Earnings Call Transcript - CPAC Q2 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Cementos Pacasmayo Second Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on listen-only mode and the floor will open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mrs. Claudia Bustamante, Investor Relations Manager. Claudia, over to you.

Claudia Bustamante, Investor Relations Manager

Thank you, Jenny. 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 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 once again for joining us today. This quarter's results show our ability to sustain profitability even in the face of a slowdown in demand. Even when there has been a slight deceleration in terms of volumes, consolidated EBITDA was $120.5 million, a 33.9% increase when compared to the same period of last year, achieving a margin of 24%. Moreover, our net profit increased 74% year-over-year, reaching $48 million. This is especially relevant considering the current context with a significant decrease in coal and energy prices and overall inflationary pressures throughout the global economy. We have been able to achieve this by focusing on operational efficiencies, prioritizing the use of our own clinker and implementing an accurate pricing strategy across both bag cement and concrete. We are certain that this approach and our sustained focus on efficiency will continue to reap benefits in this extremely difficult environment. The most significant actions we have taken to decrease our exposure to these external factors is the optimization of our current capacity in our Pacasmayo plant. As most of you know, at the end of last year, our Board decided to invest in adding 600,000 metric tons of announced capacity in this plant, allowing us to stop almost completely the usage of imported clinker. Despite some bureaucratic delays, I'm very happy to announce that we are very much on track to finish this optimization as planned in the second half of 2023. We're currently in the same workspace, finishing the preheater and we'll soon begin the assembly phase. As this is a brownfield project and the kiln will be part of an already established production, we expect the ramp-up process to be smooth and relatively fast. Besides the obvious benefits in terms of profitability, this new kiln will also lead to a reduction in overall CO2 emissions because of the new state-of-the-art technology involved, aligning this investment with our long-term goals of achieving carbon neutrality by 2050. During this quarter, we launched an initiative that highlights our ability to adapt and align our client needs with our company's long-term goals. As you all know, Peru is a market that still sells mostly bag cement. Throughout the years, we have constantly focused on reducing the clinker cement ratio by producing blended cements and making sure these are the most widely used cement in our portfolio. As of this date, our branded cements make up over 80% of our total sales. In the same quest to continue promoting eco-friendly cement, we have developed and launched what we call the EcoSaco. This is a new technology that allows the bag to disintegrate completely within the concrete mix, achieving zero waste. This product is completely aligned with our vision and our intentions as a company as we are able to provide a lower impact on the environment and dispose of less waste. Moreover, it takes us one step further towards creating a culture that values and demands eco-friendly cement, which is crucial in order to achieve the significant reduction in emissions that we are currently striving for. Finally, I'd like to proudly mention the substantial positive evolution we have had as a company in the Merco talent ranking. Merco is a corporate monitor reference in Latin America based on a multi-stakeholder methodology composed of six evaluations and more than 20 information sources. In 2020, we were ranked in the 88th position. We have now climbed 66 positions to achieve the 22nd place in 2022. This is undoubtedly a sign that we are on the right track and encourages us to challenge ourselves to improve even more. As I have mentioned many times before, our people are the most valuable assets we have and the driving force behind our current and future success. I will now turn the call over to Manuel to go into more detailed financial matters.

