. They are well underway and have estimated financing. Although sales of cement have been and continue to be the main part of our goal, we're very pleased with the results of concrete and precast. As we mentioned last quarter, sales of light precast materials such as precast blocks have substantially increased over the past year. Although these are more representative of our sales, the relative performance illustrates how successful our overall sales strategy is at providing construction solutions that meet market needs. We have generated a new customer base, mainly bringing the sales of precast blocks to housing projects. We believe this strategy will bring significant increases in sales volume, taking us one step closer to our long-term goals. This quarter, we are also very proud of Silver Effie, awarded in the brand experience category for construyexperto.pe, an online platform created to redesign the foreman's experience with training and tools that enhance their efficiency. As we've seen in previous quarters, we are convinced that our strength during these trying times comes from our ability to reinvent ourselves, staying one step ahead in terms of digitalization and demonstrating how we can share our experience with more of our customers. This award again recognizes these efforts. Although several things are undoubtedly important and deserve absolute recognition for business continuity, solid results would not be possible if we do not view our business in an integrated manner. This quarter, we have obtained 23 recognitions that are highly relevant concerning stability and business continuity. First, this year, we have improved 37 procedures in the Merco Talento Perú initiative, which aims to identify the 100 most attractive companies to work for in our country. Clearly, we have seen significant progress, showcasing our commitment to enhancing human capital management, and we will strive to improve in this ranking every year. Finally, and very importantly, this year we have once again obtained the award for social responsible company, BCR, recognizing us for maintaining high standards in ESG parameters aligned with the Global Reporting Initiative on Sustainable Development Goals. We are particularly proud this year to receive special recognition in ethics and integrity categories, which are fundamental values for us. Although 2021 is proving to be a challenging year once again, we have continued to deliver substantial increases in cement, concrete, and precast shipments as a result of our constant effort to innovate, expand our market, satisfy new niches, and remain absolutely client-focused. I will now turn over to Manuel Ferreyros for financial comments. Manuel?

Thank you, Humberto. Good morning, everyone. Second quarter 2021 revenues were $449 million, a 285.7% increase compared to the same period last year, mainly due to the halting of operations during most of the second quarter of 2020, as well as an increase in cement shipments. However, even when comparing this quarter's revenues to those from the second quarter of 2019, there is still a significant increase of 37%. Gross profit increased substantially this quarter compared to the second quarter of 2020, primarily due to almost no gross profit last year because of the halt in operations. There was no dilution of fixed costs. Consolidated EBITDA was $90 million in the second quarter of 2021, representing a significant increase compared to the second quarter of 2018 when EBITDA was negative, for the aforementioned reasons. We expect an important increase in EBITDA for the rest of the year. During the six months of 2021, revenues increased 119% and gross profit increased 116% compared to the same period of 2020 primarily due to increased sales and the previous halt in operations from mid-March to mid-May. Turning to operating expenses, administrative expenses for the second quarter increased 41.7% compared to the same period last year in line with increased sales, but mainly due to substantial reductions in expenses during the lockdown period in 2020, as well as an increase in workers' profit share resulting from improved results. Selling expenses in the second quarter increased 71.1% compared to the second quarter of last year, mainly due to the aforementioned decrease in expenses during 2020 and increased profit share. During the first six months of 2021, administrative expenses increased 28% and selling expenses rose 29% compared to the same period last year primarily due to increases in sales as well as savings implemented during the first half of 2020, mitigating the negative effects of the halted operations. Moving on to our different segments, cement, concrete, and precast sales increased by 296.5% in the second quarter compared to the same period in 2020, primarily due to the halt in operations during the second quarter of 2020 and increased sales of cement. Gross margins increased by 26.4 percentage points this quarter compared to the same period last year, mainly due to sustained fixed costs during the second quarter of 2020 when virtually no selling occurred. During the first six months of 2021, sales of cement, concrete, and precast increased 120.1%, and gross margins improved by 5.1 percentage points, primarily due to increased sales and the halt in commercialization during the second quarter of 2020. Sales of cement increased 261% in the second quarter of 2021 compared to the second quarter of 2020, primarily attributable to the halt in commercial operations during that time, as well as increased shipments of bagged cement. Gross margin improved by 19.2 percentage points, mainly due to the negative effects from costs during the halt in operations in the second quarter of 2020. During the first six months of 2021, sales of cement increased 121.8%, and gross margins improved by 2.1 percentage points compared to the first half of 2020, mainly owing to the production and commercialization halt mentioned earlier. In the second quarter of 2021, concrete and paver sales increased substantially, as they were only $3.3 million in the second quarter of last year owing to a complete halt in operations. Gross margins surged by 273.5 percentage points because of the substantial costs prior that could not be reviewed during last year. Similarly, sales of concrete and pavers for the first six months increased 132%, with gross margins improving by 20.2 percentage points compared to the same period last year. Precast sales in the second quarter increased by 347.4% compared to the second quarter of 2020, mainly due to the halt in operations; however, when compared to the first quarter of 2021, we see a positive upward trend continuing, as sales increased 33.3% quarter-on-quarter. Gross margin improved by 94.8 percentage points, mainly due to the negative margin during the second quarter of 2020 because of fixed costs without sales during that quarter. Similarly, during the first six months, precast sales increased by 31.6%, and gross margins increased by 20 percentage points compared to the same period last year. In terms of our debt, our debt to EBITDA ratio has come down to 1.9x. Importantly, we have quickly recovered low indebtedness levels following the most challenging times. To summarize, this quarter shows solid performance in volume despite political uncertainty. We are convinced of the financial and operational strength of our company and expect to continue delivering solid results in the upcoming quarters. We will now open the call to questions, operator.

