Cementos Pacasmayo Saa Q4 FY2022 Earnings Call

Good day, everyone, and welcome to the Cementos Pacasmayo Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Claudia Bustamante. Ma'am, the floor is yours.

Thank you, Matthew. 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 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, trends 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 today. This quarter, we continue to focus on our strategy, which has led us to deliver outstanding results. During 2022, we achieved over 9% growth in revenues and a similar level of growth in EBITDA year-over-year. Moreover, our profit for the year increased a substantial 15.4%. This is especially relevant considering that 2021 was already an all-time record year. We are convinced that these levels of profitability are possible because of our focus on three main pillars: sustainability, digital transformation and innovation. We will continue to focus on these aspects to deliver the best possible results, especially to the staff in uncertain times. As we have mentioned before, operating sustainably at our core is key for our company's future and to fulfill our purpose. On the environmental front, we have signed the Peru roadmap to net zero, committing ourselves to implement the necessary actions as an industry to reach net emissions of 520 kilograms of CO2 per return on cement by 2030. To achieve this, we need to commit ourselves to working on two fronts: first, by promoting the regulatory framework that allows a minimum of 12% coprocessing; and secondly, and most importantly, by continuing the reduction of our clinker factor with an industry average of 70%. On this last issue, even though our clinker factor of 73% is already below the natural average of 76%, we are working hard on continuing this reduction. The cement and concrete results center finance completed by Pacasmayo has already worked on a cement that at the lab level can have a clinker factor of under 55%. We expect to have this cement ready for market in 2023. On the social front, I'd like to briefly mention that our procedure is very much aligned with our purpose. During this year, we began with a pilot to provide improved lending conditions to 935 minutes of the area of influence. As you may know, many of the houses in the poor areas in Peru do not have proper floors. These floors are sources of infection with parasites, bacteria, and insects causing respiratory diseases, anemia, among others. This project aims to provide them with cement for their floors and to build together a better home. We look forward and are very excited to scale this project in the near future to be able to improve the lives of more people. Moving on to digital transformation. For the past couple of years, we have been working on enhancing our business model through digitalization. We've developed digital tools for our different clients and stakeholders. We are developing our own marketplace to bring together construction companies, hardware stores and the final customer, incorporating a new value proposition. For construction companies, we remain very focused on serving our digital tools that aim to improve connectivity with our clients, maximizing efficiency in the project's management and substantially increasing the user experience. Finally, for retail consumers, we have enhanced MundexPerto, our ecosystem of vital solutions. For us, adapting very quickly to new technologies in order to respond to the new needs of the format builders, consumers and clients is essential. MundexPerto is a platform designed to promote the professional development of our format through virtual tools as well as training and custom-made consultations. MundexPerto focused on hardware stores has a wide variety of selling opportunities, inventory control tools, order stocker benefits, and promotions. We will continue to enhance our current tools and develop new ones that support and maximize our company's strategy and future growth. Finally, we are convinced that innovation is absolutely key to supporting our vision of becoming a leading provider of building solutions, contributing to the progress and development of our country. To achieve our 2025 goal of deriving 25% of our revenues from nontraditional solutions we are innovating in both new products and services. We continue to seek innovation in our products to develop building solutions that are fit for infrastructure products since this is an area that is still lacking in Peru. We also want to extend the solutions to the self-construction segment since it remains as the largest proportion of our income. During 2022, we started developing IU, a platform that helps small retail consumers save money to achieve the financing needed for construction projects. We believe that by staying close to our clients, being flexible, and adapting quickly, we will always be able to anticipate their needs and continue creating and selling value. I will now turn the call over to Manuel to provide more detailed financial insights.

