Earnings Call Transcript - CPAC Q3 2021

Operator, Operator

Good day ladies and gentlemen and welcome to the Cementos Pacasmayo Third Quarter twenty twenty one Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host for today, Claudia Bustamante. Ma'am, the floor is yours.

Claudia Bustamante, Host

Thank you, Kate. 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 filing. With that, I'd now like to turn the call over to Mr. Humberto Nadal.

Humberto Nadal, CEO

Thank you, Claudia. Welcome, everyone to today's conference call. This quarter's segment shipments continued their very strong trend, reaching record revenue levels. Self-construction is still the main driver of this growth, but concrete sales have increased significantly this quarter. Year on year growth of concrete sales was seventy-three percent with a very solid margin of twelve percent. We're looking at quarter on quarter results that display substantial growth of twenty-one point two percent. Furthermore, margins have seen an outstanding increase of eight point two percentage points. The primary driver of this growth in both volume and margin comes from the demand from reconstruction-related projects, which should continue at least for the next eighteen to twenty-four months. This financial growth we have experienced this year could not have been foreseen. If we compare cement shipments year to date with the same period of twenty nineteen, which was already a record year, the growth rate is almost an incredible forty percent. Because of this, for almost a year now we have been using some imported clinker along with our own clinker to meet the cement demand of our clients. We have successfully used a similar strategy while building our new capacity in Piura around seven years ago. However, current market conditions are different in many ways, making it less profitable today to use imported clinker. Freight prices have gone up significantly, increasing the cost of importing clinker, and experts agree that this situation is unlikely to change in the short to medium term. This situation led us to re-evaluate our current strategy and to think outside the box. The original plan of investing in Pacasmayo was too costly and would take too long considering the pressing need. This is why, after capital evaluation, we have decided to invest approximately seventy million dollars to build an additional six hundred thousand tons of clinker per year capacity, effectively eliminating the need to use imported clinker. The demand remains similar to what it is today. We believe this project is the best alternative given current market conditions since it optimizes our current capacity, making the Pacasmayo plant a more balanced one in terms of clinker cement production capacity, and it delivers results in approximately eighteen months, which is much shorter than our original plan, which was closer to forty months. We are absolutely confident that this investment will be very profitable for the company and it confirms our commitment and confidence in the development of the country. Finally, I would like to talk briefly about our new hybrid work model. This pandemic has forced us to innovate and fast-track processes that were already underway and rethink many others. Most of our administrative staff have been working from home since March twenty twenty. Throughout this period, we have been in constant contact with our employees. Following the improving COVID-nineteen numbers and the advancement of the vaccination process in Peru, we decided to implement the hybrid work model since October. We have carefully put in place all necessary safety protocols to ensure a safe voluntary return to the office. We believe a work-life balance is crucial to overall well-being and productivity. Happy people lead to great results. Interaction that occurs at the office is part of this balance, which has been lacking for over a year. The purpose of this return is to reconnect, promote our culture, and generate greater value for our clients and the company. We are aware that there will be much to learn and adjust during this process, but I’m confident that this is another step towards our purpose to build together the future we dream of. I will now turn the call over to Manuel for a more detailed analysis of the financial results.

