Cementos Pacasmayo Saa Q4 FY2024 Earnings Call

Good day, ladies and gentlemen. Welcome to Pacasmayo's Fourth Quarter 2024 Earnings Conference Call. At this time all participants are in 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, Louis. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; Mr. Manuel Ferreyros, our Chief Financial Officer; and Eli Hayashi, our Finance Managing Director. 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 methods 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 Humberto.

Thank you, Claudia. Welcome, everyone, to today's conference call, and thank you for joining us today. Before beginning the analysis of this quarter's results, I would like to take a few minutes to talk about the recent announcement of Manuel Ferreyros' retirement as CFO. As most of you already know, at the end of last year, we announced that Manuel will be stepping down as CFO effective March 31, after an impeccable career that led him to be considered several times as one of the best CFOs in our industry in Latin America. His retirement is part of a succession plan carefully drawn up more than three years ago. In April 2025, a new chapter will begin for the company under the leadership of Ms. Eli Hayashi, who will maintain Manuel's legacy and learnings, leading Pacasmayo to be better every day. Now moving on to our results. This quarter, we saw a reversal of the negative trend in sales volume, resulting in an increase of 2.6% year-over-year. This increase was mainly due to increased sales to the public sector and concrete payments for the Piura airport project. For the whole year 2024, revenues increased 1.4% despite a slight decrease in sales volumes, mainly due to sales mix and our dynamic pricing strategy. Moreover, consolidated EBITDA reached a record PEN549.3 million with an EBITDA margin of 27.8%. These results, considering a challenging demand environment, are outstanding and give us the confidence to believe that with a stronger demand scenario in 2025, we will be able to deliver even better results. I would now like to highlight the progress in 2024 of some key elements of our strategy. As you are all aware, the world is transforming fast. The understanding and use of new technologies such as AI and machine learning and the immense power of data are accelerating the pace of change. As a company, we are focusing on both developing and adopting digital tools and reinforcing the culture to adopt them. Throughout 2024, we made significant strides in digital transformation aligning technology with our strategic objectives to enhance efficiency and innovation. We developed initiatives focused on the digitalization of operations, introduced a user-centered service model to improve customer interactions, and AI-driven solutions play a growing role in the company's evolution. Additionally, data management and automation played an increasingly crucial role in optimizing supply chain efficiency, modernizing logistic processes, streamlining operations, and reinforcing our commitment to continuous improvement. However, all of this technology adoption and data reliance brings its own challenges. Cybersecurity is paramount in the process of digital transformation. During 2024, we focused our efforts on strengthening the protection of operational technologies by increasing the maturity of the industrial network. We also consolidated an Information Security Committee composed of representatives from various management positions to ensure a comprehensive approach to digital risk management. These efforts culminated in a major milestone as we became the first Peruvian cement company to obtain an ISO 27001 certification, the international standard for safeguarding the confidentiality and integrity of information. Another important pillar of our strategy is to continue to develop and strengthen our building solutions. During 2024, we made significant projects towards this goal. First, we designed an innovative solution for river bank protection using mainly cement, local materials, and modular designs, making it more cost-effective and durable. Secondly, we executed the reconstruction of the two runways and the perimeter fence of the Piura airport, not only as a concrete and payment provider but also directly involved in the construction as part of the consortium. The way in which we approach this project is different from other airport improvement projects we have provided concrete for in the past. Here, we actively participated in every step, beginning with prospection and ending with the actual delivery of the finished infrastructure project. This involvement in every step of the process has brought invaluable insights and learning opportunities, albeit at some additional cost. We remain very confident that value-added building solutions are a significant step forward for our company, and we will continue learning, adjusting, and improving in this journey. Finally, I would like to briefly mention some advancements and recognitions in terms of sustainability. We are extremely pleased to be the first Peruvian cement company to obtain an environmental product declaration from the global EPD program for three of our cement plants, representing an estimated 75% of our current portfolio. Verified by third parties, this international certification provides full transparency regarding the environmental impact of our products throughout their life cycle, reaffirming our leadership in sustainability and our commitment to responsible construction. In addition, we are honored to have been included for the fifth consecutive year in the sustainability yearbook by S&P and will maintain our position as industry leaders in the macro responsibility ESG ranking for the ninth year in a row. This valuation, which considers environmental impact, social responsibility, ethics, and corporate governance, places us among the top 10 most responsible companies in the country. These recognitions reinforce our dedication to sustainability and drive us to continue embedding it at the core of our business strategy. I will now turn the call over to Manuel to go through the financial analysis.