Manuel Ferreyros, CFO

Thank you, Humberto. Good morning, everyone. Second quarter 2022 revenues were $502.9 million, a 14.1% increase when compared to the same period of last year, mainly due to an increase in the price of bag cement and concrete in line with increased inflation. The gross profit increased 35.8% mainly due to a reduction in average costs as we were able to prioritize our own clinker, decrease in the overhead cost of using imported clinker as well as the increased revenues mentioned before. Consolidated EBITDA was $120.5 million in the second quarter of '22, an increase of 33.9% when compared to the same period of last year, mainly due to operational efficiencies and increased prices. During the second half of 2022, revenues increased 13.5%. The gross profit increased 29.4%, and the consolidated EBITDA increased 27.1% when compared to the same period of last year, mainly due to the increase in sales and decreased costs, as mentioned before. Turning to operating expenses. Administrative expenses for the second quarter of 2022 increased 16.3% and 14.8% for the six months of the year compared to the same period of last year, in line with increased sales, mainly due to increased salaries and an increase in personnel expenses due to the union bonuses that are negotiated every three years and have a larger impact during the first year. Selling expenses in both the second quarter and during the first six months of 2022 increased 19.7% compared to the same period of the previous year, mainly due to higher salaries and the union bonus as mentioned before. Moving on to a different segment. Sales of cement increased 18.1% in the second quarter of 2022 compared to the same period of last year, as bag cement sales continue to be the biggest driver of demand. Gross margin also increased by 5.5 percentage points this quarter when compared to the same period of the previous year as we were able to mitigate increases in the cost of raw materials with lower use of imported clinker and optimization of our own capacity. During the first six months of the year, cement sales increased 16% and margin improved 4.6 percentage points, in line with the quarter's results. During the second quarter of 2022, concrete and payments and mortar sales remained in line with the same period of 2021; however, gross margins increased by 7.5 percentage points during the same period, mainly due to our decision to focus on higher-margin products. During the first six months of the year, revenues decreased 7.4% and sales volume decreased because of a slowdown in public sector sales. However, the gross margin increased by 4.2 percentage points because of the profitability strategy mentioned before. Sales of precast materials during the second quarter of 2022 and during the first six months of the same year decreased 4.7% and 0.7% compared to the second quarter and first six months of 2021, mainly due to a slowdown in public sector spending. The gross margin was negative for both the quarter and the first six months, mainly due to the write-off of past inventory, which generated a cost increase as well as an overall increase in prices of raw materials. The net profit for the period increased a substantial 73.9% in the second quarter of this year as compared to the same period of last year, mainly due to the higher operating profit mentioned above as well as a positive exchange rate effect. During the first six months of the year, net profit increased 57.5%, mainly due to the higher operation profit, as mentioned before. In terms of debt, our net debt-to-EBITDA ratio was 2.3x, which is a level we feel very comfortable at. To summarize this quarter, results show our ability to find efficiencies in times of cost and inflationary pressure, allowing us to continue delivering substantial profitability. Can we now please open the call to questions?

Operator, Operator

Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Francisco Suarez of Scotiabank. Francisco, please ask your question.

Francisco Suarez, Analyst

I have a couple of questions, and I apologize for not being able to attend your Investor Day in New York where these topics were discussed. I would like to know if the current FOB clinker prices are sufficient for you to depend more on your Piura plant for clinker, given the limited capacity in Pacasmayo. Additionally, I noticed that you've made significant efforts to reduce coal imports for your kiln over the past year. Could you elaborate on other initiatives you're pursuing to improve your energy mix? Is the reduction in coal imports sustainable, and does this positively affect your overall energy cost structure?

Humberto Nadal, CEO

Francisco. It's Humberto. Let me talk about your questions. On the first one, any clinker that we produce, whether it's Rioja, Piura or Pacasmayo, it's going to be cheaper than imported clinker. That's a fact. So we are working at 100% with all the plants to avoid importing clinker. So yes, what we have been doing is very efficient usage of that clinker and that lowers the need for imported clinker. That's a fair part of your question. The second part of the question is, as you know, cement is all about energy and freight cost, among other things. In terms of coal, we have increased the usage of imported coal from 20% to 15%. And also, we're trying to use as much local coal as we can. So that's why you're seeing the impact on the cost, as you mentioned. One thing we're doing strongly, not only because of cost but also because of the environment, we're trying to reengage with gas supply. We are very optimistic about this. We don't have any concrete results to announce as of right now. But hopefully, before the end of the year, we will have news to report that we have been able to reengage with the gas and this will be helpful both in terms of our environment and in terms of costs.

Operator, Operator

Thank you. Your next question is coming from Adrian Huerta of JPMorgan. Adrian, over to you.

Adrian Huerta, Analyst

Going back to the question on energy costs, what was your energy per cost this quarter versus a year ago? That's my first question, given the changes on reducing the imported coal, etc. And the second question is, if you're planning further price increases for the rest of the year.

