Earnings Call Transcript - CPAC Q2 2020

Operator, Operator

Good day ladies and gentlemen. Welcome to Pacasmayo’s Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode, and 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, Melinda. 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, especially our response to COVID-19 and 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. We hope all of you and your families continue to stay safe in these very difficult times. We are all joining from different locations, so let’s hope that everything works from a technological side. As you probably know, the Peruvian Government continues extending the lockdown and state of emergency intended to last two weeks at first, for a total of almost 3.5 months that ended June 30. Economic activities started gradually since mid-May with activities related to mining, industry and construction services, tourism, and commerce. We started producing our ship instrument on May 20, always with the health and safety of our employees as our undisputed top priority. We continue to operate with as few workers as possible in our plants. And those who have to come in are following strict guidelines of social distancing, hygiene, and regular check-ups by our health and safety team. All of our administrative staff continues to work from home, and we plan to continue this way until we are certain that the benefits of returning to the office outweigh the risk. Before moving on to the results of our return to operations, I would like to highlight our actions to fight against the spread of COVID-19. We have acted on four different fronts and have acted strongly. First, in terms of health-related initiatives, we have implemented an additional program to help our workers with BMIs above 30. This program has been very successful, and after 2.5 months, almost 70% are already below 30. We continue to work with the other 30% and will closely monitor all of them so they can maintain these healthy levels. We have also provided all of our workers with access to online doctor's appointments, so they don't have to leave their houses unless strictly necessary. Testing kits, face masks, hand sanitizers, and psychological and emotional support have also been provided. We have also donated testing kits to our communities and local authorities. Second, in terms of goods, we have donated food to communities in our area of influence, benefiting over 1,800 families. Third, through our volunteering program, we have helped with the disinfection of streets in some of our areas of influence. We filled our mixer trucks with water and disinfectant, and thanks to our almost 80 volunteers, we were able to clean and disinfect more than 17 kilometers of roads. Finally, communication is also very important. In the first weeks of the state of emergency, in some areas of the country, including the North, there was a lack of information on this ongoing pandemic and the true importance of staying home to prevent the spread. We produced radio and TV spots to help inform the population, and we believe it was a very successful strategy. We firmly believe in building a better future together, and now is the time to show our support to our workers, their families, our communities, and those less fortunate during these difficult times. Also, in conjunction with virtual mining, we have developed various programs to aid our people in these challenging times. Moving on to our results, we have been pleasantly surprised by the behavior of our operations. We expected the self-construction segment to suffer significantly due to the lockdown, but this has not been the case, and it has once again proven its resilience. This segment is generally tied to employment, but in the North, which is primarily agricultural, it has had a good year, so it was less affected than in other areas of the country. Due to the size of the informal sector in the north, which did not quite stop during the lockdown, we can see why the recovery has been faster than expected. Our sales in June were only around 20% below the same period of the previous year, which was a record year as you may recall. July sales have continued increasing and look extremely promising, leading us to project that sales could be close to those in 2019. Nonetheless, the effect of over two months of not sending any cement will definitely burden our end-of-year results, even if this faster expected recovery consolidates in the coming months. Another reason to be very optimistic about the second half of 2020 and all of 2021 is the agreement signed between the Peruvian and the British Government to accelerate the execution of the reconstruction plan from the 2017 El Niño phenomenon. The agreement involves the execution of 7 billion soles over the first two years, during which the UK Government will provide technical assistance for the construction of hospitals, schools, and river defenses, all of which should be finished by June 2022. These are excellent news for the northern region, as much-needed infrastructure will finally be built effectively and hopefully in the most efficient manner. Finally, I would like to take a moment to briefly explain our most relevant digital initiatives, as they have become even more applicable in today's context. Since 2018, when we launched our new vision, we identified digital transformation as one of the key components of our strategy. Since then, we have worked on various tools and projects to digitalize our processes and our relationship with our consumers. We have developed a platform for registration, control, and follow-up of different kinds of discounts and promotions, granting a new digital experience to our clients, providing a great user experience with required speed and access to information. Another very important digital tool on the operational side of the business is one that allows for online control of the main production variables: quality, energy consumption, and resources. It provides real-time information that also keeps historical records, enabling operational intelligence as well as predictive analysis. This is complemented by a platform that digitalizes our production teams to work and is managed through mobile devices. One of the most relevant initiatives that has been developed is to digitalize our relationship with construction companies of all sizes through Pacasmayo Professional, allowing them to program requirements and track shipments online. It integrates all of our back-office platforms for optimal customer service experience, enabling efficient planning and scheduling of our fleet according to client requirements. All of these tools are already in planning or execution. The pandemic has only led us to accelerate the development and implementation of these initiatives. We are firmly convinced that we have already identified these opportunities and have started working decisively on them, positioning us strongly to adapt to new market conditions. I want to emphasize that we will remain fully focused on our long-term goals and are pleased to have already seen some recovery in sales. We are convinced that the work done over the past years in terms of long-term strategy and vision, as well as a quick adaptation to the long-term period, puts us in an incredibly strong position to capitalize on future opportunities and continue helping our country progress. I will now turn the discussion over to Manuel to go into more detail on our financial performance.

