Cementos Pacasmayo Saa Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen. Welcome to Pacasmayo's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode and please note that this call is being recorded. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. I would now like to introduce your host for today's call, Mrs. Claudia Bustamante, Investor Relations Manager. Mrs. Bustamante, you may begin.

Thank you, Tim. 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 are related 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.

Thank you, Claudia. Welcome everyone to today's conference call and thank you for joining us today. This quarter we delivered very solid results in terms of margins, EBITDA, and profitability. Although sales volumes continued to lag behind due to demand-side challenges, we were able to achieve a consolidated EBITDA of PEN132.8 million, a solid 10% increase year-over-year, as well as a 13.8% increase in net income by focusing on operational efficiencies related to clinker production and our most efficient kilns. Northern Peru was impacted by climatic effects such as higher temperatures and increased water temperatures, which in turn affected agriculture and fishing. For example, mangoes, one of the main crops in Northern Peru, experienced a drastic decrease in production during the 2023-2024 agricultural campaign. This translates into decreased disposable income, which in turn affects self-construction. Additionally, there is a general lack of safety in the country, specifically the northern part of Peru, mainly in the form of extortions that are affecting overall economic activity including, especially self-construction. We hope that these demand-side challenges can be reversed, and we are confident that when they do, we are in the best possible position to tackle the resultant increase in demand. In our journey to continue developing our building solutions, we recently embarked on the reconstruction of the two runways and the perimeter fence of the Piura Airport, not only as a concrete and pavement provider but for the first time directly involved in the construction as part of a consortium. The way in which we are approaching this project is different from our airport improvement projects, for which we have provided concrete in the past, since we are in this case actively participating in every step, beginning with prospection and ending with the actual delivery of the finished infrastructure project. We firmly believe that involvement in every part of the process brings invaluable insights and creates significant opportunities to promote, improve, and market our building solutions looking towards the future. I would like now to focus on something that is absolutely crucial for the future of all businesses and organizations including our own: artificial intelligence and machine learning. New technologies will bring a wide variety of opportunities and there is no doubt that early adopters will be the biggest beneficiaries. And we intend to be one. As a company, we're focusing on both developing and adopting digital tools and reinforcing the culture to adopt it. As I mentioned earlier, one of the ways we look to gain traction in the building solutions market is by doing prospection work. This is mostly focused on looking for infrastructure opportunities in the initial phase, so we can get involved in defining the materials required, hence creating and capturing more value for our building solutions. We have recently developed a model that uses AI to identify all of the pilot infrastructure projects in our area of influence. The robot developed in this project can capture the information and feed it into a large database, allowing the team to focus on the actual development of a solution instead of spending valuable time scouting for projects. Moreover, this tool generates valuable information to guide our data-driven analysis and enhances our portfolio of products and services tailored to the needs of our customers. I will now turn the call over to Manuel to go into more detailed financials. Manuel?

Thank you, Humberto. Good morning, everyone. As Humberto mentioned, our first quarter 2024 revenues were affected by a decrease in demand, reaching PEN476.5 million, a slight decrease of 0.7% when compared to the same period last year. However, the gross profit increased, achieving PEN173.9 million, an 8.3% increase when compared to the same period last year, mainly due to reduced production costs as we maximized the use of our most efficient kilns and benefited from lower raw material costs. The consolidated EBITDA was PEN132.8 million this quarter, a 10% increase when compared to the first quarter of 2023. And the EBITDA margin was 27.9%, a 2.8 percentage point increase when compared to the first quarter of 2023. Turning to operation expenses. Administrative expenses for the first quarter of 2024 remained in line with those of the first quarter of 2023. Selling expenses during this quarter increased 9.1% when compared to the same period last year, mainly due to increases in personnel expenses in line with inflation as well as software, licenses, and higher provisions for doubtful payments. Moving on to the different segments. Sales of cement decreased 4.6% this quarter when compared to the same period of 2023, mainly due to decreased sales volume in the self-construction segment, primarily because of negative effects as well as low levels of private and public investment. Nonetheless, gross margin increased 5.2 percentage points this quarter compared to the same period last year, mainly due to the lower clinker production costs associated with the use of our most efficient kilns, as well as the lower cost of coal. During this quarter, concrete, pavement, and mortar sales performed very well, increasing 73.8% compared when compared to the first quarter of last year. This increase was mainly due to increased sales of pavement for the Piura Airport. Gross margin decreased by 2.5 percentage points this quarter when compared to the same period of last year, mainly due to changes in the composition of our sales portfolio. Finally, net profit increased 13.8% this quarter when compared to the same period last year, mainly due to the operational efficiencies mentioned above. In terms of debt, our net debt-to-EBITDA ratio was 3.2 times, which is a level we expect to reduce in the future. To summarize this quarter's results, we show our ability to manage costs and focus on profitability when faced with challenges on the demand side. We are confident that we will continue delivering positive results during the rest of the year. Operator, can we now please open the floor for questions?

