Earnings Call Transcript - CPAC Q3 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Cementos Pacasmayo Third Quarter 2020 Earnings Conference Call. After the presentation, there will be a question-and-answer session. [Operator Instructions] At this time, it's my pleasure to turn the floor over to Ms. Claudia Bustamante, Investor Relations Manager. Ma'am, the floor is yours.

Claudia Bustamante, Investor Relations Manager

Thank you, Tom. 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 term 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 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 floor 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 during these difficult times. This quarter, cement shipments have accelerated strongly, leading us to reach historical record levels. The 14.2% year-over-year growth in cement sales volume is remarkable, and we hope it continues for the next month. This significant increase in sales also resulted in an unprecedented quarterly EBITDA level of PEN120.6 million as increased sales were matched with sustained savings in selling and administrative expenses as part of our commitment to operational efficiency. As you probably know, the Peruvian government gradually began reopening its economy in the third quarter reaching Phases 3 out of 4, with more than 90% of the economy currently operating. Although GDP has not yet recovered to pre-pandemic levels, the decline has been decreasing month by month. We hope to continue seeing some recovery as the remainder of the economy reopens. Cement shipments have recovered well throughout the quarter, but the Northern region has fared much better than the rest of the country, reaching pre-pandemic levels as soon as July and historical records during the quarter, as I already mentioned. We are aware, of course, that these growth levels may be difficult to sustain in the future, but we do believe that even if demand for bagged cement decreases in the upcoming months, the demand for ready-mix and pre-customer deals should increase as our reconstruction-related projects accelerate this execution. Although these market differences between regions cannot be denied, we do strongly believe that our actions and strategies have played a key role in our increased sales volume. We have been working steadily in the past years to focus on our clients' needs and provide solutions beyond just any product. These efforts have proven valuable during these challenging times. The self-construction segment has been the engine behind the volume growth this quarter. We are focused on several fronts to enhance the customer experience and to facilitate access to our solutions. We have developed Mundo Experto which is an ecosystem made up of digital solutions that join supply and demand and offer a superior purchasing experience, leveraging intensive use of technology to generate more value for our users. The digital solutions are targeted and customized for additional users, such as foremen, hardware stores, and the self-builder. We are convinced that being at the forefront of digitalization for these customers will bring even greater opportunities for future development and growth. On the other front, we have Pacasmayo Professional, a division that offers construction solutions for the more formal construction segments. As shown in here, it offers a portfolio of comprehensive solutions and includes technical assistance throughout the building processes in order to provide a superior user experience. Our portfolio of building solutions looks to maximize our value-added offer, distinguishing ourselves clearly from traditional cement sales and consequently strengthening our market position. We have developed targeted solutions for different types of customers, aiming to expand our customer base beyond construction companies of any size, to also include foremen and self-builders. We have developed both adapted ready-mix solutions for structural needs and pre-dosed bag solutions for non-structural purposes to better fit these customer needs. We believe that there is an important potential market for ready-mix concrete in this segment and are therefore working on adapting the value proposition to generate greater value for them. Finally, I would like to highlight that both our current achievements and the development of our future strategy would not be possible without our people. The health, safety, and well-being of our workers will continue as our top priority. We have implemented a variety of systems to communicate, inform, and support the physical health of our people, resulting in a lower than average level of COVID-19 cases among our workers. We continue to operate our plants with as few workers as possible, and those that have to go follow strict guidelines for social distancing, hygiene, and regular checkups by our health and safety team as well as a strict protocol for accessing all of our facilities, not only for workers but for contractors and visitors as well. All of our administrative staff continues to work from home, and we plan to continue working this way until we are certain that the benefits of returning to the office outweigh the risks. We also want to emphasize that emotional health is extremely relevant these days and we are making sure that the work-home balance is adequate and more importantly, as our people feel supported by the Company. We are convinced this is the only way the Company will achieve growth and development as empathetic leaders who generate the commitment and engagement needed to navigate these uncertain times. I will now turn the call over to Manuel for a more detailed analysis of 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. As Humberto mentioned, in this third quarter, we have reached historical records in revenues and in EBITDA. Revenues were PEN407.4 million, a 