Earnings Call Transcript - CPAC Q2 2024

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Pacasmayo's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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, Mrs. Claudia Bustamante, Sustainability and Investor Relations Manager. Mrs. Bustamante, you may begin.

Claudia Bustamante, Sustainability and Investor Relations Manager

Thank you, Tim. 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 are related 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.

Humberto Nadal, CEO

Thank you, Claudia. Welcome everyone to our quarterly results conference call and thank you so much for joining us today. This quarter revenues increased 3.4% year-over-year, showing a reversal of a negative trend that started almost three years ago. The increase in revenues was mainly driven by concrete and pavement sales related to the Piura airport project, which almost doubled in this quarter compared to the second quarter of 2023. Furthermore, we were able to achieve a 6% increase in consolidated EBITDA, mainly due to operational efficiencies derived from our new kiln in Pacasmayo as well as favorable raw material prices. We are confident that the efficiency achieved will be sustainable over time, and top-line growth should sustain by the continued delivery of concrete and pavement for the airport project and increased participation in public investment projects. These factors certainly make for a more promising second half of the year. Despite this increasing infrastructure-related demand, the housing sector in Peru is still by far the weakest driver of demand. According to a study conducted by GRADE, there is a requirement of 142,000 new homes every single year. Social housing programs only cover 30% of this requirement, leaving the remaining 70% up to self-construction. On average, we have to mention that the self-construction process takes an appalling 16 years from the acquisition or occupation of the property to the completion of the home. During this time, families spend about eight years in a completely precarious home and an additional eight years in a home under construction. Dirt floors are known to harbor parasites and bacteria that can cause serious illnesses, including respiratory illnesses and anemia, among many others. To tackle this extremely harsh reality, we are working on a variety of different fronts. First, to decrease anemia and illnesses as part of our corporate social responsibility efforts, we are changing dirt floors and replacing them with concrete, starting in our areas of influence. By the end of July, 255 floors will be completed, and our target is to build a thousandth of the north by the end of this year. Additionally, we want to go one step beyond and ensure improvement in the overall health. This program will also provide health counseling to help our beneficiary families understand how to make and sustain those healthy lifestyle changes. As you probably already know, the self-construction segment represents over 70% of our sales. It is unacceptable for a family to have to wait this long for a proper home. These families are our consumers, and we know that when they buy a bag of cement, what they really want is their dream home. Therefore, we are committed to working on solutions aimed at easing this unnecessarily long journey. We are developing a temporary housing service that will help low-income families to live in a better quality, temporary home. This temporary solution can be transferred without additional expenses to their permanent home, avoiding precarious situations, and enabling its transformation for future use. On the financing side, a tremendous challenge at this point, we have AYU, our solution designed as an intelligent purchasing method so that people are able to define their project and buy the materials that they need month by month until they have all of the materials needed to carry out the chosen project. All of these programs are absolutely aligned with our purpose of building together the future you dream of. Finally, I would like to mention that we are very pleased with the performance of our building solutions this quarter. Concrete, mortar, and pavement sales increased 91% this quarter compared to the same period last year. Concrete and pavement sales were mainly related to the Piura airport, as I mentioned before. This quarter we finished phase 1 of the project, which included the construction of a temporary runway. Phase 2 of the project will tackle the reconstruction of the main runway, which began at the end of this quarter and should be completed by December of this year. Precast sales this quarter also increased 46% year-over-year, positively affected by the acceleration of public sector projects. We expect this trend to continue as public works continues its execution and new projects start coming in line in the upcoming months. I will now turn the call over to Manuel to provide more detailed financials.

