Earnings Call Transcript - CPAC Q3 2022

Operator, Operator

Good morning, everyone, and welcome to the Cementos Pacasmayo Third Quarter 2022 Earnings Conference Call. It is now my pleasure to hand it over to your host, Claudia Bustamante. Claudia, please proceed.

Claudia Bustamante, Host

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 filings. With that, I'd now like to turn the call over to Mr. Humberto Nadal.

Humberto Reynaldo Nadal Del Carpio, CEO

Thank you, Claudia. Welcome, everyone, to today's conference call, and thank you for joining us today. This quarter's results show our ability to sustain profitability even in the light of a slowdown in demand. Even when there has been a slight deceleration in terms of volumes, consolidated EBITDA was PEN 124.9 million, a 6.5% increase when compared to the same period of last year, achieving a margin of almost 23%. This is especially relevant considering that during the quarter, we performed preventive maintenance of our kiln in Piura and also our main kiln in Pacasmayo. We were able to shorten the scale of maintenance time in Piura from 30 to 20 days, therefore performing it with our own clinker instead of using imported clinker. We are certain that this approach and our sustained focus on efficiency will continue to reap benefits. As we have mentioned many times before, we are absolutely convinced that operating with sustainability at our core is the only way to ensure a profitable and successful future without sacrificing the well-being of our planet for future generations. In order to continue aligning our efforts in this front with our overall company strategy and to foster a culture of sustainability throughout the organization, we have decided to appoint a dedicated management team for this purpose. Along those same lines, and considering the relevance of climate change in our line of business, we have also appointed a dedicated management team for climate change matters. That is the case. So we have both managers appointed by now. This team will focus primarily on achieving our net zero ambitions, considering that one of the biggest challenges we face now is the decarbonization of our operations. Having specific management in climate change will allow us to separate the necessary resources and streamline the decision-making process to achieve our emissions reduction objectives. Likewise, we want to consolidate ourselves as a benchmark leader in the construction materials industry for its good climate action practices actively contributing to benefit our country and protect our planet. We believe that we have always tried to compare ourselves to the leaders in both industry and globally. This is why we actively participate in organizations such as the FICEM, the Inter-American Cement Federation, that represents the cement-producing companies, institutes and associations all across Latin America, the Caribbean, Spain and Portugal. FICEM also leads the efforts of the regional cement industry in terms of adaptation to climate change and mitigation of emissions. This year, we are taking an even more active role in FICEM. That is why I am part of the 2022, 2024 Board of Directors, and other members of our company have presented significant initiatives, such as our experience in the use of green cement in the north of Peru and our success in the accident rate reduction safety action plan. We will actively continue to take a role in international platforms that allow us to both share our own experience and to learn from others as well as to work as an industry to achieve the best possible solutions, creating and enabling an environment for innovation, progress, and sustainability. Finally, I would like to say that we are extremely proud to call ourselves leaders in the Peruvian cement industry once again as we have achieved the 15th place in the Merco Company and Leaders 2022 ranking, an outstanding benchmark in Spain and Latin America for the performance of company reputations. The ranking evaluates the policies and initiatives of the main companies in the country through a survey of opinion leaders, journalists, and executives. In particular, the ranking highlights the protection of the company's reputation. Being in the top 15 for us holds a very special relevance for a company like ours that operates in only 1 region of the country, unlike most companies that operate at the national or even international level. This achievement is a result of a combined and sustained effort of years by every member of our company, and we will strive to continue improving. I will now turn the call to Manuel to go into a more detailed financial analysis. Manuel?