6.3% increase when compared to the same period of last year, mainly due to increased bagged cement shipments partially offset by lower sales of concrete. Gross profit decreased 3.4% in the third quarter of 2020 compared to the same quarter of last year, mainly due to higher costs as we had to use imported clinker because of the sharp and sudden increase in demand as well as higher fixed costs due to lower sales of concrete and a lower average price of cement, as we sold more of our value-brand cement. Consolidated EBITDA was PEN120.6 million in the third quarter of this year. As I mentioned before, the highest in the Company's history and an 8.2% increase when compared to the third quarter of 2019, mainly due to increased sales as well as our sustaining savings in administrative and selling expenses. For the first nine months of the year, revenue decreased 19.4% and EBITDA decreased 37.5% mainly due to the wholesale operations being shut down for over two months during the government-mandated lockdown between March and May. Turning to operating expenses. Administrative expenses for the third quarter of 2020 decreased 20.1% compared to the third quarter of 2019, mainly due to a decrease in variable salaries and third-party services. Selling expenses in the third quarter of this year decreased 16.8% compared to the same period of last year, mainly due to decreased advertising and promotion and lower variable salaries because of our operational results. We will continue to strive to sustain these adjustments when possible to ensure business efficiencies that can offset some of the increased costs. During the first nine months of the year, administrative expenses decreased 14.1%, and selling expenses decreased 2.8% mainly due to the above-mentioned sales. Moving to the different segments. Cement, concrete, and precast sales increased 2.9% during the third quarter of this year compared to the same period of last year, mainly due to increased sales of bagged cement, as well as precast, offset by lower sales of concrete. Gross margin decreased 2.8 percentage points in the third quarter of 2020 when compared to the same period of last year, mainly due to higher cement production costs as a result of the use of imported clinker as well as lower dilution of fixed costs from the slower recovery in concrete sales. For the first nine months of this year, cement, concrete and precast sales decreased 20.8%, and gross margin decreased 8.5 percentage points as a result of the government-mandated halt in operations. Sales of cement increased 15.2% in this third quarter compared to the same period of last year, mainly due to increased shipments of bagged cement as demand in the Northern region boomed during this quarter. However, gross margin decreased 3.1 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 a sales mix. For the first nine months of the year, cement sales increased 16.7% and gross margin decreased 7.9 percentage points. Concrete sales decreased 52.1% as gross margin decreased 17.4 percentage points, mainly due to a high comparative basis since last year we reached record sales levels as well as a slower recovery in concrete sales than in bagged cement. For the first nine months of the year, sales decreased 47.8% as gross margin decreased 23.4 percentage points. Once shipments for the public sector for reconstruction and other projects start accelerating, we should start seeing higher levels of concrete sales. Free cash sales increased 46.2% and gross margin increased 6 percentage points during the third quarter of this year compared to the third quarter of 2019, mainly due to increased sales for reconstruction-related projects. For the first nine months of the year, sales increased 21.4%. However, gross margin decreased mainly because of the sales mix since we sold more lower-margin products. Quicklime sales in the third quarter of 2020 increased 9.8% and gross margin increased 14.3 percentage points compared to the third quarter of 2019, mainly due to a temporary increase in sales of ground quicklime, which has a higher average price. During the first nine months of the year, quicklime sales decreased 13.6% compared to the same period of 2019, mainly due to decreased sales volume as a result of the halt in operations of most sectors during the government-mandated lockdown during the second quarter. Gross margin increased 7.4 percentage points during the first nine months of the year compared to the same period of 2019 mainly due to temporary increases in sales of higher-priced products as well as our decision to sell ex-works during the lockdown period. Sales of construction supplies during the third quarter of 2020 increased 68.9% compared to the third quarter of 2019, in line with bagged cement sales as families worked on home improvement projects. Gross margins remained flat in the third quarter of 2020 compared to the same period last year. During the first nine months of the year, construction supplies increased 2.2% compared to the same period in 2019 mainly due to the halt in commercialization for most of the second quarter as previously mentioned. The profit for the period was PEN45.2 million, 12.4% higher compared to the same period of 2019, primarily due to increased revenues and operating profit. This result has led us to overturn the net loss we had accumulated as of June to a net profit of PEN10.4 million. To summarize, this quarter's results show the resilience and rapid response of both the market and the Company. The negative result of the second quarter has not only been reversed, but we have achieved year-over-year growth in most key metrics. We believe that we are in a strong financial position to face the demand and to continue operating with some financial flexibility as cash generation is steadily increasing. Can we now please open the call to questions?