Thank you, Humberto. Good morning, everyone. Fourth quarter 2022 revenues were PEN553.8 million, a 1.7% increase when compared to the same period last year, mainly due to the increased prices of bagged cement in line with inflation. Similarly, gross profit increased 1.1% when compared to the fourth quarter of 2021, and consolidated EBITDA was PEN121 million in the fourth quarter, a 14.5% decrease when compared to the same period last year, mainly due to a nonrecurring expense this quarter. Despite this increase in expenses, EBITDA this quarter was similar to previous quarters of this year. During 2022, revenues increased 9.2%. Gross profit increased 16.6% and consolidated EBITDA increased 8.8% when compared to the same period last year, mainly due to increased sales and decreased costs due to our optimization of clinker use. Turning to operating expenses. Administrative expenses for the fourth quarter of 2022 increased 19.8% and 16.1% for the whole year compared to the fourth quarter and the whole year of 2021, respectively. This increase is in line with higher sales and increased salaries, as well as an increase in personnel expenses due to the union bonus negotiated every few years, which has a larger impact in the first year. Selling expenses during the fourth quarter of 2022 increased 55.7% when compared to the same period last year, mainly due to an increase in personnel expenses derived from a larger sales force, as well as a significant savings on advertising and promotion in the fourth quarter of 2021. During 2022, selling expenses increased 26.6% when compared to 2021, mainly due to higher salaries, union bonus and profit sharing, as well as an increased provision for tax payment. Moving on to different segments, sales of cement increased 8.7% in the fourth quarter of '22 and 13.5% during the full year 2022 compared to the same period last year. As bagged cement sales continue to be the largest driver of demand, gross margin decreased 2.6 percentage points this quarter when compared to the same period of last year, mainly due to the increase in the price of coal and electricity. However, during 2022, gross margin increased 1.4 percentage points as we were able to mitigate some costs of raw materials with a lower use of imported clinker and optimization of our own capacity. During the fourth quarter of 2022, concrete payment and mortar sales decreased 13.1% and 11.1% for the full year when compared to the same period of the previous year, mainly due to a significant slowdown in sales volume for private and public works. However, gross margin increased 2.5 percentage points in the fourth quarter of 2022 compared to the fourth quarter of 2021 and 2.9 percentage points in the whole year 2022 compared to 2021, mainly due to our decision to focus on higher-margin services. Sales of precast materials during the fourth quarter of 2022 and the whole year decreased 19.8% compared to the same period of last year and 13.6% in 2022 compared to 2021, respectively, due to a decrease in sales volume for the public sector. Gross margin was negative in both the fourth quarter of 2022 and 2022 mainly due to the adjustment of missing inventories carried out during this year, which led to an increase in cost as well as higher prices of raw materials and a low dilution of costs. Net profit for the fourth quarter of 2022 decreased 24.6% compared to the fourth quarter of 2021, primarily due to a decreased operating profit as nonrecurring expenses increased this quarter. During 2022, profit for the period increased 15.4% compared to the whole year 2021, primarily due to increased revenues and a higher operating profit as we were able to streamline our cost despite inflationary pressure on raw materials. In terms of debt, our debt-to-EBITDA ratio was 2.9, which is a level we feel very comfortable with. It is important to mention that this February, we paid the remaining $132 million of our 10-year international bonds without incurring any additional costs due to exchange rate effects. As we mentioned before, we had already obtained a loan to pay for this bond, so our current debt levels remain unchanged. To summarize, this quarter's results show our resilience and ability to deliver continuous profitability. Now can we please open the call to questions.

Your first question is coming from Tunde Ojo from Harding. Your line is live.

Thank you. So, I have a couple of questions, and maybe I'll just ask a few and get back in the queue, just to allow others. But the first is on your use of imported clinker, right? You sort of reduced the use of imported clinker this year. But I wanted to understand your strategy going forward regarding that because it dilutes margin each time you use it. Do you have a plan to completely stop using imported clinker in the near future? And what volume of inventory do you have left? And are you going to use it in the coming year 2023?

Sure. As you know, we are towards the end of the expansion of our Pacasmayo plant. This should be operational by the third quarter of this year. The reason we have been using imported clinker is because demand in 2021 rose abruptly. But going forward, we have completely stopped importing clinker as we speak. We see absolutely no need for it in the future because our new kiln will come online in the third quarter of this year. At this point, we hold around 200,000 tons of imported clinker, which is our security stock.

200,000 tons, right?

Yes, 200,000.

Okay. And are you going to use that this year? And how would that compare with last year?