Manuel Peña, CFO

Thank you, Humberto. Good morning, everyone. In the third quarter of 2022, revenues reached PEN 553.6 million, marking a 9.1% increase compared to the same period last year, primarily driven by higher prices of bagged cement due to inflation. Gross profit rose by 11.8%, attributed to increased revenues and some cost reductions as we prioritized our own clinker, which lowered the costs associated with imported clinker. Consolidated EBITDA stood at PEN 124.9 million for the third quarter of 2022, reflecting a 6.5% increase from the prior year, mainly from higher prices and operational efficiencies. Over the first nine months of the year, revenues grew by 12%, gross profit by 22.8%, and consolidated EBITDA by 19.4%, largely due to increased sales and reduced costs. In terms of operating expenses, administrative costs grew by 14.6% in the third quarter and 14.8% over the first nine months of the year compared to the same periods last year, in line with higher sales and salary increases as well as increased personnel costs based on negotiated unit volumes every three years, which have a more significant impact in the first year. Selling expenses also saw increases of 21.1% in the third quarter and 20% over the first nine months compared to the previous year, primarily driven by higher salaries and union bonuses. Looking at different segments, cement sales rose by 14.1% in the third quarter of 2022 and 15.3% over the first nine months compared to the same periods last year, with bagged cement sales being the main demand driver. The gross margin stayed consistent with the previous year, despite maintenance on our main kilns, but improved by 2.9 percentage points in the first nine months as we mitigated raw material cost increases by reducing imported clinker usage and optimizing our capacity. During the third quarter of 2022, sales of concrete and mortar dropped 15% and 10.2% respectively over the first nine months compared to previous years, primarily due to a slowdown in sales volumes for private and public projects. Nonetheless, gross margins improved by 1.3 percentage points and 3 percentage points during the same periods, largely because of our focus on higher-margin products. Sales of precast materials increased by 25.5% in the third quarter and 10.8% over the first nine months, affected by a reduction in public sector spending. Although the gross margin was negative for both periods due to inventory write-offs and rising raw material prices, it is important to note that margins for blocks and light precast materials turned positive this quarter and are expected to slightly improve moving forward. Net profit rose by 5% in the third quarter compared to last year, primarily due to higher operating profits. Over the first nine months of the year, net profit surged by 35.7%, driven by increased revenues and lower costs, enhancing operating profits. Our net debt-to-EBITDA ratio stands at 2.4x, which we consider a comfortable level. In summary, this quarter's results reflect our ability to achieve efficiencies despite cost and inflation pressures, enabling us to maintain significant profitability. Can we now open the call to questions?

Operator, Operator

There are no questions in the queue at this time. I will now hand the floor over to Claudia Bustamante. Please go ahead.

Claudia Bustamante, Host

Our first question is, we saw weaker margins compared to the first half of the year due to the higher energy costs. Do you see a stronger impact in the upcoming quarter? What is your strategy to manage this?

Humberto Reynaldo Nadal Del Carpio, CEO

Thank you for the question. No, we don't see any further increases. I mean we all know energy price increase has been a worldwide phenomenon. But for now, I think they are level. And I think that we've been able to keep a healthy pricing strategy that has allowed us to, within a difficult situation, maintain pretty competitive margins.

Claudia Bustamante, Host

The next question, we have seen an increase in CapEx on this quarter, mainly on Pacasmayo's plant. Which were the main projects regarding this CapEx increase? And what is your guidance for 2022?

Humberto Reynaldo Nadal Del Carpio, CEO

Well, as you all know, I mean, in November of last year, our Board approved the building of kiln #4 in Pacasmayo with an approximate budget of $75 million. This project is well underway, and we are very happy that we will be on time operating this kiln by the third quarter of next year. So most of the CapEx related to Pacasmayo has to do with this project.

Claudia Bustamante, Host

And the next question is, do you expect to continue increase in prices? Or are you considering, yes, increases for the remainder of the year or going on to next year?

Humberto Reynaldo Nadal Del Carpio, CEO

As we all know, I mean, these are inflationary times. And we've been very careful to keep a balance between meeting our consumer needs, defending market share, and defending the profitability of the company. Those three things will remain our guidelines for the coming months. Depending on how they move, we will consider changing on prices.

Claudia Bustamante, Host

Could you please comment on your energetic matrix?

Humberto Reynaldo Nadal Del Carpio, CEO

We are fundamentally based on a long-term contract with ElectroPeru for our electricity needs. Regarding kiln usage, we primarily use coal, although we have been negotiating to switch the Piura plant to gas in the past weeks. We hope to make that transition to gas for Piura by the end of the year.