Operator, Operator

[Operator Instructions] We'll take our first question from Andres Soto with Santander.

Andres Soto, Analyst

Hi, Humberto, Manuel, Claudia. Thank you so much for the presentations. Congratulations on the results. My first question regarding some of the comments that you made in the release where you say that you expect by 2023, 25% of revenue should come from value-added products. I would like to understand what is the starting point that we should look at; is it 10% now or that kind of number? And what type of capabilities and investments will be required in order for you to achieve this goal? That's my first question.

Humberto Nadal, CEO

Hi Andres, Humberto, thank you for joining the call. I hope you're doing well, you and the family. When we talk about building solutions, I think I’ll focus on value creation in what sense. Last year, in 2019, we already had 17% of our sales coming from building solutions. We're talking about products based on cement that return value, for example, the underwater pipes for the Talara Refinery, for example, some bridges, and so forth. In terms of CapEx, these are very low certainly because basically includes some cranes, some facility, but nothing compared to what our cement plant would cost. I mean, probably over the next three to five years, we're going to be at around PEN20 million in this building solutions over that period of time. So like I said, it's not a substantial item for CapEx, but it does allow us minimal growth and the second biggest to the consumer and of course, great value for the Company.

Andres Soto, Analyst

Perfect. And my second question is regarding capital deployment. When I look at my numbers, I see that net debt to EBITDA next year should be already below 2 times. So I would like to understand what will be your priorities in terms of capital deployment going ahead. Is it to increase dividend distribution or are you looking for opportunities for inorganic expansion, considering that some players are apparently leaving the region? So, will you consider buying any of the operations in case CEMEX decides to sell any of their Latin-American operations?

Manuel Ferreyros, CFO

Yes, Andres, hello, this is Manuel. Considering the next year EBITDA excluding all this lockdown, we should be around 2 times net debt to EBITDA, a little bit lower than that.

Humberto Nadal, CEO

And considering the other part of the question, Andres, you know that our policy, and this is for the Board to decide, has always been that if we have sufficient cash generation, whatever money we may not use for our CapEx shall go to our shareholders. So I think dividends are always a priority on our list. Regarding potential acquisitions, we have been, since the IPO in 2011, selectively trying to pursue them. We have never been successful because we never found something that there was a clear path to value generation. We are still watching the situation. You mentioned specifications or some others. I think we have a very strong balance sheet. It's something that even though we would analyze, we would go in if we had a very clear idea of how to create value. So that will be my answer to your question.

Operator, Operator

And we'll take our next question from Lucia Calvo-Perez with LarrainVial.

Lucia Calvo-Perez, Analyst

I wanted to ask you three questions. The first one is, until when do you think you're going to be importing clinker for the unexpected growth in cement? My second question is I think that this demand for [indiscernible] and capacity. And the third question is, well, also related to volume spread if you have any expectations in terms of timing and the schedule of the reconstruction program awarded to the government—to the United Kingdom. I mean, if you are expecting demand from volumes coming in there like during the first half of the year in 2021 or maybe more toward the second half of the year?

Humberto Nadal, CEO

Yeah, thank you for your question, Lucia. Regarding the first part, I mean, we are cautiously optimistic that volumes are going to stay at their current levels. So the answer on the imported clinker is that we will always have to secure production capacity; thus, we will be importing clinker products for the coming years, which I think is a very good scenario because that means that the demand remains very high. Of course, if something happens with demand, we can always go back on that. So, my first answer to your question is that we'll be importing clinkers. We decided to go into new CapEx to increase the capacity of our plants. Regarding the second part of your question, I didn't quite hear, but the one regarding the reconstruction works—there are dozens of British citizens already working in the North on this reconstruction plan. We expect that demand should come in the first half of the coming year.

