Earnings Call Transcript - CPAC Q4 2021

Operator, Operator

Good day, ladies and gentlemen. Welcome to the Cementos Pacasmayo's Fourth Quarter 2021 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 our host for today, Ms. Claudia Bustamante, Investor Relations Manager. Ms. Bustamante, you may begin.

Claudia Bustamante, Investor Relations Manager

Thank you, Matthew. 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 findings. 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, we saw a slight decrease in volumes, which was offset by higher prices of both cement and concrete, as well as the improved sales mix favoring higher margin cement and building solutions. These all led us to an increase in revenues of 10.4%. This improvement was also reflected in quarterly EBITDA, which reached an outstanding $141.5 million, the highest in company history. In terms of annual results, revenues increased almost 50% compared to 2020. Because a bag of cement continues to represent most of our sales, it is important to mention that in 2021, concrete-based motor sales increased almost 70% when compared to the same period last year. This is truly remarkable and aligned with our strategy to become a building solutions provider. We're extremely pleased with these results. But we're also aware that it's going to be a very difficult task to surpass these record levels. So our goal for 2022, which is still an extremely challenging one, is to maintain current sales volume levels. You have to keep in mind that we went from selling 2.6 million tons in 2019 to 3.6 million tons in 2021, which means an increase of almost 40%. I would like to take this opportunity to review the year as a whole and to focus on our strategic view for the future. As mentioned before, this year saw unprecedented sales and EBITDA levels. This is undeniably exceptional and beyond any estimates that we had rationally calculated at the beginning. As we have mentioned before, the market conditions are positive throughout the country, as evidenced by our increased national market share. We have also managed to grow above the national average. Part of this is due to irrational public spending for the reconstruction of the north, or even it is fair to say that our strategy has generated demand. By maintaining and reinforcing our client-centric approach, we have been able to develop a variety of products and services that respond to their unique needs. For industrial segments and our Pacasmayo professional brand, we continued digitalizing the purchasing process in the uses of our products and services. We have almost entirely digitalized our transactional relationship with our clients. For residential purposes, on the other hand, we are creating an ecosystem and integrating physical and digital solutions to improve our purchasing experience and continue to enhance the formalization of the construction market. Although we have been working with sustainability at our core for many years now, we believe that the COVID-19 pandemic has accentuated the pressing need to show significant improvements in this path. We always strive to reach the highest standards, always looking to benchmark ourselves with global leaders, despite our size and moderate nature. Evidence of this commitment is the fact that we have been included in the Dow Jones Sustainability Index for three consecutive years, improving our ranking every year to reach eighth place in our industry during the past year. We have also been included in a sustainability yearbook for two consecutive years. In our first year, we were awarded the industry mover status, as we recorded a strong year-on-year score improvement in our industry. This makes us extremely proud. This year, we remain in the index as one of only eight cement companies included. We are very pleased to see that more companies are joining the Index and yearbook and hope the number will continue increasing. At the national level, we were recently named the top cement company in Latin America and reached the 50th place in the world ranking, improving 24 spots since last year, the strongest improvement of any top 100 companies. We are very proud of this achievement and are pleased to see that our efforts over many years are recognized and rewarded. We'll continue to strive for improvement, as we know that there are always things we can do better and are constantly challenging ourselves to reach higher scores. I will now turn the call over to Manuel for additional financial details.