Manuel Ferreyros, CFO

Thank you, Humberto. Good morning everyone. I hope all of you and your families are staying safe and healthy. The second quarter of 2020 revenues were PEN114.3 million, 64.5% lower than the same period last year, mainly due to the halt in production and commercialization after the government declared the state of emergency to prevent the spread of COVID-19. Gross profit decreased 98.2% in the second quarter of this year compared to the same quarter last year, mainly due to lower sales, as well as higher fixed costs derived from the sudden stop in regular production. However, as Humberto mentioned, revenues have started improving since June, and we expect further improvements in the upcoming months. Consolidated EBITDA was negative PEN5.7 million in the second quarter of this year. For the first six months of the year, revenues decreased 34.9%, and EBITDA decreased 64.6% for the mentioned reasons, which were partially offset by a very positive first two months of the year. Turning to operating expenses, administrative expenses for the second quarter of this year decreased 20.7% compared to the second quarter of last year, mainly due to decreased variable salaries as a result of the company's operational outcomes. Selling expenses in the second quarter of 2020 decreased 21.7% compared to the same period last year, mainly due to decreased advertising and promotional from budget adjustments and lower variable salaries because of our operational outcomes. During the first six months of the year, administrative expenses decreased 11.3% for the reasons mentioned above. Selling expenses for the first six months of the year increased 4.8%, mainly due to the increase in the allowance for credit losses. Moving on to different segments, cement, concrete, and precast sales decreased 65.5% during the second quarter of 2020 compared to the same period last year, mainly due to the halt in production during most of the quarter. Gross margins decreased 35.9 percentage points in the second quarter of 2020 when compared to the same period last year, primarily due to the sudden halt in production. However, the gross margin in June was already almost 30%, and we should see continued improvement. Sales of cement decreased 60.9% in the second quarter compared to the same period last year, mainly as a result of the halt in production and commercialization. Gross margins decreased 29 percentage points, primarily due to lower sales and increased costs related to the halt in operations. For the first six months of the year, cement sales decreased 34.8%, and the gross margin decreased 12.1 percentage points. Nonetheless, as Humberto indicated, we have been pleasantly surprised by the performance of bagged cement sales in the restart of operations, and we expect July sales levels to be similar to the same period of 2019. Concrete sales decreased 92.3%, and gross margins decreased significantly due to the halt in production and commercialization for most of the quarter. For the first six months of the year, sales decreased 43.8%, and gross margin decreased 26.9 percentage points. Once shipments to the public sector for reconstruction and other projects restart, we should begin to see higher levels of concrete sales. Precast sales decreased 64.6%, and gross margin was negative due to a complete halt in sales and higher fixed costs during the quarter. For the first six months of the year, sales actually increased 6.5% compared to the same period last year due to very high sales during the first two months of the year, but gross margin remains negative due to higher fixed costs. Quicklime sales decreased 38.2% compared to the second quarter of 2019 and 25% during the first six months of the year, primarily due to decreased demand during the lockdown period. Gross margins increased 5.5 percentage points in the second quarter of 2020 compared to the second quarter of 2019 and 2.6 percentage points in the first six months of the year compared to the same period last year, mainly due to temporary increases in sales of higher-priced products and the decision to sell X works during the lockdown period. The loss for the period was PEN45.5 million, primarily due to decreased revenues and higher costs from the halt in production, as well as a slight increase in financial costs due to short-term loans taken for working capital. To summarize, this quarter’s results show the sharp effect of the complete stop in production and commercialization during the lockdown period, but June and July have already started showing very positive signs of recovery, giving us reasons to be optimistic about the second half of the year. We have preserved the financial health of the company during these challenging times and find ourselves in a good position to continue operating with financial flexibility as cash generation is steadily increasing. Can we now please open the call to questions, operator?

Operator, Operator

Thank you. [Operator Instructions] And first, we go to Andres Soto with Santander. Please go ahead.