Yes. I mean, we're going to use it in the coming months before we go into operation. The average cost is similar to what we're using towards the end of last year.

Okay. The other question I have is regarding your volumes, which declined in the 2022 financial year for the reasons you mentioned; they were high in the previous year. However, I noticed that the central and southern regions are still growing despite having a higher base. You mentioned that your company saw a decline last year, so I'm curious why those areas are experiencing growth while you are facing challenges with your products. Additionally, you mentioned some reconstruction projects that had fewer shipments. Are those construction projects completed now, or are you still working on them? I would like to know the current status of those implementations. Thank you.

Yes. Sure. I mean, when you see the numbers of growth, you have to go back more than last year, to look at the last two or three years. What happened was we grew 42% over the previous year. So even though we decreased 5% in net sales from last year, we were still up by 30-something percent from two years prior. The other regions of the country did not grow by 42%. So of course, they're catching up. If you do the math over the last three years, we have grown much more than the southern and central regions. Regarding construction, the reconstruction in the north is something that has been ongoing over the last few years, and there's still a lot to complete. The issue is that the government has to approve these projects in packages. We finish a package, and now they must approve two or three more packages coming in. It all depends on how quickly the government moves forward based on the G2G agreement to get these contracts underway.

Your next question is coming from Francisco Suarez from Scotiabank. Your line is live.

The question that I have first relates to social unrest. I want to understand a little bit better where did the road blockades happen? Is this actually disrupting the shipments coming from Piura to the southern portion of your footprint, or is that concentrated much more within the Pacasmayo area and the southern portion of your footprint? If you can help us a little bit to understand because, from my knowledge, I think that the social unrest has been concentrated much more in the southern portion of the country and to some extent in the Lima market as well. But I wanted to understand what the risks of disruptions from shipments from Piura might be going forward?

Francisco, it's Humberto. Good to hear from you. Clearly, the social unrest has been much more focused on the southern part of Peru. The Northeast remains pretty calm, even though there have been some interruptions in the area of Chao going to Chimbote. So, the southern part of our area has been a little affected, but not at all compared to what has been going on in the south where they have had four, five, six, or eight days of operation that could not go ahead. So, as we are speaking right now, there are no roadblocks ongoing; that was an issue that occurred towards the second week of January. So that's the current state. And regarding the second part of your question, yes, you're correct about the conversion number.

Okay. Perfect. And do you think that free cash flow conversion ratio might be something that you can sustain in the year going forward?

Yes, indeed. Once you take out the Pacasmayo project, which is almost done, we should be able to sustain that.

Your next question is coming from Tunde Ojo from Harding. Your line is live.

Just a few follow-up questions I have left. Can you provide some guidance on what you're expecting in terms of your performance for 2023, maybe like volume growth expectations, revenue, EBITDA margins, if you can provide any of those three? It would be helpful.

Sure. It's very hard to predict volumes with the country in the middle of such social unrest, but despite that, we closed last year with 3.4 million tons, and we would like to remain somewhere around that area. In terms of EBITDA margins, I think they're going to be stable until we have our kiln number four coming into Pacasmayo in the third quarter, which should boost our EBITDA margins as we start making our own clinker and stop depending on imported clinker. That should lead to higher margins.

Okay. When you say EBITDA margin stable, are you talking about 22%, 33% because you have different numbers across the year, or are you talking about the average for 2022?

You can calculate based on the EBITDA margin.

No. I'm asking you when you said it would be stable. What number would it be stable at for Q4? Is it the average for 2022?

Yes, I think we should be around the volumes similar to last year.

No, I'm not about volumes. I'm talking about the EBITDA margin. You said it would be stable until Q4. Can you clarify?

25% EBITDA margin for the whole year.

25%, you said?

Yes, 25%.

Okay. That's very helpful. And in terms of pricing, are you putting in any additional pricing? What sort of price growth are you looking at for 2023?

I think we've been very aggressive in terms of market pricing last year. We remain like that at the beginning of this year. A lot depends on how inflation behaves in our region, specifically in the country. But we'll always ensure that the price is set in a way that we retain our profitability levels.

Yes. So, you mentioned you implemented pricing earlier this year in January.