Manuel Ferreyros, CFO

Thank you, Humberto. Good morning, everyone. Fourth quarter 2021 revenues were $524.9 million, a 10.4% increase when compared to the same period of last year, mainly due to increased bag of cement prices, as well as concrete sales, which performed very well this quarter. Gross profit increased 7.6% in the fourth quarter compared to the same period last year, mainly due to the increase in sales mentioned before, partially offset by higher costs as we had to use imported materials. Consolidated EBITDA was $141.5 million in the fourth quarter of 2021, the highest in the history of the company, and an 18.5% increase when compared to fourth-quarter 2020, mainly due to increased sales. For the full year, revenues increased 49.5%. As Humberto mentioned, EBITDA increased 44% mainly due to increased sales volume, pricing of both cement and concrete, as well as a more favorable sales mix since we sold higher margin types of cement. This is the highest EBITDA in company history, despite the significant amount of imported clinker, which increased our production costs. Turning to operating expenses, we noticed that expenses for the fourth quarter decreased 4.7% compared to the same period of last year, mainly due to an increase in personnel expenses and donations, which were high due to COVID-19 during 2020. During 2021, administrative expenses increased 20% when compared to 2020, mainly due to the increased workers' profit-sharing in line with the increased income tax base, an increase in the exchange rate, as well as an increase in third-party services, mainly covering COVID-related expenses to comply with protocols to ensure the safety of our workers. It is also important to note that administrative expenses during the period of 2020 were low due to budget restrictions after the halt in production and commercialization. Selling expenses for the fourth quarter increased 3.4% mainly due to an increase in variable salaries aligned with the increase in sales. During 2021, selling expenses increased 28.1% compared to 2020, mainly due to the increase in variable salaries mentioned before, as well as an increase in advertising and promotion as we recovered from a very low base during 2020 because of COVID-19. Moving on to a different segment, cement, concrete, and precast sales increased 9% during the fourth quarter of 2021 compared to the same period of 2020, mainly due to increased sales price of bags of cement, as well as higher volumes of concrete. Gross margin during the fourth quarter of 2021 remained in line with the same period of 2020, mainly due to higher cement production costs as a result of the use of imported clinker, which were partially offset by higher prices. For the full-year 2021, cement, concrete, and precast sales increased 50.6%, driven by the substantial increase in sales volume, as well as an increase in prices of both cement and concrete to offset cost inflation. Gross margin in 2021 remained stable. Sales of cement increased 10.4% in the fourth quarter, mainly due to the increased prices and a more favorable sales mix, as we sold more of our higher margin type of cement. Gross margins increased 0.8 percentage points, mainly due to the increase in average prices. For the full-year 2021, cement sales increased 49.9%, mainly driven by increased sales volume and prices. Gross margin decreased 0.5 percentage points, mainly because of increased costs derived from the use of imported clinker to satisfy the increased demand. Concrete pavement and mortar sales increased 7% this quarter, mainly due to increasing volumes. Gross margins decreased 1.8 percentage points in the fourth quarter compared to the same period last year, mainly due to higher margins in the fourth quarter of 2020 due to shipments of special concrete for specific projects. For the full-year 2021, sales of concrete increased 69.3% compared to 2020, mainly due to the sharp increase in sales, both in volumes and prices, as well as a low comparison base due to a complete stop in sales during the second quarter of 2020. Precast sales decreased 28.4% compared to the fourth quarter of 2020, mainly due to a higher comparative basis from the fourth quarter of 2020, as well as demand that had been dampened due to prior lockdowns. Gross margins were negative this quarter, mainly due to a write-off of some tax inventories, which generated an increase in costs, as well as less dilution of fixed costs. For the full year 2021, quicklime sales increased 2.6% when compared to the same period of last year, mainly due to the increased sales of light precast products, such as blocks and pavement for reconstruction-related projects. Gross margin for 2021 decreased 12.2 percentage points when compared to 2020, mainly due to the write-downs of inventories mentioned before. The quicklime sales in the fourth quarter of 2021 increased 49% when compared to the fourth quarter of 2020. This last quarter we increased the volume against our average since we have been able to regain some past clients. However, these are more distant, so costs are higher, but there is still a large contribution margin since there was plenty of spare capacity. During the full year of 2021, quicklime sales increased 20.3% compared to the same period of 2020, mainly due to increased sales volume mentioned before. Gross margin, however, decreased 1.1 percentage points during the full year 2021 compared to the previous year, mainly due to the costs mentioned earlier. Sales of our aggregates during the fourth quarter of 2021 increased 70.1% in the fourth quarter of 2021 and 45.7% in the whole year when compared with the same periods of last year, respectively, mainly due to increased sales, as well as unusually low sales during the second quarter of 2020. Gross margin in the fourth quarter of 2021 remained in line with the same period last year, mainly due to exchange rate effects on imported materials, such as steel bars. During the fourth quarter of 2021, the profit for the period was $51.6 million, an 8.6% increase compared to the fourth quarter of 2020, primarily due to increased revenues from higher average prices. For the full year 2021, the net profit was $153.2 million, up from $164.5 million compared to 2020, mainly due to increased revenues as well as the effects of the losses during the lockdown period in 2020. To summarize, this quarter's results continue to show our strength despite some slowdown in volumes as comparative bases become more complex. For the full-year 2021 results are outstanding and showcase our strong financial management during these difficult times. We believe that we are in a strong financial position to face future demand and to continue growing with some financial flexibility as cash generation steadily increases, focusing on operational efficiency. We can now please open the call for questions.