Manuel Ferreyros, CFO

Thank you, Humberto. Good morning, everyone. Third quarter twenty twenty one revenues were fifty-seven point two million, a twenty-four point five percent increase when compared to the same period last year, mainly due to the continued increase in cement sales volume, as well as an increase in sales volumes of concrete this quarter and an increase in the prices of both cement and concrete in line with inflation. Gross profit increased thirteen point two percent compared to the third quarter of twenty twenty, mainly due to increased revenues. Consolidated EBITDA was one hundred seventeen point three million in the third quarter, a slight decrease when compared to the third quarter of twenty twenty, primarily due to increased costs associated with the use of imported clinker, as well as higher expenses. During the third quarter of twenty twenty, we faced significant budget constraints as we recovered from the lockdown's effects and the halt in commercialization. EBITDA margin for the third quarter was twenty-three point one percent, a two point seven percentage points increase compared to the previous quarter. During the nine months of twenty twenty-one, revenues increased seventy-two point one percent and gross profit increased seventy-six point seven percent compared to the nine months of twenty twenty, primarily due to the increase in sales, as well as the aforementioned halt in operations from mid-March to mid-May in twenty twenty. Turning to operating expenses, administrative expenses for the third quarter of twenty twenty-one increased forty point four percent compared to the same period last year, mainly due to increased worker profit sharing in line with an expanded income tax base, as well as increased third-party services, primarily COVID-nineteen related expenses to comply with protocols ensuring our workers' safety, software and licenses, training, and workers' composition. The administrative expenses during the third quarter of twenty twenty were very low since we had implemented budget restrictions during twenty twenty after the initial lockdown. During the nine months of twenty twenty-one, administrative expenses increased thirty-two point one percent compared to the same period last year, mainly due to increased sales, as well as the saving measures implemented during the nine months of twenty twenty to mitigate the negative effects of the halt in operations. Selling expenses increased fifty-one point one percent in the quarter compared to the same period last year and thirty-five point seven percent during the nine months of twenty twenty-one compared to the same period last year, primarily due to increases in variable salaries and advertising and promotion in-line with increased sales. Moving on to different segments, cement, concrete, and free cash sales increased twenty-seven point three percent during the third quarter of twenty twenty-one compared to the same period in twenty twenty, mainly due to increased sales of bagged cement and concrete, as well as rising prices for both. Gross margin decreased three point five percentage points in the third quarter of twenty twenty-one when compared to the same period of twenty twenty, mainly due to the decreased cement margin because of the use of imported clinker. During the nine months of twenty twenty-one, sales of cement, concrete, and precasts increased seventy-four point five percent, and gross margin improved by point six percentage points, mainly due to increased sales and the halt in commercialization during the second quarter of twenty twenty. Sales of cement increased twenty-three point two percent in the third quarter compared to the third quarter of twenty twenty, mainly due to increased shipments of bagged cement, as demand in the North continued booming during this quarter, as well as price increases in line with inflation. Gross margin decreased three point two percentage points, primarily due to the need to use imported clinker to satisfy the outstanding levels of cement demand. During the nine months of twenty twenty-one, sales of cement increased seventy-two point five percent, and gross margin remained stable compared to the same period last year, mainly due to increased sales of self-construction during twenty twenty-one, as mentioned previously, and the production halt. During the third quarter of twenty twenty-one, concrete and pavement sales increased seventy-two point eight percent and gross margins increased three point four percentage points, primarily due to higher sales volumes and increased prices, both a result of demand for our construction-related projects. In terms of pricing, during this quarter, we also decided to gradually, but consistently raise prices since they were at a low point after the lockdown in twenty twenty and the subsequent slow recovery. This, along with higher prices for more complex types of cement for our construction projects, has facilitated significant margin expansion, which we are confident will be sustainable for at least the next few months. During the third quarter of twenty twenty-one, precast sales increased fifteen point eight percent compared to the same period last year and twenty-three point three percent during the nine months of twenty twenty-one compared to the same period of the prior year, mainly due to heightened sales of light precast products such as blocks and pavement for reconstruction projects. Gross margin during the third quarter of twenty twenty-one decreased twelve point three percentage points, mainly due to the sales mix; however, gross margin during the nine months of twenty twenty-one increased five point two percentage points. During the third quarter of twenty twenty-one, quicklime sales decreased twelve point two percent, mainly due to increased demand in the early part of the quarter, which was partially offset by higher sales towards the end, and we expect this trend to continue in the fourth quarter of this year. Over the nine months of twenty twenty-one, quicklime sales increased eight point one percent, primarily due to higher sales volume. Gross margins remained stable in the third quarter of twenty twenty-one and during the nine months of twenty twenty-one compared to the same periods in twenty twenty. During the third quarter of twenty twenty-one, construction supply sales were consistent with the same period last year. Gross margin decreased three-point one percentage points in the third quarter of twenty twenty-one compared to the same period last year, primarily due to the exchange rate effects that impacted the cost of imported materials such as steel bars. Over nine months of twenty twenty-one, construction supply sales increased sixty-six point three percent compared to nine months of twenty twenty, mainly due to very low sales during the second half of last year. In terms of debt, our net debt to EBITDA ratio is two point six times, which is a level we feel very comfortable at. During this quarter, we obtained a syndicate loan from Banco de Crédito and Scotiabank with a nine-year maturity in the currency of soles at a rate of five point eighty-two percent per year. With this plan, we will pay off short-term bank loans, and the contract also includes plans to repay international bonds due in twenty twenty-three. We believe that given the situation, this operation has been an absolute success both in terms of the rate and the turn. In this way, we have secured plans to repay our short-term and remaining bonds, and we believe that we therefore have an optimal financial structure to face uncertain times. To summarize, this quarter's results show resilience in volume despite the political uncertainty. We are convinced that our decision to expand to optimize capacity is the best possible approach during these times and that we will soon reap the benefits in terms of profitability. Can we now please open the call to questions?

