Earnings Call Transcript - CPAC Q1 2021

Operator, Operator

Good day, ladies and gentlemen. Welcome to Pacasmayo’s First 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 your host for today's call Ms. Claudia Bustamante, Investor Relations Manager. Ms. Bustamante, you may begin.

Claudia Bustamante, Investor Relations Manager

Thank you very much. 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, strength 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.

Humberto Nadal, CEO

Thank you, Claudia. Welcome everyone to today's conference call. We hope all of you and your families continue to stay safe in this difficult time. This quarter cement shipments were strong and proved once again our resilience. Despite partial lockdowns for the country in February, the main sales volume at the natural level increased by 42.7% in the first quarter of 2021 compared to the previous year. The north clearly outperformed the rest of the country once again as our shipments increased by 67.4% this quarter compared to the same period in 2020. Although this increase is partially due to the lack of sales during the last two weeks of the quarter in 2020, most of this growth comes from increased sales year-over-year without taking into account the holding operations. If we compare only January and February of both years where there was no lockdown before, there is still an increase of almost 40% in cement sales volume when comparing both periods, really remarkable. Although sales of cement have been and continue to be the main driver of our growth, we are very pleased with the results of concrete and precast. As we mentioned last quarter, concrete sales had already started picking up. And during this quarter, they reached peak levels we achieved in 2019 and we are confident that these levels are sustainable and may even accelerate in the upcoming quarters. We are especially confident in this because as opposed to 2019, where we were serving demand from medium and large infrastructure and private projects, the demand now comes from small construction companies. We have generated a new customer base that is much more optimized and therefore less volatile, as it's less reliant on government spending. Owner investment decisions by large private companies are especially important during certain times. As the construction spending materializes during the upcoming quarters, concrete volumes should further accelerate. I would also like to mention the increasing sales of light precast materials such as precast blocks. Although this is a smaller percentage of our sales, I strongly believe its performance illustrates our successful strategy to transform ourselves and provide the construction and building solutions market needs. Growth in this segment has also stemmed from changes to our strategy and from tackling a large number of smaller clients. As with concrete, this allows us for less volatility as we rely on a more optimized customer base. This growth has put some pressure on our margins due to the use of imported clinker. However, we have to keep in mind it is important not to lose focus on two aspects that are key to understanding the reasoning behind using imported clinker. First, that the use of imported clinker is directly related to higher profitability. Even if it comes at a slight margin decrease in terms of percentage, we will simply be unable to sell the amount of cement we are selling. We did not import some clinker and hence take a much higher loss in overall profit. Secondly and more importantly, there is a clear benefit in delaying the investment of a new plant both financially and strategically. In order for our new clinker to be more profitable than using imported clinker, there needs to be a minimum and steady utilization rate, which we cannot guarantee right now, since we are still uncertain about the sustainability of the current sales volume levels. We applied this strategy in 2017 for the Piura plant and it worked beautifully. 2021 has started as a very strong year for us in terms of sales. We continue to deliver substantial increases in cement, concrete and precast shipments that come as a result of our constant effort to innovate, expand our markets, satisfy new niches and always remember to be client-focused. We have already surpassed the most challenging year in our history and we are willing and able to face the challenges that 2021 may bring. We have almost 65 years of successful operating history in a country that has undoubtedly had its share of political turmoil during that period. We will work as hard as ever to continue fulfilling our purpose to transcend as a company, to sustainable development and value generation always with our people and our country's best interest as our undeniable focus. Before closing, there are two points I need to touch. I would like to inform you that based on the strong results of the first quarter and considering the fact that last year, as a precaution, we lowered our usual dividend. Our Board this morning has decided and approved a dividend of S/366 million that we will pay in the first week of July. Our strong financial position and positive growth outlook are fully based on our old philosophy that the cash the company won't be needing belongs to and should be given out to the shareholders. Finally, as I'm sure all of you are aware, Peru held presidential and congressional elections on April 11th and the outcomes have generated great uncertainty as well as the candidates experiencing the election in the runoff representing left-wing anti-free-market ideas. This uncertainty has of course spread to the stock market and almost all Peruvian stocks have accumulated losses in the past weeks. Although we are absolutely confident in the strong fundamentals of our company, we can't avoid country risk and this volatility will remain until there is a final outcome in the first week of June. 