Manuel Ferreyros, CFO

Thank you, Humberto. Good morning, everyone. Our second quarter 2024 revenues were $457.1 million, a 3.4% increase compared to the same period last year, mainly due to increased sales of concrete, mortar, pavement, and precast, as Humberto mentioned beforehand. Gross profit increased 5.9%, achieving $161.6 million, mainly due to lower production costs as we discontinued the use of imported clinker and maximized the use of our new and more efficient kiln in Pacasmayo, as well as lower costs of raw materials, mainly coal. Consolidated EBITDA increased 6.1% this quarter compared to the same period last year, mainly due to efficiencies, as well as increased revenues. For the first six months of the year, revenues increased 1.3% compared to the same period of 2023. Gross profit for the first six months of the year increased 7.1% compared to the same period of the previous year, mainly due to efficiencies derived from our capacity optimization, as well as lower costs of raw materials. Likewise, EBITDA increased 8.1%, and the EBITDA margin increased 1.7 percentage points for the first six months of the year compared to the same period last year. Turning to operating expenses, administrative expenses increased 6% in the second quarter of 2024, and 2.1% in the six months of 2024 compared to the same period last year, mainly due to a slight increase in personnel expenses and property taxes. Selling expenses increased 11.5% and 10.2% in the second quarter of 2024 and the six months of 2024 compared to the same period last year, mainly due to increased software and licenses, third-party services, and personnel expenses. Moving on to a different segment, sales of cement decreased 3.6% in the second quarter of 2024 and 4.1% during the first six months of the year compared to the same period last year, respectively, mainly due to a decreased demand from the self-construction segment. However, gross margin increased 3.7 percentage points during the second quarter of this year and 4.4 percentage points during the first six months of the year compared to the second quarter of 2023 and the first six months of last year, respectively, mainly due to cost optimization related to our optimized kiln capacity and more favorable raw material costs, as mentioned before. During this quarter, we are glad to report that sales of concrete, pavement, and mortar increased 91.1% during the second quarter of this year and 82% during the first six months of the year compared to the second quarter of 2023 and the first six months of 2023, mainly due to increased sales of concrete and pavement to the Piura airport project. Gross profit or gross margin in the second quarter of 2024 was in line with the same period of last year. Sales of precast materials also increased 68.2% this quarter and 46.2% during the first six months of the year compared to the second quarter and the six months of last year, respectively, mainly due to increased public sector investments. Gross margin increased 21.3 and 19.9 percentage points in the second quarter and the first six months of the year compared to the same period of last year, mainly due to higher dilution of fixed costs as volume increased. Net profit decreased 15.4% this quarter compared to the same period of last year, mainly due to a one-off exchange rate gain in the second quarter of 2023 due to the completion of our Pacasmayo plant project as the equipment was paid in local currency. During the first six months of the year, net profit remained in line with the same period of last year. In terms of debt, our net debt-to-EBITDA ratio was 3.1x, which is a level we expect to sustain and progressively decrease as EBITDA increases; we currently do not plan to incur additional debt. To summarize, this quarter's results show the benefits of our continued focus on cost management and operational efficiencies. These efficiencies allow us to capitalize on profitability beyond top-line growth. We are confident that we will continue delivering positive results during the following quarters.

Operator, Operator

We have a question from Marcelo at Itau.

Marcelo Furlan, Analyst

Yes, hi, everyone. Good morning. Can you hear me? Okay, thank you. So my question is related to cement volumes for the second half of the year. I mean, you guys mentioned that volumes from precast and concrete were better given the Piura airport project and also higher public investment and so on. But on the low light here, we had this few weeks bagged cement and sales volume. So could you please give a little bit more color regarding in terms of what we can expect in terms of the bagged cement volumes for the second half as we also know could expect a better macro trend and so on if this could help to support a higher bagged cement for the second half. So this is my first question. And the second question is related to capital allocation as the company does have any major growth projects and the rate? If you could explain or give more color about what is the management views for capital allocation going forward. So these are my two questions. Thank you.

Humberto Nadal, CEO

Yes, Marcelo, thank you for the question. As I mentioned in my brief speech, we are optimistic about the second semester in terms of volumes. Generally, if you look at the history, the second semester usually performs better. We are seeing quite a few public projects gaining traction over the last weeks. So I think the volumes in the second semester will definitely be higher than those in the first semester. Regarding capital allocation, as Manuel said, we are currently at a comfortable debt level. We have a club deal that we have to honor over the next six years, and we intend to strictly adhere to that. We have no need for any further debt or capital at this moment.

Operator, Operator

Our next question comes from Natalia Leo at JPMorgan.

Natalia Leo, Analyst

Thank you. Good morning, everyone. Thank you for taking my question. I just wanted to understand a bit better the dynamics for concrete. And if you expect this volume of sales or this amount of sales to continue in the second half and maybe in 2025, and also what can you tell us about the margins on concrete as well that we saw EBITDA low in the second quarter? Thank you.

Humberto Nadal, CEO

Yes. To complement my answer to Marcelo, besides the increased public investment gaining traction, we have to understand that the fishing season has been extremely good in recent months, which will translate into higher demand for cement and concrete in the coming months. The same applies to agriculture. Both fishing and agriculture are crucial to our business because they employ thousands of people, and these individuals usually invest their excess income in improving or starting to build a home. So in addition to public investment, I think we will see a higher pull in terms of self-construction, as people who are employed and earning higher salaries will also drive demand. Regarding demand, concrete and cement are significantly influenced by activity levels. The urgency for these materials has completely recuperated, and we expect to see better numbers.

Operator, Operator

We have a text question from Gerard Fort at Integra. He asks, what explained the lower gross margins in concrete and pavement, considering revenue increased 91%, but we saw a decrease in margins year-on-year?

Manuel Ferreyros, CFO

Yes, hello. Good morning. Basically, it’s related to the mix of the products that we sell in concrete. The larger the infrastructure project, the lower the margin we have. However, the advantage of this is that we can dilute fixed costs better.

Operator, Operator

We have a text question from Marco Mejia at Calpa who asks if there will be a recovery of cement dispatches for the second semester. He also mentions new projects for the next quarters and wants to know if this will keep concrete demand at current levels.

Humberto Nadal, CEO

Thank you for the question, Marco. As I mentioned in previous questions, I see a much stronger second semester than the first one, absolutely. I believe that public works will contribute to this strength. Yes, concrete will definitely have a very strong second semester as well.

Operator, Operator

We have a question from Steven Matos. Please go ahead. Your line is open.