Operator, Operator

Certainly. Ladies and gentlemen, the floor is now open for questions. We ask that while posing your question, please use your handset if you're on speakerphone to ensure the best sound quality. Please hold while we gather questions. Thank you. Your first question is coming from Adrian Huerta. Please state your affiliation and then ask your question.

Adrian Huerta, Analyst

Thank you. I'm Huerta from JP Morgan. Hi, Humberto and Manuel. Thank you for taking my question and congrats on the results. My question has to do with demand. If you can just tell us what was the growth in cement demand from self-construction during the full year? And what percentage of your volumes last year was for the reconstruction efforts done in the country?

Humberto Nadal, CEO

Hi, Adrian. Good to hear from you. I think, I mean, it gives you the mine was really outstanding. Like, I mean, 2019, which was the previous record year, we were around 2.6 million tons. In 2020, even after two months of lockdown, we were closer to 2.6 million, and last year, the cost were 3.6 million tons, which is 38% higher. Reconstruction was not that relevant. I mean, it was probably around 2%. So really what we are seeing is extremely strong demand from the informal sector. We're going to see much more reconstruction coming on this year when all other projects materialize. But as I see it, it has a lot to do with high employment levels in terms of agriculture, fishing, and even construction. And that's all generating demand. Also, we believe that when people are locked in their houses for so many months, they realize that their homes probably need some improvement, or even some younger families try to find a new home. So I think our firm demand has come from there. And point number two, I mean, we've been pushing building solutions since 2017. That is also very important, so we were selling cement-based products. Probably before we were still working with traditional clay bricks.

Adrian Huerta, Analyst

Thank you, Humberto. I have another question. Throughout the entire year, prices increased by 3% to 4%, and the growth was even stronger in the fourth quarter. Was there another price hike this year? How do you plan to address the inflation experienced last year?

Humberto Nadal, CEO

Last year overall, our price increase was close to or above 15%, which I think was very important to keep profitability. It was above the inflation rate of 7%. I don't recall in all the years as CEO, we were able to rule out such increases. We will keep this year looking for small opportunities to raise prices. But we're already at our level of very competitive rates. It's extremely competitive.

Adrian Huerta, Analyst

Thank you. On all price increases so far this year, even in January, did you have no price increase in January?

Humberto Nadal, CEO

We did move a little bit on price in January, yes. Thank you, Adrian. Take care.

Operator, Operator

Thank you. There are no further questions in the queue at this time. We'll now switch to webcast questions.

Claudia Bustamante, Investor Relations Manager

Okay. I have a question for Paulo Ricardo. Can you provide additional information on the changes in sales mix during the quarter? And if you expect this favorable mix effect to continue in 2022?

Manuel Ferreyros, CFO

Yes. The public infrastructure spend is pushing for more expensive or more profitable types of cement. Also, the self-construction market is shifting towards the more profitable cement options. Hopefully, that answers your question.

