Cementos Pacasmayo Saa Q3 FY2024 Earnings Call

Good day, ladies and gentlemen, and welcome to Pacasmayo's Third 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, Ms. Claudia Bustamante, Investor Relations Manager. Mrs. Bustamante, you may begin.

Thank you, Michael. Good morning, everyone, and thank you for your patience. 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 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. My apologies for the delay; I was just landing on a plane. This quarter, we delivered very solid results in terms of margins, EBITDA, and profitability. Sales volumes this quarter recovered on a sequential basis, although still slightly behind the same quarter of 2023. Despite this slight decrease in demand, we were able to achieve a record consolidated EBITDA of PEN154.6 million, an increase of almost 20% year-over-year, as well as a remarkable increase of 35.9% in net income, focusing on operational efficiencies related to clinker production in our most efficient kilns, as well as cost efficiencies in our sales of raw materials. In our journey to continue developing our building solutions, this quarter, we embarked on very relevant projects. First, we designed an innovative solution for riverbank protection. As you probably already know, Northern Peru is consistently affected by El Niño, which results in strong rains that overflow the rivers, causing significant flooding. Traditionally, riverbank protection is done with steel and rocks, but since there are parts of the North where rocks are not readily available, we designed a new solution using mainly cement, local materials, and mortar that is both more cost-effective and durable. We are currently implementing this in Lambayeque, but the solution is scalable, and we look to expand it to other areas. Secondly, we have taken on a new challenge by collaborating with Newmont and Bexel Corporation in the construction of a water treatment plant at the Minera Yanacocha operation. The treatment of water in mining is crucial for environmental sustainability, maintaining a balance between economic and social development in our country. Proper management of water resources not only minimizes environmental impact but also generates efficient use of our natural resources, preserving them for new generations. These two projects exemplify how we are innovating and adapting our products and services to satisfy the current and potential demand for building solutions. Always, and I mean always, with a client-centric view and aligned with our purpose. I would now like to focus on something that is absolutely crucial for the future of our business, including our own, artificial intelligence and machine learning. New technologies will bring a wide variety of opportunities, and there's no doubt that early adopters will be the biggest beneficiaries. Pacasmayo's AI strategy has been crafted with a multiphase approach, starting with a very deep understanding of the business and its needs. A robust operational and organizational model will be designed, incorporating the expansion of our new building strategy, capabilities assessment, and a clear governance model. The implementation roadmap focuses on three key fronts: preparing the organization for AI adoption, experimenting with AI solutions, and expanding the impact of AI across the enterprise. The strategy has resulted in high engagement, with 86% of employee participation and 84% satisfaction. We also developed seven successful pilot projects, including a fragmentation model, a commercial virtual assistant, and an automatic back and cloud-based assistants. Overall, we see that this strategy has allowed us to prioritize use cases across various departments and positively impact the value chain. It has not only delivered tangible results but has also laid the foundation for Pacasmayo to become a purely, and I mean purely, data and AI-driven company. The next step involves defining the scope and resources for full-scale implementation in 2025, further cementing Pacasmayo's position as a leader in AI adoption within the industry. I would now like to turn the call over to Manuel to go into a more detailed financial analysis. Manuel?

Thank you, Humberto. Good morning, everyone. This quarter, revenues increased 0.2% compared to the third quarter of 2023, reaching PEN517.8 million. However, during this same period, gross profit increased 12.1% when compared to the previous year, mainly due to the cost efficiencies throughout our operations, including our new kiln in Pacasmayo and lower costs of raw materials, mainly coal. Consolidated EBITDA was a record of PEN154.6 million this quarter, and the EBITDA margin was 29.9%, a 19.9% and a 5 percentage points increase, respectively, when compared to the same period of 2023. The trend was similar for the first nine months of the year, with revenues increasing 0.9%, consolidated EBITDA, 12.3%; and the EBITDA margin, 2.8 percentage points when compared to the same period of last year. Turning to operating expenses, administrative expenses for the third quarter of 2024 increased 15.4% and 6.7% during the nine months of this year when compared to the same period of the previous year, respectively, mainly due to an increase in personnel expenses as a result of increased workers' profit sharing and higher IT research and cybersecurity-related expenses. Selling expenses during this quarter increased 10.7% and 10.4% during the first nine months of the year when compared to the third quarter of 2023 and the first nine months of 2023, respectively, mainly due to the increase in personnel expenses mentioned before. Moving on to different segments, sales of cement decreased 2.7% this quarter and 3.6% during the first nine months of the year when compared to the same period of 2023, mainly due to decreased demand from the self-construction segment. Nonetheless, due to our continued focus on efficiency, gross margin increased 7.3 percentage points in the third quarter of 2024 and 5.5 percentage points in the first nine months of the year when compared to the third quarter of 2023 and the first nine months of last year, respectively, mainly due to cost optimization and lower costs of raw materials mentioned before. During this quarter, concrete, pavement, and mortar sales increased 25.6% and 57.9% during the first nine months of the year when compared to the same period of 2023, mainly due to increased sales volume from pavement for the Piura airport project. Gross margin decreased during the quarter and the first nine months of the year, mainly due to a difference in the exchange rate between the projected rate at the time that the contract was signed and the current rate. Most of this impact has already been accounted for, and we expect the margin to improve in the upcoming quarters. Sales of precast materials during the third quarter of 2024 and the nine months of 2024 increased 10.4% and 31% compared to the third quarter and first nine months of 2023, respectively, mainly due to increased demand from the public sector for construction projects, among others. Moving back to our consolidated results, net profit increased 35.9% this quarter and 11.9% during the first nine months of the year when compared to the same period of last year, respectively, mainly due to the increase in operating profit, as mentioned before. In terms of debt, our net debt-to-EBITDA ratio was 2.8x, below the level obtained in the previous quarter. To summarize this quarter's financial results, they show our ability to manage costs and focus on efficiencies to provide outstanding profitability. We are confident that we will continue delivering positive results during the rest of the year. Can we please open the questions?