Operator, Operator

Thank you. Our first question today is from Adrian Huerta at J.P. Morgan. Your line is live. You may begin.

Adrian Huerta, Analyst

Hi, Manuel and Humberto, congrats on the results. Quick question on margins; we saw the gross margins for cement at almost thirty-five percent. What was the margin on imported clinkers during the quarter? And is this higher freight cost already impacting the cost of imported clinker during the quarter, or should we expect increased costs on imported clinker in the fourth quarter versus this quarter?

Manuel Ferreyros, CFO

Hello, Adrian. How are you? Yes. What we've used this third quarter of twenty twenty-one had to do with more than one hundred thousand tons of clinker. This has impacted around fifty million soles this quarter. For the fourth quarter, we expect similar consumption of around one hundred and thirteen thousand tons, and the cost will be very similar to the third quarter.

Adrian Huerta, Analyst

Sorry. The fifty million soles is what, the cost of the imported clinker?

Manuel Ferreyros, CFO

The excess cost of imported clinker.

Adrian Huerta, Analyst

Versus the clinker that you've produced?

Manuel Ferreyros, CFO

That's right. Yes.

Adrian Huerta, Analyst

And again, the higher freight that we're seeing over the last couple of months; should we continue to see this cost on a per ton basis increase in the fourth quarter?

Humberto Nadal, CEO

According to – this is Humberto, how are you? According to market analysis, we should not see any more increases in freights during this coming quarter.

Adrian Huerta, Analyst

Okay. Thank you. And if I may ask another question on demand; what percentage of your volumes year-to-date do you think is attributed to the reconstruction efforts?

Humberto Nadal, CEO

Around ten percent.

Adrian Huerta, Analyst

Ten percent. Perfect.

Humberto Nadal, CEO

If I may elaborate, I mean, the strong demand is fundamentally based on self-construction. That's why we are so optimistic for the future. Granted, reconstruction government spending is important, but self-construction is what is really driving the demand higher.

Adrian Huerta, Analyst

And are you guys seeing remittances growing strongly in Peru?

Humberto Nadal, CEO

I don't have the information on that, but what I can tell you is that when we emerged from the pandemic towards the end of last year, we conducted a very extensive analysis of why the demand was so high because we were surprised when we reached three hundred thousand tons per month. We were concerned it was related mainly to government bonds or some kind of assistance from the pandemic. Surprisingly, when we asked people who were building or were considering building over the next forty-five days about how they financed their investment, only four percent said it was thanks to government assistance; almost eighty percent said it was with their own money, and only around ten percent said they borrowed the money. So, the foundation of the demand was primarily the efforts of these individuals.

Adrian Huerta, Analyst

Yeah. I'm not sure how remittances are doing in Peru, but at least, in Mexico and the Caribbean, it was quite relevant; remittances are growing twenty percent this year and they were also strong last year, and that's driving cement demand in this country. So, I wonder how important remittances are in Peru, but I have no idea? Okay. Thank you.

Humberto Nadal, CEO

If I might talk about remittances, they are not as significant as they are in Ecuador or Mexico and other countries. Here, what we are seeing is that the northern part of Peru has achieved full employment. This condition has persisted for the last eighteen years, thanks to strong contributions from agriculture, fishing, and construction. So, I think the foundation here—if I double down on that eighty percent figure of people using their own money—very few mentioned bases of remittances. Most said it was from savings due to their full employment. Thank you, Humberto.