Claudia Bustamante, Host

How do you see self-construction going into 2023 considering higher financing costs, inflation, and lower household savings?

Humberto Reynaldo Nadal Del Carpio, CEO

You have to keep in mind that self-construction is the most informal sector. This is a sector that has a very few bancarization effects. So I think as soon as there's employment, and we believe the employment turnover, thanks to agriculture, fishing, construction, and commerce, is going to be very strong, we remain optimistic that the self-construction building will keep being a basis for our demand.

Claudia Bustamante, Host

Okay. I have two similar questions on guidance for dispatches for 2023, pricing invoice for 2023?

Humberto Reynaldo Nadal Del Carpio, CEO

Well, prices, I think I have said that before. We're going to be very attentive to what happens with our market share, our costs, and inflation. And in terms of guidance, as you all know, last year, we grew 42% going from 2.6 million to 3.6 million tonnes, which is really a revolutionary number. Our aim this year and the aim next year is to remain very close between the 3.5 million and 3.6 million tonnes, which I think is a fantastic platform to stand on.

Claudia Bustamante, Host

The next one is regarding the infrastructure plan. It said the infrastructure plan was recently updated. What is the impact you are seeing in your area of influence?

Humberto Reynaldo Nadal Del Carpio, CEO

I would love to say that we see some, but the reality is we see none. I mean, this is a plan that has been updated for the last 35 years probably 5 or 6 times. It's not about having a plan. It's about execution. And we don't see any execution coming in the near future. Hopefully, I'll be wrong.

Claudia Bustamante, Host

Do you plan other maintenance of any of your clinker or cement plants in the following quarters?

Humberto Reynaldo Nadal Del Carpio, CEO

No. As I mentioned last month, we performed maintenance on our two largest kilns, the Piura kiln and kiln #3 in Pacasmayo. Therefore, no further preventive maintenance is planned for this year.

Claudia Bustamante, Host

When do you plan to have the new kiln in Pacasmayo operational?

Humberto Reynaldo Nadal Del Carpio, CEO

As we announced in November last year, we referenced the third quarter of 2023. At this time, we are on schedule and within budget.

Claudia Bustamante, Host

And finally, regarding financial liabilities, what is the proportion of fixed variable rates on your debt? Would we expect further impacts from interest expenses in line with higher rates?

Manuel Peña, CFO

All the answers in our debt, it's fixed. We have no variable interest.

Claudia Bustamante, Host

Could you further explain the increase in inventories affecting cash flow from operations? Should we expect a reduction in the coming months?

Manuel Peña, CFO

What we've been working on is increasing inventories because what we are seeing is more community issues along the country. So in a preventive way, we have increased our push on landing material, our clinker, our coal to be prepared if something happens in the country.

Operator, Operator

Thank you. That concludes your Q&A session. I will now hand the conference back to Humberto Nadal for closing remarks. Please go ahead.

Humberto Reynaldo Nadal Del Carpio, CEO

Thank you. The level of uncertainty the world is experiencing today is unprecedented, especially considering the ever-increasing needs of access to information we have become used to. It is understandable and expected that higher inflation rates and lower growth rates have made investment in emerging markets less attractive. Although this is also the case in Peru, it is important to understand that the macroeconomic figures continue to be very solid with inflation rates way below that of our neighboring countries, a very strong currency, and debt levels which are still at very conservative levels. Despite the lower growth predictions, our company continues to deliver in terms of profitability. Moreover, once the optimization of our plant is ready in the third quarter of 2023, we will be able to increase profitability as we're no longer strongly dependent on imported clinker to produce the cement that the market demands. We are convinced that if we continue to focus on what we know best and are constantly analyzing and investing in potential improvements and innovations, we will be able to continue delivering outstanding results for our stakeholders that we've been doing for the last 10 years. This concludes, and thank you very much. And we are always at your disposal should you have any further questions, and thank you for the interest in our company.

Operator, Operator

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