Humberto Nadal, CEO

Adrian, this is Humberto. In terms of pricing, yes, I mean, as we all know, we are living in the middle of inflationary pressure. So for sure, we think there's more room to increase in the coming six months. It's going to be very closely related to keeping profitability and depending on what happens to our costs. If you take our price per ton 18 months ago to now, we have significantly increased, but more so than that, what you have to realize is that we have been able to keep, and I would say even regain profitability through a very thorough pricing structure. In terms of coal, I'll leave it to Manuel.

Manuel Ferreyros, CFO

Yes. In terms of coal, the cost compared to the same quarter last year has seen an increase of around $10 million in costs, and energy costs have also increased around $9.5 million per quarter.

Adrian Huerta, Analyst

Those increases are $1 million increase year-on-year from energy and from electricity.

Humberto Nadal, CEO

Yes.

Manuel Ferreyros, CFO

Yes.

Operator, Operator

Your next question is coming from Marco Mejía of Kallpa. Marco, please ask your question.

Marco Mejía, Analyst

Please could you explain to me what is your outlook for the volume of cement for the whole year?

Humberto Nadal, CEO

Yes. As you may recall, Marco, last year we grew almost 40%. This was something absolutely unprecedented, as we went from 2.6 million tons to 3.6 million tons. This year, our biggest objective is to try to stay close to that 3.6 million, which is already, I would say, a high expectation on our part, but we're trying to stay very close to that. Probably at the end, even if we decrease a little bit in volume, we'll more than compensate that in terms of price or revenue should be definitely up this year.

Operator, Operator

I will now hand back over to Claudia for any questions that may have come in via the webcast. Claudia.

Claudia Bustamante, Investor Relations Manager

So firstly, I have a question from Pablo Ricalde. Can you share your outlook towards pricing in the second half of this year? Do you think there is room for another price hike in the second half? I think we had this already, but…

Humberto Nadal, CEO

Yes. I'll give you so glad that we addressed that. But thanks, Pablo, for the question. Like I said, definitely the answer is yes. We're always keeping a balance between profitability and our market share. So I think if inflation pressures keep going up, I mean, there will be room for that.

Claudia Bustamante, Investor Relations Manager

What is driving the strong cement demand in northern Peru? After a robust 2021, I anticipated a notable decline, but that did not occur. Is the demand coming from the public sector, and is it likely to continue?

Humberto Nadal, CEO

Thank you for your interest in our company. I think it's a very good question. After 40% growth last year, we were all concerned if it was going to drop. The main driver is still self-construction. It is not public investment or private investment. We don't see any hospitals, malls, or large hires happening. Self-construction accounts for probably 85% of our sales. We remain optimistic because in the north, agriculture, fishing, construction, and tourism are all driving employment at a very good rate. As long as employment remains stable, these individuals will continue to build. Especially in an inflationary economy, for the employee sector, if you earn above inflation, you tend to purchase durable goods. What is more durable than a home? We are pleasantly surprised that the levels have not decreased and hopefully, we will be very close to last year’s figures with significantly higher prices.

Claudia Bustamante, Investor Relations Manager

Thank you for the presentation and congratulations on the results. Could you share your expectations for volumes in the second half of the year and EBITDA margins? Additionally, do you anticipate a transition to natural gas in Europe and the Pacific?

Manuel Ferreyros, CFO

Carlos, yes, Humberto already answered the question about the volumes. Concerning the EBITDA, we should be around 25% for the second half of the year.

Humberto Nadal, CEO

In terms of gas, thank you for the question. I think I mentioned this before. We have been working closely with our operations team to try to reengage with gas as we did two years ago in the Piura plant. Hopefully, we'll have something to announce before the end of the year.

Claudia Bustamante, Investor Relations Manager

We have a couple more questions from the webcast. One question is about how you will manage the quick lime reduction considering the shortage of bituminous coal.

Humberto Nadal, CEO

We're not talking about a shortage of bituminous coal. We're talking about reshuffling the structure of coal.

Manuel Ferreyros, CFO

Yes. Only to complement what Humberto mentioned is that we are receiving the bulk of bituminous coal today. So since next week, we will be already on board with quicklime supply.

