Earnings Call Transcript - CPAC Q1 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to Pacasmayo's First Quarter 2022 Earnings Conference Call. 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, Paul. 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 and 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 today's conference call, and thank you for joining us today. This quarter's results prove once more the resilience of the cement industry, which is operating in the face of great uncertainty, both at the local and international levels. Pacasmayo has been able to reach an outstanding 13% increase in revenues and an even more substantial 21.3% increase in EBITDA this quarter when compared to the same period in 2021, which was already a very strong quarter despite the difficult environment in which we have to operate. As you all know, the current conflict between Russia and Ukraine has generated, among other things, an energy shortage, resulting in increased prices of oil, coal, and gas. Coal prices have a direct and relevant effect on cement production. This is one of the main raw materials used in clinker production. Although we use mostly anthracite coal, which is sourced locally and ordinarily not exported because of its lower calorific value, the exponential increase in international prices of bituminous coal has also had repercussions on the price of this coal. Fortunately, our strategic approach of holding enough inventory of bituminous coal for our year-long supply of our key raw materials has allowed us to balance the use of more expensive coal with the one we had in stock and, therefore, mitigate the pressure on our margins. We're also able to offset this cost pressure and actually improve our cement gross margin by 3.7 percentage points due to a reduction in the use of imported clinker, partly due to a slight decrease in sales volumes, but most importantly, because of the optimization of our kiln in Piura. You must know that in the first quarter, this kiln was able to produce above its nominal capacity because of repairs made to the mill at the beginning of the year as well as implementation of improvements identified by a consulting firm that inspected the plant at the end of last year. These efforts to optimize our own clinker capacity have delivered excellent results, which we hope we can maintain in the upcoming quarters. At the local level, even though the constant political noise has become part of our daily routine, the recent nationwide strike by transportation and agriculture workers did have an effect on our results. This has affected our ability to produce cement during the days the strike took place. Currently, the production of Las Bambas, one of the largest copper mines in the country, has been halted due to unresolved issues between local communities and the company, as well as the government's complete inability to mediate favorably in the negotiations. This has already caused our country a loss of $110 million in copper exports and an estimated $62.5 million in mining royalties. Furthermore, the current proposal by the government to change the constitution, mainly the changes in the economic chapter, have added once more to the feeling of uncertainty and loss of confidence, having a direct effect on private investment. The expectation is for private investment to decrease around 4% this year. Although this may not have an immediate effect on our results, it will definitely have a medium to long-term effect unless it is averted. 2022 marks a substantial milestone for Pacasmayo as it's the 10-year anniversary of our listing on the New York Stock Exchange. We believe we have come a very long way since February 2012 when we took the bold and courageous decision to expand our horizons and commit ourselves to the highest standard of transparency and corporate governance. During the last decade, Pacasmayo did its first international bond issue in 2013, a greenfield plant expansion in Piura in 2016, and a significant change in strategy in 2017 when we once again boldly decided to go beyond selling cement to become a building solutions provider. We also became the first Peruvian cement company to be included on the Dow Jones Sustainability Index in 2019, one of only two Peruvian companies to be included in a Sustainability Yearbook in 2020, earning the Industry Mover status that year as a company with the most improvement year-over-year. We can proudly say that we have achieved our objective of being able to compare ourselves with the most important cement companies in the world despite our relatively small size. But the most valuable thing we can learn from these past 10 years is that this is a constant and unstoppable learning process and that the ability to develop quickly and efficiently will always be our most important quality. Finally, I'd like to reiterate that despite the headwinds, we will always, and I want to stress always, strive to continue delivering the best possible results by focusing on what we know best, knowing our customers' needs and thinking outside the box and permanently pushing our limits to satisfy them in the most beneficial way for our business and our shareholders. Our almost 65 years of operating history have taught us that difficult times will come and go, but our resilience stems from the confidence that having solid values has given us, and we will continue to push ourselves to stand tall and improve ourselves in all aspects of our business. We have a permanent and undivided confidence in our country. I will now turn the call over to Manuel to go into a more detailed financial analysis.

Manuel Ferreyros, CFO

Thank you, Humberto. Good morning, everyone. The first-quarter 2022 revenues were PEN 525.4 million, a 13% increase when compared to the same period of last year, mainly due to the strong price strategy. Moreover, gross profit increased 23.9% this quarter compared to the first quarter of 2021, mainly because we were able to decrease costs by optimizing our clinker production, hence reducing the need for imported clinker. Turning to operating expenses, administrative expenses for the first quarter of 2022 increased when compared to the first quarter of 2021, mainly due to an increase in salaries, in line with increased inflation as well as higher expenses in software licenses and occupational health expenses. Selling expenses this quarter also increased 19.7% when compared with the same period of last year, mainly due to an increase in personnel expenses. We are operating with a larger sales force and higher salaries to support the significant increase in sales, and we have also had a slight increase in the provision for doubtful payments. Moving on to different segments, cement sales increased 14% this quarter when compared to the first quarter of 2021, mainly due to the increase in the average price, both from an overall increase as well as from an improvement in the sales mix as we sold more of higher-priced types of cement. Gross margin increased 3.7 percentage points during the first quarter of 2022 compared to the same period last year, mainly due to our ability to optimize our clinker production and hence decrease the use of imported clinker. This quarter, concrete payment and mortar sales decreased 12.5% when compared to the first quarter of 2021, mainly due to a slowdown in sales to the public sector and the halt in construction work experienced during the first month of the year, as COVID-19 cases resulted in a lack of workers. Despite this decrease in sales volume, gross margin improved 0.9 percentage points this quarter when compared to the same period of last year, mainly due to our decision to focus on higher-margin markets. During the first quarter of 2022, precast sales increased 6.3% compared to the first quarter of 2021, mainly due to the sales of higher-priced products. Gross margins were negative mainly due to the write-off of past inventories during this quarter, which generated a cost increase as well as a higher price of raw material. In terms of EBITDA, this quarter reached PEN 127.5 million, which is a 21.3% increase when compared to the same period of last year. This improvement was mainly due to the higher operating profit levels as a result of cost optimization as well as the increase in revenues. Net profit for the period was PEN 45.7 million, a 43.7% increase when compared to the same period in 2021, mainly due to the increase in operating profit mentioned above. To summarize, this quarter's results are very strong and, as Humberto mentioned, clearly show our resilience and operational strength as we have managed to obtain them in a difficult and uncertain environment. And now, please open the call for questions.