Thank you, Humberto. Good morning, everyone. This quarter, revenue increased 3% compared to the same period in 2023, reaching PEN526.7 million. During this same period, the gross profit decreased 2.1% compared to the previous year, mainly due to higher costs related to the execution of the Piura airport project. Consolidated EBITDA was PEN142.5 million this quarter, and the EBITDA margin was 27.1%, reflecting an 8.7% and a 3.4 percentage point decrease, respectively, when compared to the adjusted EBITDA and the 19.2% and 3.7 percentage point increase, respectively, when compared to a consolidated EBITDA of the same period in 2023. For the whole year of 2023, revenues increased 1.4%. Consolidated EBITDA increased 14% and the EBITDA margin also increased 3.3 percentage points compared to the same period last year. These positive results, as Humberto mentioned, are the outcome of a smart pricing strategy and solid operating efficiencies. Operating expenses, including administrative expenses for the fourth quarter of 2024, increased 16% and 9.2% in 2024 compared to the same period of the previous year, respectively, mainly due to increased personnel expenses related to a larger workforce, as well as a higher workers' profit share and third-party services related to renewal fees for mining concessions, software and licenses, among others. Selling expenses during this quarter increased 34.8% and 17% in 2024 compared to the fourth quarter of 2023, respectively, mainly due to the increase in personnel expenses because of a larger workforce, higher workers' profit share, advertising and promotion, as well as software and licenses. Moving on to the different segments, sales of cement increased 1.8% this quarter compared to the same period in 2023, mainly due to an increase in average prices. The gross profit for this period also increased 1.9% and the gross margin remained flat compared to the fourth quarter of 2023. For the whole year of 2024, sales of cement decreased 2.2% compared to the entire year of 2023, mainly due to a decrease in demand from the self-construction segment. Nonetheless, due to our continued focus on efficiencies, the gross profit increased 7.6% and the gross margin increased 4.1 percentage points in 2024 compared to 2023, mainly due to cost optimization. During this quarter, concrete payments and mortar sales increased 30.9% and 48.8% for the whole year of 2024 compared to the same period of 2023, mainly due to an increase in sales volume of payments for the Piura airport project, among others. Gross margins decreased during this quarter and the full year, mainly due to increased costs related to the execution of the Piura airport project. There is a difference in the exchange rate between the projected rate in the contract and the actual exchange rate, as well as additional costs incurred due to the extension of the project beyond our planned execution period. As Humberto mentioned before, we remain confident that developing building solutions is the right path for our company, even if it entails some additional costs in the short term. Regarding precast material sales, the gross margin for the fourth quarter of 2024 was mostly in line with the fourth quarter of 2023. During 2024, precast sales increased 18% compared to 2023, mainly due to increased demand from the public sector. Moreover, gross margin increased 10.7 percentage points compared to 2023, mainly due to dilution of fixed costs resulting from this higher sales volume. Moving back to our consolidated results, the net profit increased 39.3% this quarter and 17.8% for the whole year compared to the same period last year, respectively, mainly due to increased operating profit, as mentioned before, as well as the impairment loss of our vertical gains included in the 2023 results. Finally, in terms of debt, our net debt-to-EBITDA ratio was 2.7 times, below the level obtained in the previous quarter as we continue to deleverage. As Humberto mentioned, I have decided to step down as CFO as of March 31. Pacasmayo has been my home for the past 17 years, and I will surely miss it. But it is time for the next generation to step forward, as the greatest legacy we can leave is a team of well-prepared and talented individuals. El Hiyashi has worked for Pacasmayo for the last 20 years since her internship, and I have worked closely with her for the last five years. I am confident that she is more than ready to take up the challenge. I want to thank each and every one of you for your trust in me as CFO and in our company throughout this time.

Our first question comes from Marcelo Furlan from Itau. Please go ahead.

Hi, everyone. Can you hear me?

Yes, please go ahead.

Okay. Thank you guys for taking my question. So I have a couple of questions here. The first is related to sales volumes for 2025. When we see the volumes in this 4Q, which rose by 3% year-over-year, and actually when you compare the second half sales volumes in 2024, it increased by 14% versus the first half of last year. So on top of that, I'd like to have more color on what are you guys expecting for sales volumes in 2025? This is my first question. The second question is, if you could please give a little bit more detail regarding the higher costs and expenses that you had in this 4Q. This would help as well. And finally, my third question is related to capital allocation ahead. What are you forecasting for CapEx in 2025? And also what are your plans for increasing shareholder returns and so on? That's pretty much it. Thank you.