Our first question today comes from an unidentified speaker.

Thank you, gentlemen, for the call. I have one question. I was wondering if margins are being affected by clinker imports? If that is the case, how much does a ton of imported clinker cost?

Yes, of course. You have to realize that we mentioned a year and a half ago that we were coming close to finalizing clinker capacity facilitation for importing. In my opinion, we have enough volume that makes sense for being the new plant. Even if there are fixed margins, we are still going to earn more in terms of soles or dollars. The thing is the margin will go down because imported clinker is more expensive. Typically, it is around $20 more, but it all depends on the exchange rate and freight costs.

Okay, and can we expect these lower margins to remain for the rest of the year? Should they gradually go up?

I think, for the first part of the year, yes. We used an important component of clinker because we had to perform maintenance to our Pacasmayo accounting unit. This should result in a lower rate in the second quarter of the year. Like I said, it all depends on the exchange rate and the freight rates. So yes, margins could remain the same or increase slightly.

We have one more question from Andrés Soto with Santander.

Perfect. Good morning, Humberto, Manuel, and Claudia. Thank you for the presentation. My question is, in your earnings release, you mentioned political uncertainty as a cause for slowdown in volumes in the second quarter compared to the first quarter of this year. I would like to understand what you are seeing at this point. Do you believe that now that Pedro Castillo has been confirmed as President, we can expect an improvement in those projects? Or do you expect political uncertainty to persist? If so, what will you need to hear from the Castillo administration for you or your clients to become more constructive on the political outlook?

Hello, Andrés, and thank you for the question. As I mentioned in my opening remarks, I believe our self-builders and government-to-government agreements have little to do with the macroeconomic fundamentals. They are expecting many things to be announced from President Castillo. I believe the growth dynamics remain strong. When we observe our daily dispatches, we notice a very strong rate and we think we will certainly see a record year in demand. For the time being, and this is my personal interpretation, people are not waiting for announcements. They are continuing their work as they did throughout the COVID-19 crisis, which is part of Peru's robust economy.

There appear to be no further questions at this time; we'll turn the floor back to Mr. Humberto Nadal for closing remarks. Please go ahead, sir.

Thank you very much. In summary, Pacasmayo has been operating for 64 years, which is remarkable. This is wonderful in such a complex country like Peru. We have experienced many types of governments, ranging from left, center, and right, and we will not only prevail but accumulate valuable experience from each. We see every new chapter as an opportunity to learn and improve. We are ready to face the challenges that may arise due to our confidence in our solid fundamentals, integrity, and adaptability, leading to a promising and sustainable future. We remain extremely optimistic about our company and our country's future. Thank you for your interest in our company. As always, Manuel, Claudia, and I are here for any further questions. Thank you very much. Have a great day and please stay safe.

Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time and have a great day.