Cementos Pacasmayo Saa Q2 FY2023 Earnings Call

Good day, everyone. Welcome to Pacasmayo's Second Quarter 2023 Earnings Conference Call. I would now like to introduce your host for today's call, Mrs. Claudia Bustamante, Sustainability and Investor Relations Manager. Mrs. Bustamante, you may begin.

Thank you, Jenny. 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 includes 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 experienced some demand-side challenges as heavy rains during March and April caused a decrease in demand. Since May, we have seen a consistent decrease in our cement daily shipments, which gives us the confidence to believe that the second half of the year should be much stronger in terms of demand. It is also important to note that even though revenues were down 12.1% in the second quarter compared to the second quarter of last year, the EBITDA margin reached 25.5%, an increase of 1.5 percentage points year-over-year. This is a very clear indicator of how we are maximizing profitability by striving for efficiencies in this complex demand environment. I would like now to focus on a remarkable event that happened this quarter. As we have mentioned before, last year we launched the EcoSaco, a new technology that allows the cement bag to disintegrate completely within the concrete mix, achieving zero waste. This is a significant innovation in a country like Peru where most cement is still sold in bags, but it's also challenging. Most foremen have learned how to build empirically through experience that is passed down from generation to generation. Innovating in this context is indeed difficult. Moreover, many of these families put their life savings into these houses. They need to be absolutely confident that the quality properties and the final product will not be affected at all by this new technique. And this is precisely why a strong marketing campaign is so important. The EcoSaco innovation obtained the Gran Effie this quarter as well as a Gold Effie in the Innovation In Product Marketing category and a Silver Effie in the Positive Change In Environment category. The Effie Awards are a symbol of outstanding achievement recognized worldwide that honors all types of effective marketing. It is truly remarkable that a cement company with original scope such as Pacasmayo obtained the greatest prize that is usually awarded to companies with a national presence and in the mass consumption segment. We are indeed very proud of this outstanding achievement, especially because the product truly represents our DNA. The effective marketing of this innovation is key to the achievement of its full potential as a zero-waste product as well as changing consumers' mindsets towards eco-friendly and more sustainable products. As we have mentioned before, we have been producing cement with a lower clinker factor for over 25 years. Pacasmayo's portfolio is mostly made up of blended cement, which has a lower impact on the environment since they use less clinker in production. Currently, over 85% of our cement sales come from blended cement with an average of 22% less clinker than regional important cements, achieving significant savings in CO2 emissions in production. However, we consider that this is not enough. We are voluntarily, and I repeat, voluntarily committed to a reduction of 20% in our emissions by 2030, which means we have to decrease our average clinker factor to at least 68% by reducing it by 3.5 percentage points compared to our 2022 average. We continue innovating to find alternative materials that can deliver the same or even better quality cement with an even lower carbon footprint. After speaking about sustainability, I would like now to focus on other fundamental pillars of our strategic model, digital transformation. This is no doubt a popular term these days, but one has to be at the center of businesses that truly want to be at the forefront. Changes in the purchasing behavior of consumers and open access to digital technologies are catalysts of this new wave of digitalization. These trends create both opportunities and risks as they challenge the status quo. In this changing world, with ever more demand in consumers, the transformation strategy that seeks to guide and accelerate the company towards its vision, with a focus on collaboration and cost innovation, is even more relevant. And although we have talked about this before, we want to discuss the great milestone for Pacasmayo as we have taken the first step towards becoming a fully data-driven organization. We now have a clear strategy for data management. We have established a data and analytics committee to both prioritize and foster initiatives; we have funded the first agile unit within Pacasmayo. And we are designing and making available a consistent source of corporate data through our own data lake. Finally, we are developing case studies to lead and implement data and analytic solutions that add value to our businesses. We are aware that we still have a long way to go, but we believe we are now better prepared to face the future and will continue to promote flexibility, agility, and innovation through our business model and culture to continue along this path. Finally, I would like to briefly update you on the status of our Pacasmayo plant optimization. We are very pleased to inform you that kiln number 4 is now operational and ramping up its production and expect to reach its full capacity during the next couple of weeks. This newer technology will allow us to save 15% in the consumption of kilowatts per hour per ton of clinker and an estimated reduction of 30% in the consumption of kilocalories per ton. We were able to deliver this project on time with an overall investment of $80 million or original 600,000 metric tons of clinker per year. I will now turn the call over to Manuel to go into a more detailed financial analysis.