Sure. As we mentioned, in the last quarter, we saw for the first time in 2024, an increase compared year-over-year. So we believe the volumes should show a positive trend in 2025, probably on the same positive numbers that we saw in the last quarter of 2024. Regarding the CapEx question you had, our sustaining CapEx remains at PEN100 million more or less. We don't foresee any additional CapEx in this coming year or even 2026. I think we are well prepared to deliver all the demand that will be showing up. And in terms of higher costs and expenses, I would like to draw your attention back to the fact that we finished with an EBITDA margin that we think is very good. More than being good and competitive, it is very sustainable. Of course, we have had some increased costs in terms of a larger personnel count. The company is growing and we have seen some increases due to profit-sharing according to the law. But in the end, you have to look at the EBITDA margin with which we closed the year, as one that we should sustain into the future.

Okay. Thank you so much, guys.

Okay, thank you. Our next question comes from Adrian Huerta from JP Morgan. Please go ahead.

Thank you, Humberto and Manuel, and Manuel, best wishes on whatever you do. I was privileged to work with you all these years, Manuel. My question is just on energy costs. Could you tell us how your energy cost per ton behaved during 2024 and what we could expect for this year, Humberto?

Hello, Adrian. Thank you. Energy costs in 2024 have gone down compared with 2023, and we expect them to be flat for 2025.

And just remind me, what are the main fuels that you use?

For the kilns, we use local coal, and for the mills, we use electricity.

And do you have fixed costs on that coal?

No, for coal, we buy local coal. Honestly, the price is quite steady. We don't have a contract; we buy on the spot. But we are the main buyer in Peru. So, overall, I would say it’s quite steady with price. And for electricity, yes, we have a long-term contract.

And just a follow-up on the previous question about cement volumes for this year. Can you elaborate just a little further on those positive trends that we saw in 4Q that could continue into this year? By segment, how do you see the different segments, residential, non-residential, infrastructure? What should be the main drivers for this year for volumes?

Sure. I'm going to answer the question on volumes from a different angle than the segments you're asking. For us, since 80% of our sales go to self-construction, the key proxy for us is employment. We just closed last year our agricultural exports at a record level, PEN12 billion. That means a lot of people are employed and well-paid. That's why this year has begun strongly, and that’s why the end of last year was so robust. Fishing also had a fantastic first season of the year. So all these factors convey a potential residential demand that should be very positive compared to last year. Secondly, we just appointed a new Minister of Economics two weeks ago. Even though he's not a specialist in economics, he comes from a long and successful career in building infrastructure. He has already come in strong in terms of unlocking some projects. So I think we are going to see the central and regional governments spending much more. We closed this year at a very high volume, and this year has opened in similar conditions. All these factors make us feel very optimistic about volumes.

Thank you, Humberto, Manuel.

Our next question is from an unidentified analyst.

Thanks for the presentation. Why has the number of employees increased? Is it due to a specific project?

Yes. When we talk about the numbers, it has a lot to do with specific projects. Sometimes, like we do the Piura project, we hire a lot of people, which will reduce by the end of the project. In the ready-mix business, depending on the project, we will set Chavimochic irrigation and Yanacocha projects. Those factors lead to temporary employment increases. The increase of people that are going to stay for good is still at a lower level, probably about 10 or 15 people a year.

We have a question from Francisco Suarez from Scotiabank. Francisco.

Thanks so much. Good morning, everyone. And congrats on the results, and Manuel on a personal note, thank you for all your wonderful effort, it was quite right. Thank you for everything, best wishes as well. The question that I have relates to overall utilization. I mean, you have reached levels that usually in the future may lead to a downward trend. Are you still optimistic about your overall utilization rates in your cement operations? And the second question that I have is if you can walk me through what are the structural features that make you think so positively about your ability to maintain the current margins? Thank you.