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, and I hope all of you and your families are staying safe and healthy. The first quarter of 2021 revenues were, as Humberto mentioned, extraordinary, S/464.8 million, a 55.3% increase compared to the same period last year, mainly due to an increase in cement shipments, as well as to the halt in commercialization during the last two weeks of the first quarter of 2020. The gross profit increased by 44.8% in the first quarter of 2021, compared to the same period of 2020, mainly due to increased sales mentioned before and partially offset by higher costs as we had to use imported clinker to support our growth. Consolidated EBITDA was S/105.1 million in the first quarter of 2021, representing a 45.4% increase compared to the first quarter of 2020, mainly due to the increased sales under the halt in commercialization during 2020. Turning to operating expenses, administrative expenses for the first quarter of 2021 increased by 16.9% compared to the first quarter of 2020 in line with increased sales. However, if we look at administrative expenses as a percentage of our sales, it decreased compared to the same period in 2020 as we continue striving for savings. Selling expenses in the first quarter of 2021 only increased by 3.6% compared to the first quarter of 2020, mainly due to an increase in advertising and promotion, offset by a decrease in the allowance for expected credit losses. Moving on to a different segment, cement, concrete and precast sales increased by 55.2% during the first quarter of 2021, compared to the same period of 2020, mainly due to increased sales of cement, as well as increased sales of concrete and light precast materials, slightly offset by lower sales of heavy precast. The gross margin decreased by 2.1 percentage points in the first quarter of 2021, compared to the same period of 2020, mainly due to the higher cement production costs as a result of the use of imported clinker, as well as slightly lower average prices for cement and concrete due to the sales mix, as we sold more of our lower-priced products. Sales of cement increased by 62.7% in the first quarter of 2021, compared to the first quarter of 2020, mainly due to an increase in the shipment of cement, as demand in the north continued booming during this quarter. However, gross margin decreased by four percentage points, mainly due to increased costs related to the use of imported clinker because of the sudden increase in demand, as well as lower average prices due to the sales mix. Concrete and precast sales increased by 32.8% and gross margin increased by 0.8 percentage points, mainly due to higher sales to small construction companies. During the first quarter of 2021, precast sales decreased by 33.3% compared to the first quarter of 2020, mainly due to decreased sales of heavy precast materials. However, it is important to note that light precast sales performed very well and we expect them to continue increasing during the following quarters. Gross margins increased by 5.7 percentage points, mainly due to the increased sales of blocks resulting in high utilization rates in our plants, which allows us to achieve operational efficiencies. Quicklime sales in the first quarter of 2021 increased by 23.2% compared to the same period last year and gross margin increased by 1.5 percentage points compared to the first quarter of last year, mainly due to increased demand. Sales of construction supplies during the first quarter of 2021 increased by 74.8% compared to the same quarter of 2020, mainly due to increased sales to self-construction and families working on home improvement projects, as well as a lower comparative basis due to the government-mandated lockdown during the first quarter of 2020. Gross margin decreased by 4.5 percentage points in the first quarter of 2021, compared to the same period last year. During the first quarter of 2021, profit for the period was S/31.8 million, a 197.2% increase compared to the first quarter of last year, primarily due to an increase in revenues and operating profit, as well as a lower comparative basis due to the halting operations during the last two weeks of the quarter in 2020. In terms of debt, our adjusted debt in Soles, considering the exchange rate of cross-currency swap hedging agreements amounts to S/1,210 million. This debt represents 3.47 times EBITDA. And we expect that this will continue decreasing as EBITDA for the last 12 months still shows the effect of the two months on halt in commercialization during 2020. We do expect in the next quarter this ratio should be under three times EBITDA. To summarize, this quarter's results show the resilience in volume, despite focused lockdowns that affect other industries. Moreover, we are now seeing strong growth across all segments, which aligns with our long-term strategy. We are convinced of the financial and operational strength of our company and hope the political uncertainty can settle soon enough to let our stakeholders benefit from the true value of our company. Can we now please open the call to questions.

Operator, Operator

Thank you. The floor is now open for questions. We'll go to the line of Andres Soto with Santander. Please go ahead.