Operator, Operator

Thank you. Our next question today is coming from Francisco Suarez at Scotiabank. Your line is live. You may begin.

Francisco Suarez, Analyst

Thank you so much. Congrats on the results, and apologies if I missed the earlier remarks. The question that I have is related to your expansion at the Pacasmayo plant. Seventy million dollars seems to be a low price investment. So, what I want to understand is; I think that you might be considering an expansion that will not require a new grinding unit, and perhaps, if you can elaborate a little bit on the tons of capacity of clinker for that new line? Thank you so much.

Humberto Nadal, CEO

Sure, Francisco. Very good question. When we talk about our three plants, if you talk about Piura or our plant in the jungle, these are plants that have pre-tight balances between grinding raw materials, clinker production, grinding cement, and dispatches. That's not the case with Pacasmayo. Pacasmayo has been growing over the last thirty years, leading to some cement capacity outages. So, what we have today is a very unbalanced plant. What we’re doing is basically adding only clinker capacity. Why? Because we have enough raw material for grinding, and enough cement grinding. So, what we're doing is upgrading to two thousand tons per day, meaning six hundred thousand tons per year. With this, we're going to raise our raw grinding to one hundred percent usage. This will result in a well-balanced plant. That’s why the investment seems relatively low compared to; remember the three hundred sixty-six million for Piura. Piura was a big greenfield project, and this is why this decision makes so much sense. It's a limited amount—around seventy million dollars—and we anticipate a very quick payback because we're only adding the necessary capacity. Now, we will have a one hundred percent usage in raw grinding and clinker utilization, and we believe we will have some spare capacity in cement grinding, which is always important for the market. So, that’s the rationale behind the decision.

Francisco Suarez, Analyst

That's perfectly clear. Thank you for that. A follow-up on Adrian's questions regarding the cost structure; what can you tell us about the flat costs that you are experiencing at the moment on coal prices as well? Do you see, and if you can answer this question, connect the dots between the level of inventories that are relatively at low cost in your books compared to the additional inventories that you need to purchase at current spot prices?

Humberto Nadal, CEO

Yeah. I mean, what we have seen over the last five months is a dramatic increase in freight costs. This is a global phenomenon. I mean, when we started importing clinker right after the pandemic, we resumed after the pandemic, we were talking about seventy dollars for clinker—around seventy dollars for imported clinker. That has now increased by more than thirty dollars over the last month. That has also pushed us to make the decision to build additional capacity. I mean, what we’re hearing from the experts on pricing is that these prices will not decrease in the coming months, but rather, they are expected to stabilize at current levels, which will likely hold steady for the coming years. They believe they will remain elevated.

Francisco Suarez, Analyst

Yeah. And if you can elaborate on the cost of slag as well as coal?

Humberto Nadal, CEO

Yes. I mean, let me clarify on the question before I respond to yours. Because you asked about inventory: when I say clinker prices will remain stable, this applies to the future acquisition of clinker, which is important to clarify. In terms of slag and coal, once again, all of these are being affected by increasing freight costs. So, depending on what type of slag and coal we source, that's going to be similarly impacted by freight costs. Manuel?

Manuel Ferreyros, CFO

Francisco, hello good morning. Well, you have to consider that eighty-eight percent of the total coal we use is unpurified coal that we buy locally. So, we have some impact of local prices, but the major impact is coming from shipping costs.

Francisco Suarez, Analyst

Perfect. Thanks so much. Congrats again.

Manuel Ferreyros, CFO

Thank you. Nice to hear from you.

Operator, Operator

Thank you. We have no further questions in the queue at this time. I will now turn the floor back over to Humberto Nadal for closing remarks.