Thank you, Francisco. I think right now, we're at 70% clinker utilization capacity. We are very confident with that. Also, you should bear in mind that we keep lowering our clinker factor. In the next couple of years, we should be around 67% to 68%, which really means increasing capacity. In terms of cement utilization, we're talking about 60%. So, yes, I think we are not concerned at all about capacity. Regarding EBITDA margins, I believe the question regarding energy costs is crucial, as they have been flat over the last two years. If you add to that personnel costs, which go up with inflation, that allows us to be very confident that margins should be maintained. Our pricing policy has been very efficient over the last years. Those three factors permit us to think that EBITDA margins going forward should be sustained. If anything, if the volume picks up more than we expect, we might see some improvement there.

And if I may, and thanks for your complete answer, you also caught my attention regarding clinker factors. What are the drivers behind the improvement? What type of additions are you working on? Is anything happening on that front that explains such improvements?

Yes. We are not slacking in this area. We are heavily focusing on pozzolan materials. I think those are the main drivers pushing our clinker factor lower. Also, Francisco, we are at 60% clinker factor. It’s not just a production issue; it's a commercial one. Some cements required by the government have a clinker effect of 90%. We’re trying to communicate that other cements with lower clinker factors are just as effective as cement type 1. It’s not solely production; it's a very strong commercial aim to shift our portfolio's average clinker factor.

We have a question from Luis Ramos from Larrain Vial.

Hi, everyone. Thanks for taking my questions. First, how vulnerable is this projected recovery on cement volumes in 2025, especially considering the increase in security and upcoming elections? Second, could you provide us more details on the cost overruns in the Piura airport project? How long will these negative effects impact gross margins?

Thank you for the question. In terms of vulnerability, I don't believe the upcoming elections are an issue. I do think that increased security may impact availability, as 80% of our market relies on construction, which we must still undertake. So, no, I don't see the elections as an issue, and security has been stable over the last two years. In terms of Piura, all the cost overruns are already reflected in our results. There are no further costs coming into the future. All issues are resolved. The challenges included an unfavorable exchange rate projection versus the realized exchange rate, as well as overruns in time, since we should have completed the project months earlier. These negative impacts on gross margins are not expected in future results. This is a project that's almost complete. We expect revenues of PEN500 million coming from building solutions. One of our positioning factors has been that we are more than just a company selling cement bags. I think some of the learning curve from Piura airport was important for us, and in the end, we could deliver the project, albeit at an additional cost, but all of this has been accounted for in the 2024 results.

Okay. Thank you. We have a question from Gabriel Perez from CrediCorp.

Yes, I have two questions. I'll start with the first one. Could you give us more color on your expectations regarding 2025 in terms of cement deliveries and EBITDA margins?

Yes. I think I've addressed that before. The trend we saw in the last quarter of 2024 should continue moving forward. In terms of EBITDA margins, we should be able to maintain the high EBITDA margin we achieved at the end of 2024.

Okay. And the next question is regarding new projects. Given projects like the Yanacocha project, where we should expect higher concrete sales, do you believe gross margins could be lower than those achieved in 2024?

I think regarding concrete sales, we have a significant Yanacocha project coming in this year. The Chavimochic project should come in probably towards the end of the year. We anticipate the ready-mix service. As mentioned previously, I reiterate that EBITDA margins should remain at the level achieved at the end of 2024.

Okay. Thank you. We are not seeing any more questions. Thank you to everyone who submitted questions. Perhaps I can hand it back to Mr. Humberto Nadal for concluding remarks.

Thank you, everyone, for participating today. Today, indeed, is a special call for all of us at Pacasmayo, especially for me, as my dear friend is joining me for the last time. I would like to close on a more personal note, as Manuel's retirement signifies a very significant milestone for our company. Succession is never easy because it involves people, human feelings, size, and expectations, but it is clearly necessary. It represents one of the greatest tests and ultimate credit demonstrations of a professionalized organization, recognizing when it's time to pass the torch to ensure it is placed in the right hands. While leadership may change, the essence of this company remains absolutely unchanged, built on the dedication, values, and reasons that each of us upholds. Manuel has exemplified these during his extraordinary 17 years, leaving a lasting impact that will guide us going forward. On behalf of all of us at Pacasmayo, and especially on my own behalf, we thank you for your leadership, integrity, uplifting spirit, and all the lessons you have imparted to us over these last 17 years. You will always be part of this company's story, and we wish you nothing but the best in this next chapter. We will miss you dearly, my friend. With that in mind, thank you very much, everybody, for joining us today. We closed a record year, and hopefully, this year, as we did in 2024, we will be able to achieve even better results. Thank you for your continuous interest in our company. Have a very nice day.

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