Claudia Bustamante, Investor Relations Manager

Next question from an unidentified attendee. We understand the situation regarding volumes in 2022, but what are the expectations for the beginning of 2023? Also, do you anticipate that higher prices will negatively affect volumes in 2023?

Humberto Nadal, CEO

Yes. At this point, it's very hard to anticipate 2023. We still have six more months to go in a very uncertain environment. So I wouldn't want to give any guidance at this point. We're very focused on defending the volumes that we achieved in 2021. In terms of prices, our strategy is to always serve our clients in the best way and keep a balance between market share, price, and profitability. So, we'll remain on that strategy.

Claudia Bustamante, Investor Relations Manager

Next question from Carlos Kadasa. Why did you switch from natural gas in Piura? And what are the savings concerns?

Humberto Nadal, CEO

Regarding the Piura plant, we were not able to achieve a sustainable supply of gas in the amount and quality we needed. We're trying to fix that in the coming months, so we can engage with gas. At this point, we cannot talk about any savings specifically because we don't have the final numbers yet.

Claudia Bustamante, Investor Relations Manager

Okay. Next question. Could you share an outlook on dividends for this year?

Humberto Nadal, CEO

I think what we said in the past is that we've had a consistent dividend policy over the last years, except for the extraordinary dividend we provided in July of last year. I think this year, in the second part, we should go back to the historic level of dividends we had previous to 2021. However, this decision is something that the Board has to decide in the coming months.

Claudia Bustamante, Investor Relations Manager

Okay. Are there any concerns regarding excess capacity after the clinker expansion in the Pacasmayo plant?

Humberto Nadal, CEO

So we understand the numbers, last year we sold 3.6 million tons of cement, and only 3 million of those were made from clinker. The expansion will really only replace imported clinker if the volumes stay at the level right now. It has never been our strategy to operate with high capacity utilization. We have always had a 25% to 30% idle capacity. Even if demand drops a little bit, we are confident that the utilization rate of the new kiln in Pacasmayo is going to be in the less optimistic scenario, probably at 60% or 70%.

Claudia Bustamante, Investor Relations Manager

Okay. That's all the questions from the webcast, but I do think we have one more question on the line. So I'll turn it back over to Jenny.

Operator, Operator

Yes, we certainly do. We have a question again from Francisco Suarez from Scotia Bank. Francisco, over to you.

Francisco Suarez, Analyst

As for the second question. But I was curious because you were also referring to overall weakness on works related to the reconstruction programs in Northern Peru. Can you provide us a little bit more color on what is driving these delays in the overall execution? Is that weather-related or is it actually much more structural? And what do you expect for the rest of the year?

Humberto Nadal, CEO

Thank you, Francisco, for the question. I think the delays are related to the fact that the lady in charge of reconstruction was removed from her position and nobody has been announced yet. So I think it has to do with our own ability to operate. It has nothing to do with weather or anything. It's strictly the inability of the authority to keep working on the game plan.

Francisco Suarez, Analyst

So that's interesting because it is about execution risks rather than any problem with funding, isn't it?

Humberto Nadal, CEO

Absolutely, only execution risk. It is not about funds.

Operator, Operator

Okay. We don't have any more questions in the queue. So I'll now hand back over to Humberto for any closing remarks.

Humberto Nadal, CEO

Thank you. There is no doubt that we are living difficult and uncertain times. Even though we may have learned to live with COVID, we now have to deal with war in Europe and precedent levels of inflation, civil unrest, and more radicalized political positions globally. As the world continues to spin in ever-changing directions, we have to remain calm and confident that the solid foundation we have built for the Company will allow us to prevail and succeed once the cycle, as all of them before, comes to an end. Our 65 years of experience in a country that has given us quite a variety of challenges during that time have provided us with the tools to face difficult times and with absolute confidence that by continuing to focus on our clients' needs and constantly challenging ourselves to think outside the box, we will continue to deliver the best possible results. I want to thank all of you for attending the call this morning. As I always say, thank you for the renewed interest in our company, and we always remain here should you have any further questions. Stay safe, and have a great day.

Operator, Operator

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