Thank you, Humberto. Good morning, everyone. As Humberto mentioned, our second quarter 2023 revenues were impacted by a temporary decline in demand, totaling PEN 442 million, a decrease of 12.1% compared to the same period last year. Although gross profit also fell, it did so to a lesser extent, reaching PEN 152.6 million, a 3.5% decrease from the same quarter last year. This was mainly due to lower sales, which were partially countered by reduced costs from less reliance on imported clinker and decreased coal prices. Our consolidated EBITDA for this quarter was PEN 112.6 million, down by 6.6% compared to the previous year’s second quarter. It is noteworthy that the EBITDA margin improved to 25.5%, an increase of 1.5 percentage points year-over-year. For the first six months of the year, we saw a similar pattern: revenues dropped 10.3%, gross profit declined by only 3%, and EBITDA decreased by 5.9% compared to the same timeframe in 2022. The EBITDA margin during this period rose to 25.3%, showing improvement of 1.2 percentage points from last year. Looking at operating expenses, administrative expenses climbed by 6.2% in the second quarter of 2023 compared to the same period last year, and increased by 7.2% during the first six months owing to wage hikes aligned with inflation and increased donations related to Cyclone Yaku. Selling expenses, however, decreased by 7.6% in the second quarter of 2023 and by 2.4% over the first six months, mainly because of reduced personnel expenses from variable salaries due to lower sales and decreased advertising and promotional costs. In terms of product segments, cement sales fell by 7.4% this quarter compared to last year and by 5.8% in the first half against the same period in 2022. This was primarily driven by a temporary decline in demand due to the flooding and landslide from Cyclone Yaku and subsequent heavy rainfall. We have started to see a rebound in sales volume and anticipate an improvement in the second half of the year. Interestingly, gross margin improved by 2.3 percentage points in the second quarter of 2023 over the same quarter last year, and by 1.7 percentage points over the first six months compared to the prior year, attributed to a reduced use of imported clinker and falling coal costs. Sales of concrete, pavement, and mortar saw a significant decline of 30.6% compared to the same time last year, largely due to a sharp drop in sales for both private and public projects. New regional authorities took office this January and faced immediate challenges from Cyclone Yaku and its impacts. They have only recently started exploring investment opportunities. We believe the second half of the year should see increased public infrastructure investments, particularly in preventive measures for the anticipated El Niño in 2024, which should commence soon. Despite a 9.5 percentage points decrease in gross margin in the second quarter of 2023 compared to the prior year, due to less fixed cost absorption because of lower sales volume, we are committed to cutting costs. We are confident that once sales volume recovers, we will maximize our margins. Results for the first half of the year mirrored this trend, with revenues down by 26.5% and gross profit decreasing by 5.5 percentage points compared to the same period last year. Sales of precast materials during the second quarter of 2023 and the first half also declined as a result of low public investment and heavy rains. Net profit dropped 9.4% this quarter and 7.2% in the first half compared to the same periods last year, stemming mainly from the temporary decline in sales. Regarding debt, our net debt-to-EBITDA ratio stood at 3.3 times. To summarize, this quarter's outcomes reflect our ability to manage costs and find efficiencies during periods of lower demand. This gives us confidence that we will be able to enhance profitability as the market begins to recover.

Profit decreased 9.4% this quarter and 7.2% during the first six months of the year compared to the second quarter and the first six months of last year, primarily due to a temporary decline in sales. Regarding debt, our net debt-to-EBITDA ratio stood at 3.3x. In summary, this quarter's results reflect our capability to manage costs and pursue efficiencies during periods of lower demand. This gives us confidence in our ability to enhance profitability once the market begins to recover.