Operator, Operator

There were no questions from the dial-in lines.

Claudia Bustamante, Investor Relations Manager

We have one question from the webcast. It says we saw an improvement in clinker capacity in the Piura plant. So do you expect to maintain the levels of clinker production?

Humberto Nadal, CEO

Yes. The answer would be, yes. Like I mentioned in my speech, we did some optimization work in the ball mill in Piura. So the numbers we provided this quarter should be sustainable for the rest of the year.

Claudia Bustamante, Investor Relations Manager

The next question?

Humberto Nadal, CEO

Yes. As I mentioned, we were able to mitigate some of the increase in the cost of bituminous coal due to our stock levels. However, we do expect to see price increases in the coming months. This will depend on whether the global rise in energy materials continues, and we will always strive to maintain our margins through price adjustments.

Claudia Bustamante, Investor Relations Manager

Another question from the webcast. What is your revised outlook for EBITDA margin for 2022?

Manuel Ferreyros, CFO

Yes. The EBITDA margin for the whole year should be around 27%.

Claudia Bustamante, Investor Relations Manager

The next question is regarding the pension fund. So the possible pension fund injections to the public? And how do you expect that income to impact your revenue?

Humberto Nadal, CEO

Well, you have to keep in mind that 75% of our sales go to self-construction. These are basically from our sector, which is not part of the pension fund system. So even though there may be a little bit of impact, I don't think it will be a substantial impact in the coming future.

Claudia Bustamante, Investor Relations Manager

We have two more questions. One saying, aren't you worried about losing market share?

Humberto Nadal, CEO

Well, we are always worried about losing market share, and that's how we keep a very sound commercial strategy. It has not happened over the past years, and we remain confident that the capacity of our team, the quality of our products, and the strength of our brand will maintain our market share at the levels we have right now.

Claudia Bustamante, Investor Relations Manager

Do you expect to continue increasing prices?

Humberto Nadal, CEO

Yes. I think in today's inflationary environment, prices will keep increasing because we have to adjust for our increasing costs.

Claudia Bustamante, Investor Relations Manager

We have another question. Do you continue to consider the increase in capacity of clinker of the Pacasmayo plant necessary?

Humberto Nadal, CEO

Absolutely. If we take the sales of this quarter and multiply them for the whole year, we realize that we have a deficit of almost 0.5 million tonnes of clinker. So I think the expansion in Pacasmayo is absolutely needed.

Claudia Bustamante, Investor Relations Manager

And then a couple of questions on first outlook for volumes in Peru for the whole year. And then about a cost control initiative that has been given for the government if we think about cost control initiatives given a potential increase in coal costs.

Humberto Nadal, CEO

Yes. Like we've been saying, we had an outstanding year last year when we reached 3.6 million tonnes. Our highest expectation for this year is somehow to stay around those levels, maybe a little bit lower. That would be my guidance and my idea of volumes. And yes, we are permanently trying to be more efficient in terms of all energy usage because of the increasing coal costs. And I think we have achieved it in our plants. But we remain, I would say, always looking for ways to be more efficient in terms of energy.

Claudia Bustamante, Investor Relations Manager

We also have a question on an update on the construction of the kiln in Pacasmayo.

Humberto Nadal, CEO

We have already purchased all the equipment from FLS in Europe and selected the construction company. Some of the movements have started, and we expect to be operational by the third quarter of next year. We aim to meet that target.

Claudia Bustamante, Investor Relations Manager

I think we've addressed this question already, but the view for cement volumes for the year has not changed because of the reduction?

Humberto Nadal, CEO

No, it has not changed.

Claudia Bustamante, Investor Relations Manager

And then finally, if we can have a breakdown of the reduction in clinker imports, how much comes from the optimization and how much from the actual reduction in volume?

Humberto Nadal, CEO

To give you an idea, the nominal capacity of the Piura plant is around 90,000 tonnes of clinker per month. We are at levels of 97,000. So really, we have optimized probably 20-something tonnes of clinker in the first quarter. If you take that to a yearly basis, that would mean around 80,000. That is the reduction of clinker that has resulted from the optimization period.

Claudia Bustamante, Investor Relations Manager

Okay. We have no more questions from the webcast.

Operator, Operator

There were also no other questions from the lines. I would like to now hand the call over to Humberto Nadal for closing remarks.

Humberto Nadal, CEO

Thank you. The past couple of years have shown us that the world is constantly and rapidly changing and that transformation and adaptability are the key aspects of a successful business. As I mentioned before, this year marks our 10-year anniversary as an NYSE-listed company, and we would like to invite you all to join us for our in-person Investor Day in New York on June 29 to further discuss this and many other strategic topics with our senior management team. We will be delighted to host you. As the world starts to find a new normal in the post-pandemic world, we could not be happier that we'll be able finally to see many of you face-to-face after over two years of almost exclusive virtual encounters. We will be giving further details in the coming weeks, but I want to take the opportunity to personally invite you. And once again, thank you so much for following our company, and we are absolutely committed and convinced that hard times will come and go, but good companies will always remain. Thank you very much.

Operator, Operator

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