Yes. Thank you, Manuel. We will now move to the question-and-answer session. Our first question comes from Natalia Leo from JPMorgan. Your line is open. Please go ahead.

Thank you. Hi, everyone. Thank you so much for taking my question. I actually have two. So I was wondering if you could tell us a bit more about your expectations for volumes for the full year. I remember last quarter you mentioned a low single-digit increase. But just wondering if maybe your expectations are down a bit considering how they were in this quarter, so maybe flat or down. And the other one was on gross margins. So, you had like 44% gross margin this quarter. Just to understand if that's the normalized level you expect for the full year, or should it be closer to the 47% that we saw in the fourth quarter? Thank you.

Thank you for the question. The first part of the question, we have always experienced seasonality in our demand and we remain confident that, especially public expenses should pick up in the second semester of this year. We also think that the security issue should be tackled in the coming months. So, we are optimistic that the second semester this year will bring better volumes to the table and that should counteract the decrease in volume we had in the first part of the year. And concerning margins, we believe that the margins we mentioned today in this call are the ones that should be sustainable looking into the future.

Great. Thank you. If I could just follow-up. So do you see volumes increasing sequentially in the second half of the year?

Yes, that's the case. If you see our last four or five years, it's usually the case and we think this year there's no reason why it should be different.

Thank you.

Okay. Thank you. Our next question comes from Marcelo Furlan from Itaú. Please go ahead.

Yes. Hi, everyone. Good morning. Can you hear me?

Yes, we can hear you.

Okay. Thank you. So my question is related to capital allocation. I mean, following the conclusion of kiln number four last year, now the company doesn't have any major projects underway. So I would like to know in terms of capital allocation if you are thinking about distributing dividends to shareholders, considering the shareholders going forward. And also regarding the financial leverage you have at 3.2 times. So if you have plans to decrease the financial leverage going forward and what would be a sustainable financial leverage for the company? So these are my questions. Thank you.

Thank you. The first part of your question regarding the level of dividends is for the Board to decide. With that being said, and me being part of the Board, the idea philosophically has always been that leftover cash should go to shareholders. I think over the last year we've had a very consistent dividend policy. The way we look at it right now, that consistency will likely continue towards the end of this year. Regarding the leverage level, as you know, we finished kiln number four last year. We don't foresee any substantial CapEx investments in the near future. We have structured our debt in a way that we have a club deal with two main banks in Peru and we're going to be lowering the debt over the next four to five years according to that club deal with the banks.

Okay. Thank you so much, guys.

Thank you. Our next question is a text question from David Cuenca from Compass Group. David asks, thanks for the presentation. I would like to know if you have some insights about prices of cement for this year and maybe for next year, and if you have some information about other projects like the Piura Airport? Thank you.

Thank you. We've been monitoring the price situation carefully. Even though our cement sales in terms of tonnage are lower, our revenues remained almost flat. I think we've managed the prices very successfully. We will continue to monitor the situation. It's always a fine line between maintaining a substantial market share and profitability. So that is just an ongoing situation. We're always going to look for ways to maximize profits. Regarding the Piura project, there are more airports coming down the line, not this year, but in the coming few years. We strongly believe, as I mentioned in my speech, that the learning curve with the Piura Airport will help us with the other airports. Also, the next phase of Chavimochic should go ahead probably towards the end of the year. There's a G2G government agreement between Peru and Canada, which should give a green light to that construction project. Those are the main points I think. Other than that, we still believe that private investment remains very low.

Great. Thank you, Humberto. We also have a question, a text question from Marco Mejia from Kallpa who asks, could you please provide some insights about coal prices? Thank you.

Hello, Marco. Yes. Coal prices are now stable in a range of around PEN250 per ton. We expect stable prices for at least this year.

Okay. Thank you. I'm not seeing any more questions. So perhaps I can hand it back to Humberto for closing remarks.

Thank you. As I said, our current political and financial market conditions have unfortunately made it less attractive to invest in Latin American companies. That being said, we remain firm believers in the great potential that both our company and our country hold for the future. The true test of a successful company strategy comes during times when market conditions are least favorable. I think we have been consistently delivering very good results over the last few years. We will continue to focus on our strategic goals, reinforcing digital transformation, developing and empowering our talent, and operating our business responsibly. By doing this, we are absolutely certain that we will not only continue delivering positive results today but will be ready to reap further benefits when market conditions improve. Thanks to everyone for your renewed interest in our company. As always, we remain at your disposal if you have any questions in the future. Thank you very much.

That concludes the call for today. Thank you and have a nice day.