Claudia Bustamante, Investor Relations Manager

Yes, thank you. The next question is from Louis Ramal. What are your expectations for volumes in 2022? How much of this dynamic will come from reconstruction projects? And the second part, could you provide more detail on the mix improvement, which I think we just discussed?

Humberto Nadal, CEO

In terms of volume, like I said in my presentation, 3.6 million tons of cement is really an incredible volume. I mean, we used to have 20% of the national demand, and we're up to 27%. So I think if we manage to keep the volumes at higher prices, it will be outstanding results. In terms of reconstruction, 2022 will be south of 2%, so it's not really a relevant number. In 2023, we will have to grow to 5%.

Claudia Bustamante, Investor Relations Manager

Regarding prices, do we foresee them to remain stable or will competition drive prices down as supply chains return to pre-pandemic levels?

Humberto Nadal, CEO

Like I mentioned before, we were able to implement substantial price increases over the last year, including the last quarter. Our recent revenues went up 10%, even though sales were down 6%, primarily due to prices. We have started moving a little bit on prices in January and February this year. So we're going to keep watching the competitive situation, and depending on that, we'll see if prices can still be increased.

Claudia Bustamante, Investor Relations Manager

A couple of questions on the dividend. We have our first question regarding dividends of $0.75 per share. That amounts to about $300 million. The accumulated results for 2022 are not enough. From which accounts will you take the general contribution?

Humberto Nadal, CEO

Keep in mind that the dividend payout of this year was absolutely exceptional for many resources. I'm sure investors understand. This year we should go back to more normal levels from what was seen in the past, but we're still recovering from a very high dividend this past year. Also, the fact that we distributed most of our retained earnings means we'll have to see how the results come in the first two quarters of this year. It will likely be a level somewhere south of what it was before the pandemic.

Claudia Bustamante, Investor Relations Manager

Moving on to a question regarding competition under this environment of strong demands and higher prices. Could you provide financial guidance for 2022 and CapEx needs for 2023?

Humberto Nadal, CEO

In terms of competition, I mean, with the dollar heating up by even those going back to 380, it's very much less competitive for people to import either cement or any materials. So I think we are pretty much less concerned than we were at pre-pandemic levels. It seems to us that the logistics chain in the world still remains extremely expensive and confusing. This year, competition will be a huge issue in terms of costs.

Manuel Ferreyros, CFO

This should be similar to last year, around $100 million.

Humberto Nadal, CEO

Yes, so it was basically around $20 million plus.

Claudia Bustamante, Investor Relations Manager

And then finally, from what are the expected levels of SG&A? We expect these levels will recur?

Humberto Nadal, CEO

Yeah, they should be similar to 2021. Okay. Thank you, everybody, for the questions. In closing, the year 2021 has been a remarkably successful year in many respects. We saw record sales volume that led us to initiate these Pacasmayo optimization investments in order to supply the clinker needed. This decision was taken within an uncertain macro environment, and it will be very profitable for the company. It really ratifies our commitment to the company's development. I think that commitment has to be verified when things are perhaps uncertain. But we are here more than 60 years. I'm absolutely convinced we'll remain here in Peru, fully committed to our country for many more decades to come. I also want to mention that none of these achievements, I stress the word none, could have been possible without the talented and outstanding group of professionals that make up Pacasmayo. They are the reason we achieve every single goal we set every year. The past two years have been extremely challenging for all of us, both personally and professionally, and the commitment and engagement from our team is undoubtedly the biggest source of our success. We would absolutely be nothing without our team, without our people. Our challenge now is to sustain our current financial results and continue proving our sustainability management as the independent foundation that will allow for a prosperous future. As we now prepare to hopefully leave COVID behind, we also have an enormous challenge in how we want to go back to the office, fundamentally centered on our people's well-being and being close to our clients. Thank you very much for taking the time today. As always, Manuel, Claudia, and I are here if you have any more questions. Have a nice day and please stay safe.

Operator, Operator

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