Andres Soto, Analyst

Good morning, Humberto, Manuel and Claudia. I hope you and your families are well. Maybe the natural question that I want to ask is what has changed since February that makes you guys decide to postpone the capacity expansion and rather make a dividend distribution? I suspect I know the answer to the question. So I will rather ask if the same level of caution is what you guys are seeing among your customers and if we should expect this to affect Pacasmayo's volumes in the second quarter?

Humberto Nadal, CEO

Hello, Andres, I hope you are doing well and your family. Let's face it. What I said is absolutely true. Last year our dividend that was normally running around $150 million, we lowered it by half. The fact of the matter is sales remain strong. We're very confident about that. But if you see our debt level considering that a potential expansion in the Pacasmayo plant is going to spread over the next three years, we feel like we have enough room in our balance sheet to accommodate an investment of that sort. So nothing has really changed in terms of that. And in terms of the dividend, of course we have to take into consideration everything surrounding us. But we have always, and we've talked about this in the past many times. We strongly believe that the cash that is not needed by the company belongs to shareholders. So we have only acted upon what we have always predicated.

Andres Soto, Analyst

Perfect. So you are not seeing a slowdown in volumes related to the political uncertainty to put it in different words?

Humberto Nadal, CEO

Not at all.

Andres Soto, Analyst

Perfect. My second question is related to outsource of clinker. I would like to understand, you have already depleted the expensive inventory you had, or if you continue expecting this to continue to be a factor in your margin performance over the next few quarters?

Manuel Ferreyros, CFO

Yes, Andres, hello, this is Manuel. Yeah, we should expect the same percentage of gross margin in the second quarter, primarily due to the May maintenance of the kiln in Pacasmayo and the kiln in Piura. This should pick up again in the third and fourth quarters of this year.

Humberto Nadal, CEO

If I may complement that question, Andres, I mentioned it in my speech, but I think it's very important to realize that when we analyze the over cost of imported clinker, which runs around $20 to $21 per ton, we compare it to how much we are saving in terms of financial cost of deferring the investment for the time being until we have a higher need. We believe that, as long as we are south of 700,000 tons, we are more or less neutral to both positions. And at this time, I mean we are still very south of that. We did it for Piura, and only when we are importing over 0.5 million tons at that moment with the amount a little bit higher than we tried to move into investment. So we are very positive about our investment, but we're always watching the sales to see what is the exact moment to trigger the decision.

Andres Soto, Analyst

That's very clear. Thank you so much.

Operator, Operator

Next, we go to the next question. Please go ahead.

Unidentified Analyst, Analyst

Hi. Thank you very much for taking my question. Could you provide a view of the political situations and if the outcome favors Pedro Castillo, the left-wing candidate? Do you see any potential risk for your business?

Humberto Nadal, CEO

That is a very good question. If I was a political analyst, I would have a better answer. But the way I see it, the country has to decide five weeks from now what kind of model, in terms of political economics, is in store for its future. I think if we take what has been going on over the last elections, Peru has been usually a country that's more on the moderate center to center-left. I believe that this will be the way the country will go. Of course, I have no guarantee of that. But my experience tells me that, in the event that Mr. Castillo becomes the President, we would need more clarity on exactly what he is intending to do. As of now, we are still finding out this potential government plan and what he's trying to do. So I think at this point, there is not much I can comment on that.

Unidentified Analyst, Analyst

Okay. Thank you very much.

Humberto Nadal, CEO

You're welcome.

Operator, Operator

And that is all the signals we have at this time. We'll return to Humberto Nadal for closing remarks.

Humberto Nadal, CEO

Thank you very much. I want to thank everybody today for their continued interest in Pacasmayo. Pacasmayo has been sailing through different kinds of orders, storms, and peaceful waters, but we are very positive both on the fundamentals of the company and we will always remain very positive on the potential this country offers and has offered in the past for our businesses. We remain committed to our country, our regions in which we operate, and our clients, our customers, and our workers, as we did during the pandemic and in COVID times. So we are always cautiously optimistic. The numbers give us a reinforcement of why we should remain optimistic. We will keep working no matter who wins the elections, and we will keep working very strongly to deliver the best results in value creation for our shareholders that we have been doing over the last 65 years. Thank you very much for your time and your interest.

Operator, Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.