Yes.

Can you give a sense of what percentage increase you did on average in that period?

Around 3%.

Around 3%. Okay. That's very helpful. And the last one for me is, you're kind of reaching 100% clinker capacity utilization from your disclosures. And I’m just wondering what next after that? Are you looking at increasing clinker capacity prior? Or since Pacasmayo is coming up, you don't need to do anything at Pure? I just wanted to understand what you're doing in terms of capacity expansion or optimization going forward.

That's a very good question. I think it's a very straightforward answer. Once kiln number four comes online, we will be able to produce around 3.5 million tons of cement with our own clinker capacity, which is what we will have with kiln number four. We will be at 100% capacity as soon as we turn on that kiln. What happens from then on depends on demand. We don't foresee any expansion in the near future because even if demand goes up by 5%, 10% or 15%, reaching 3.7 million tons, it is always smarter to import a little bit of clinker than to set up a new plant used at only 20% capacity. So, I don't foresee any projects.

Hello? Yes. I lost you for... at the last. But I think I get it that you don't foresee any expansion in the near term. I think that's clear.

No.

Yes. So, in terms of CapEx, how much are you looking at this year? Because Pacasmayo is still ongoing. What kind of level are you looking at in aggregate for CapEx for 2023?

We normally spend about $20 million.

Okay. Alright. Thank you.

Regarding total CapEx for 2023, including the continued expansion at Pacasmayo, we're looking at around $50 million.

Okay. It does cost a bit, but I had the figure of $50 million. My last question is about your balance sheet and your debt. You mentioned that you refinanced part of your debt, but I didn’t fully understand that. Could you please repeat what you did regarding financing and if it was at a higher cost? Should we anticipate higher interest expenses moving forward?

No, we don't expect any additional expenses. The bond that we issued 10 years ago had a rate of 4.5% plus. The swap all-in was around 7.10%, and now our new credit is at a cost of 5.8%. So, if anything, the financial cost is lower.

Okay. Got it. Alright. Thanks, that’s all for me. Thank you so much.

Thank you. There are no further questions on the phone lines at this time.

I have two questions from the webcast. So, can you first give more color on the nonrecurring expenses that occurred in the fourth quarter?

Yes, basically the nonrecurring expenses are, as we mentioned, an increase in the bonuses that we pay or that we negotiate with unions, which have a much higher impact in the first year of a three-year arrangement with the union than in the second and third years. Comparing this year with the previous year, the impact has been much higher this year. Additionally, there is an increase in profit sharing for the employees. So, those are the two main impacts.

What is your strategy to manage costs going forward?

Yes. We are always working to be extremely efficient. Our main costs are related to energy, so coal and electricity are the things that are mostly impacting us due to inflationary pressure. Looking forward, we plan to transition to gas, and we are trying also to make our coal buying process as efficient as possible.

How do you plan to mitigate the risk of not having geographical diversification in your top line?

That's a very good question. The fact of the matter is, in 2021, we grew 42%. So yes, we are very focused in the northern part of Peru. But this is a region with enormous growth potential. If we were diversified into a neighboring country, it could have taken us 10 years to grow by 42%. So, while we may be exposed to the risks in a single region, we believe that our focus on this area pays off given the significant growth potential.

I think there are no more questions, so I'm going to go on with my closing remarks. 2022 was a remarkable year, and I want to say it was a remarkable year for us, both in terms of significant advancement in our strategy and in achieving some outstanding financial results. We are aware that 2023 brings even more challenges and higher levels of uncertainty for the world and particularly for our country. Although we are influenced by the macroeconomic and political framework, we do believe we have two clear competitive advantages. First, the north of the country has had a slightly different dynamic that has made it less impacted by conflict. Second, and most importantly, our focus on digital transformation and innovation has provided us with the tools to be more resilient and adaptable. Finally, we understand that there is little benefit in being primarily focused on our challenges. Instead, we focus on our behaviors and how we can positively impact those around us. We are at a crucial time to influence significant change, which will only happen by working together. We have a strong belief in the future of our region, and we also have a stronger belief in the future of our country. Thank you very much for your time today.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.