Operator, since we have no questions on the floor, we're going to go to the questions on the web.

Yes. Perfect.

I'll start with a question from Francisco Suarez. Congrats on advancing in your production integration, namely improving clinker capacity. Two questions: the first one, any plans to add a new grinding unit in your Pacasmayo plant to reduce further kilowatt hour per ton? And the second one, can you tell us about spending related to reconstruction efforts in Northern Peru and the creation of resilient infrastructure to cope with more climate volatility in the future?

Thank you, Francisco, for your comments. On your two questions, we have no intention of adding grinding capacity. As a matter of fact, we have more than enough. As you well know, we always want to lower clinker factors; usually, our grinding capacity is ahead of our clinker capacity. At this point, as a company, we can dispatch 5 million tons. The two grinding facilities, grind number six and number seven in Pacasmayo, were built around 2009 and 2010, so they are quite modern. Regarding your second question about infrastructure, yesterday, President Boluarte signed the official recreation of the national authority for infrastructure, which I think is a huge step in the right direction. This is a very interesting position because it will not be politically appointed. It has a lot to do with a long-term vision. So I'm sure with that and with all the activities we are seeing over the last 3 or 4 weeks, or the authorities preparing for El Nino, we are very confident that the second semester will show better numbers in terms of volumes. As a matter of fact, if you see our daily sales, we have seen a consistent improvement over the last 3 or 4 weeks, and I think this will be reinforced by the spending of the local and national authorities in the coming months.

The next question is about the cost of coal as a percentage of your clinker.

The percentage of the cost of coal is approximately 14%.

Regarding the EcoSaco, is there any difference between the gross margin of this product with other products? Also, what's the share of the EcoSaco within our sales?

No, there is basically no additional cost; the additional cost is minimal because the only difference is the cost of the bag. So it's essentially the same as traditional cement.

Pacasmayo has dispersed PEN 160 million in the first half, which is well above historical levels. Could you provide more color regarding the main investments the company has made so far in 2023 that justify the increase?

Yes. Fundamentally, we spent around $80 million to put clinker number 4 into production, which is an extraordinary CapEx event. After that, we have nothing on the horizon except the normal sustaining CapEx.

After the full ramp-up of kiln number four, what can be expected as sustainable margins in the medium to long term?

The sustainable EBITDA margin in the medium term should be around between 26% and 27%. Sorry, but it will depend on the amount of ready mix we sell. If the ready mix increases, obviously, the margin goes down. But at the absolute EBITDA that may go up.

We have high expectations for the country by the end of the year. Can we anticipate improved cement demand in the third quarter due to enhancements in public and private investments?

Absolutely. I mean, we're already seeing that over the last few weeks. Regional government is trying to get up to par with El Nino preventive measures. So yes, I believe whether El Nino happens or not is something we don't know. We are not clear at this moment on the strength of it, but we are seeing a lot of investment in terms of preventive works.

Short-term debt seems high for this year. Cash in hand doesn't seem enough. Please explain how you are going to overcome it?

Yes. Basically, the short-term debt we've acquired has been for Pacasmayo's new kiln, but this is a very small amount. It's only PEN 100-and-something million. And we will prepay it during the next 6 months.

That's all the questions we have from the webcast. So I'll hand it over to Humberto for closing remarks.

Thank you, Claudia. Pacasmayo has been operating in Peru for over 65 years. Throughout this time, we have seen demand periodically fluctuate affecting our short-term financial results. However, our strategic model allows us to be ready to take on the market when conditions improve, focusing on things that generate long-term value. We strongly believe that the successful adoption of digital transformation and a culture of innovation and sustainability are the drivers that will lead us toward sustained value generation. The success of these measures is highly reliant on people's commitment and active participation, and we are absolutely confident that we have the best talent to achieve it. I would like to thank everybody for the renewed interest in our company. As always, Manuel, Claudia, and I will remain here should you have any further questions. Thank you very much, and have a great weekend.

Thank you, everybody. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.