During the same period last year, we saw an increase in operating profit, which has positively influenced our financial results. Our net debt-to-EBITDA ratio stands at 2.8 times, an improvement from the previous quarter. This quarter’s financial results highlight our ability to manage costs efficiently, resulting in strong profitability. We are optimistic about maintaining this positive trajectory for the remainder of the year. Now, we would like to open the floor to questions.

Okay. Sorry for the interference before. I have two questions. The first one is about cement volumes. We noticed a 16% increase in volumes from the previous quarter. Do you see cement volumes in Peru gaining better momentum compared to the first half of this year? For my second question, regarding margins, you achieved a 30% margin in the third quarter, and cumulative figures for 2024 are around 28%. Can we expect Cementos Argos to sustain margins around 30% in the future?

Let me take that question. Related to the volumes, I mean, we are seeing an increase in the third quarter. We had anticipated in our call in the second quarter that the second part of the year would be better; we're seeing increased government spending in many areas. Next year, we are still running on the budget, but we have to bear in mind that there are very important public projects going on in the north. Each Chavimochic phase will be done under a G2G agreement with the Canadian government. I think we are pretty optimistic that next year, volumes should increase, of course, with respect to this year. We don't have a specific number right now. In terms of the margins, I think the increase we have seen has to be mostly due to operational efficiencies with our new kilns. Therefore, I think going into the future, they should remain.

We will now be reading out the text questions. The first text question is from Mr. Marco Mejía from Kallpa SAB. How long is it going to impact the new project of Yanacocha on the dispatches of the concrete? Is it going to replace the volume of the dispatches to the project at Piura airport?

Could you repeat the question, please? I couldn't hear it.

Yes. First question is how long is it going to impact the new project of Yanacocha on the dispatches of the concrete? Is it going to replace the volume of the dispatches to the project at Piura airport?

Go ahead, Manuel.

Yes, I can take this question. Yes, this project will last approximately 18 months, and the volume is going to be quite similar to the one that we've been producing for the Piura airport.

The next question is from Mr. Luis Ramos from LarrainVial. Hi, Humberto, Manuel, and Claudia, congrats on the results. I have three questions. I'll read the first one. First one, regarding the volume dynamics, what are your expectations for 2025?

My expectation, like I mentioned before, for 2025, we should see an increase in volumes compared to 2024.

Which are the drivers that should enable growth in self-construction?

The drivers in self-construction are fundamentally two. One, employment is very important, and I think fishing and agriculture are extremely important for employment in our region. Fishing has had a tremendous year, and so has agriculture. I think the big driver for our self-construction is the fact that we want to have thousands of people very well employed and paid, which will translate into cement demand later in the year.

The follow-up question from Mr. Luis. Regarding prices, it seems that room for price hikes is limited. What do you expect for the price mix improvement in 2025?

I think, I mean, there's no such thing as unlimited space for price hikes. We're always very cautious about price in terms of caring for the brand, profitability, and market share. I think we've done a tremendous job in the past of maximizing price while considering those other two variables, and we're going to keep the same policy.

A follow-up question from Mr. Luis. EBITDA margins hovered around 30% this quarter; what is your guidance on margins for next year?

The EBITDA margin for the whole year should be a little bit over 29%.

We have a text question from Mr. Gerard Fort from AFP Integra. A few questions. Congratulations on the results. Number one, we have seen an improvement in gross margins throughout the year. However, this quarter's improvement has been above the improvement seen in recent quarters. While this is attributed to the efficiencies at the Pacasmayo plant and lower coal costs, this has also been the case in previous quarters. Could you comment on what has been the main driver for this quarter's improvement?

The main drivers here include our ongoing focus on operational efficiency, as each trimester presents an opportunity to enhance this aspect. It's important to note that there is always a learning curve associated with the new kiln. Currently, kiln number four is operating exceptionally well. Additionally, we secured favorable prices for coal, contributing to our business improvements.

The second question from Mr. Ford is related to the long-term expected margins for concrete and prefabricated products, given that there is an effort to expand the participation of these businesses.

I think concrete profitability is going to depend a lot on the size of the projects. I mean, when we get Chavimochic in hand, when we achieve the design of the Yanacocha plant, those things are much more profitable than small concrete operations. As we see public and private investments picking up in the coming years, then the margins for concrete should increase accordingly.

It appears there are no questions at this time. I will now turn it over to the management team for their closing remarks.

Thank you. I would like to briefly share that last week, I visited three projects in Europe focused on carbon capture, along with several other Latin American CEOs. The conditions in Europe are quite different from those in Latin America due to the regulatory framework, economic incentives, resource availability, and funding. However, it is encouraging to see significant progress towards carbon neutrality in the cement industry. We appreciate the chance to continue learning in this area, aligning with the needs of our countries. I believe we must balance environmental goals with the need to provide homes for the two million Peruvians without adequate housing. Thank you for your interest in our company. If you have any further questions, we remain at your disposal. Thank you.

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and good day.