Humberto Nadal, CEO

Thank you. I want to thank everybody for joining today's call. Indeed, the past year and a half has been extremely challenging for everyone globally. In our case, it has pushed us to adopt changes much quicker than we were used to. We have had to think outside the box regularly and learn to operate in very uncertain environments. Decision-making under such conditions is clearly uncertain, if not difficult at all. But success, we strongly believe, stems from bold decisions. We are very confident that the decision to commit to our country's long-term development and investment to expand and optimize our capacity will yield significant returns in the near future and will consolidate Pacasmayo’s leading position in our region. With that being said, thank you, everyone. And as always, I think there are some follow-up questions.

Operator, Operator

We do have two follow-up questions in queue. The first is coming from, once again from Adrian Huerta. Your line is live.

Adrian Huerta, Analyst

Thank you. Just to go back to the excess cost on the clinker that you bought in the quarter; fifteen million soles for one hundred thousand tons of clinker, I was just doing the math and that's around one hundred thirty dollars per ton U.S. Can you just clarify that, Manuel, please?

Manuel Ferreyros, CFO

One second please. That’s an excess cost of thirty dollars per ton, Adrian. Fourteen million soles and over one hundred and fifteen thousand, it's thirty dollars in extra starting costs per ton for the third quarter and fourth quarter of this year.

Adrian Huerta, Analyst

But you said fifty million soles?

Manuel Ferreyros, CFO

Fifteen million soles, yes, one five million soles.

Adrian Huerta, Analyst

One five?

Manuel Ferreyros, CFO

That's right. Yeah, fifteen million soles.

Adrian Huerta, Analyst

I thought it was fifty; sorry. Okay. Perfect. Excellent. Thank you.

Manuel Ferreyros, CFO

An additional thirty dollars per ton during this quarter and next quarter. Next year's pricing will go a little higher.

Adrian Huerta, Analyst

Excellent. Thank you.

Operator, Operator

Thank you. Our next question is a follow-up from Francisco Suarez. Your line is live.

Francisco Suarez, Analyst

Apologies for the follow-up question, but regarding prices; first of all, congrats for passing that extra cost to the consumer. The question is how risky it might be to continue pushing for higher price hikes in the sense of attracting shipments from your competitors in Peru? I know that your import party prices give you leeway to do that, but do you see any risk in increasing prices further?

Humberto Nadal, CEO

Francisco, this is Humberto. I think we have successfully read the market over the last almost sixty years, and you should remain confident that we will continue to do so.

Francisco Suarez, Analyst

Okay, got it. And lastly, when we see the shipments in Northern Peru, the total share of shipments to the total country based on the information you shared in your press release is roughly twenty-seven percent of total shipments, which is very high compared to the past ten years or so. Do you think, in other words, that the conditions related to reconstruction efforts in Peru, as well as the overall trends driving self-construction linked to relevant factors, will maintain that level of demand?

Humberto Nadal, CEO

Yes. I think, Francisco, the key factor you just mentioned is full employment. The North of Peru exemplifies our country’s condition, where heavy investments and qualified workers result in significant employment levels. You have three cities in the north with populations over one million. Thus, I think the twenty-seven percent of national sales and dispatches should hold because those favorable conditions in the north continue, and thankfully, those trends are not mirrored in the south.

Francisco Suarez, Analyst

Got it. And of course, penetration is relatively low, isn’t it? I mean, the kilograms consumed per capita are quite low despite the rising demand?

Humberto Nadal, CEO

I think rather than being really low, as we have discussed in the past, when you consider per capita consumption, you have to differentiate between per capita for housing and per capita for infrastructure. Per capita for housing consumption has been rising constantly over the years, but per capita for infrastructure remains disappointingly low. As a result, this discrepancy drags down the average consumption level. Thus, the per capita for housing is strong, but it’s the infrastructure per capita rate that is significantly low.

Francisco Suarez, Analyst

Perfectly understood. Thank you so much.

Humberto Nadal, CEO

Thank you.

Operator, Operator

We have no final questions in the queue. Mr. Nadal, do you have any final comments?

Humberto Nadal, CEO

No, like I said before, I want to reiterate that we are very confident in our decisions. We have taken last strides about this new investment. We have been here for decades and we are always very optimistic about the future of our country. We are absolutely sure that we will follow a growth path in the coming years and that Pacasmayo will be a permanent part of the history of this country. Thank you very much. And as always, we will be available if you have further questions. Have a great day.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.