Operator, Operator

And ladies and gentlemen, one moment please. We're experiencing a slight interruption in our conference, one moment. And we are now back live.

Humberto Nadal, CEO

Yes, I know you're still on the line. I hope you got my answers to your questions on the imported clinker and the reconstruction program. And I was saying I didn't quite get your second question; I mean if you can please rephrase it for me. Thank you.

Operator, Operator

And Lucia, if you could requeue, please. At this time. We'll go next to Francisco Suarez with Scotiabank, but Lucia, if you would please requeue for your secondary question. And Francisco, your line is now open.

Francisco Suarez, Analyst

Thanks again and congratulations on this superb quarter. It's been some sort of a routine for you guys. The questions that I have are on capital allocation. You mentioned previously that perhaps dividends might be ranking first in priority once that you feel comfortable enough with your balance sheet to distribute more dividends to shareholders, but what about potentially just making a single modern line in the plant of Pacasmayo? That plant probably can actually get more, much more efficient if you have something like what you have currently in Piura. And not to mention that it will be definitely producing less carbon emissions and the like. So if you can walk me through what could be the priorities on capital allocation as your cash starts to mount more than current levels and what could be the order of those priorities, that will be very helpful. And the second question that I have is that because I didn't get the right answer, I want the reasons of why do you have to rely on clinker imports because I noticed that Piura was separating very few, I mean a very small amount of clinker for the quarter? Sorry for that.

Humberto Nadal, CEO

Sure, Francisco. I think very good questions. I'll tackle them in order. First, dividends are a priority as long as the Company has both the cash position and has no use for those funds. Clearly, we are already starting to look at getting a new kiln in Pacasmayo. We are at a pre-feasibility level. We should have probably the preliminary numbers, an idea in December of this year. But you have to bear in mind two things; first, demand has risen so quickly that we're not going to make a decision, a CapEx decision on a temporary increase of demand. We will have to be very confident in the demand looking forward to do it, and point number two is, as we did with Piura, before starting Piura, we were importing three or four years of clinker because it makes sense; we need at least a deficit of 0.5 million to 600,000 tons of clinker to make it worthwhile in investment. Otherwise, there are two things: one, postpone the investment you have a lower financial cost, and it makes us import the clinker. And point number two, if you build a plant and you operate it at 15% or 20% capacity, then really the fixed cost will kill you. So like I said, dividends are a priority, but we are now actively looking at a new plant or a renovated plant in Pacasmayo; you have to also bear in mind that Pacasmayo, in terms of milling and in terms of dispatch, all that part is new. So I would look at would be a Brownfield focus fundamentally and the handling of the materials coming into the plant and the kiln. And the other question was in terms of clinker capacity when we came out of the lockdown; it was really impossible to anticipate what was going to go on with demand and at that point, our priority was to keep our cash. That's why we didn't open the Piura kiln initially. We did instead of opening in May, we did it some weeks after that when we realized demand was coming back stronger, and we switched from a cash preservation mode to let's go full production. So, at this point, all our teams are at full production. With this kind of demand, we need to import clinker to meet demand.

Operator, Operator

[Operator Instructions] There are no further questions in the queue. Mr. Nadal, I'd like to turn the call back over to you for any closing comments.

Humberto Nadal, CEO

Thank you. This has no doubt been an outstanding quarter in terms of results of operations, and we cannot deny that it surprises us as well, but we are in a very strong position both financially and operationally to take on the challenge and rise to the occasion. There definitely are certain times as none of us can really envision what the new normal will look like. But we are clearly aware of what is certain is that now more than ever, we need to present as a company and build together the future we dream of. Thank you very much for your renewed interest in our company. As always, Manuel, Claudia, and myself remain open to any questions you may have. Stay safe and have a great day.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time. Have a great day.