Andres Soto, Analyst

Hi, Claudia, Humberto, Manuel. Thanks for the presentation. My first question is related to infrastructure projects. I understand you're becoming more confident in this demand finally coming along. Can you please give us a sense of the potential cement volumes from these projects over the next 24 months? And out of these, how much is in your pipeline for the second half of 2020? I understand you made this comment that you expect it to be in line with the second half of 2019, and I would like to understand how much of that is reflected by infrastructure projects versus organic demand that you have?

Humberto Nadal, CEO

Hello, it’s Humberto. Thank you for the question. In that program that's going to be supervised by the British Government, we're expecting somewhere around 350,000 tons to 400,000 tons. It should be happening probably at the beginning of the last quarter of this year, but very strongly over the next year. I think that's significant demand. In terms of infrastructure, because this is specifically for reconstruction, I would like to avoid giving exact numbers at this point because the government seems very confident that the system will work during the remaining part of this year, and they are considering implementing it for other projects. For example, the Chavimochic project, which was stalled for more than four years, has now been taken over by the central government, so I think that it's looking positive.

Andres Soto, Analyst

Thank you, Humberto. My second question is related to dividends. Clearly, profits this year are going to be extremely low; however, the company still has some equity reserves. Given this more optimistic outlook for the next 24 months, can your shareholders expect dividends to be distributed this year?

Manuel Ferreyros, CFO

That's a very good and a very tough question. I think we are very optimistic about what's coming ahead of us, especially given what we've seen in the last six weeks financially. We have recovered all of the short-term loans we had to take because of COVID, so we're in a strong position. Like you say, profit-wise, numbers are not going to be as strong this year as in previous ones, but we have close to $200 million in reserves, and we distributed a profit. So, I think the decision is not mine, but if the numbers keep showing the strength we have shown, probably some dividend will be considered by the Board, but clearly it will not be the same as last year.

Andres Soto, Analyst

Great. Thanks, Humberto, and congratulations on the good news.

Humberto Nadal, CEO

Thank you.

Operator, Operator

Next, we go to the line of Luis Pardo with Compass Group. Please go ahead.

Luis Pardo, Analyst

Yes. Andres beat me. I don't like that. I'm usually first in the call. Hey, guys. How are you? I hope your families are doing well. I would like to second Andres' comments here. Congrats on the pickup, the V-shaped recovery we're seeing here. My question is if you could give us more details on how and why you expect the second half to be similar to 2019, which was a record year. This is very impressive, and I don't think any other cement companies have that in the region. Can you provide us with more context and the reasons behind the confidence in the second half numbers?

Humberto Nadal, CEO

Hello, Luis. This is Humberto. I hope everybody's doing great in your family. It's a very good question, why are we optimistic? Unlike other companies, we are seeing a unique situation. But besides, I mean, I think we're basing this optimism on what we have been experiencing over the last six weeks. What we're seeing right now is fundamentally in bagged cement. This is related to employment. As you know, agriculture has been performing very well in the north; they're having a good year. Fishing has almost finished all of this quarter this year, and all of this reflects strong employment. So, I think that's driving a very strong demand in terms of bagged cement. This is coupled with the fact that the pharmaceutical sector, which accounts for 70% of our demand, didn't really quarantine like other sectors. These are people that need to work every day, and their ability to keep buying cement is a clear example that they have found ways to continue working. Moreover, the agreement with the British government is tremendous news, and we're talking about 350,000 tons of cement for a company that is selling 2.5 to 2.6 million a year. These figures are significant. I mean, if you spread it over 15 months, it brings substantial growth to us. So, why are we so optimistic? Because of what we have been seeing in the last seven weeks since reopening. Even though there were big projects down, we managed to collect that information and still post strong numbers. Just as I mentioned, in June, being only 20% down in bagged cement with no ready-mix is fantastic. So, I hope we continue on this positive trajectory, and I hope you see it too. I hope you are right; we always remain cautiously optimistic, but the facts and numbers we posted in the press release reflect a positive outcome.

Luis Pardo, Analyst

Very good, congrats. I know it's early, and you're very conservative, which I appreciate as a shareholder, but if all these trends continue, then 2021 could be a very strong year. If you're anticipating a second half similar to 2019, the media, reconstruction in 2021, and the agro sector is not going to slow down, then 2021 could be another record year after 2019, right?

Humberto Nadal, CEO

Absolutely. The fact that we’ve had to stop operations for two months highlights that the second half of the year, with our country still recovering, is showing very strong numbers. The program with the British Government is set to yield benefits within the next year, so yes, I believe that 2021 could set new records beyond what 2019 achieved.

Luis Pardo, Analyst

Okay. And while I'm with you guys, I just want to make a quick comment. It's commendable the effort that Manuel and Humberto put into communicating with investors during the crisis. I appreciate the support we've received over the last few months. Thank you very much, guys.

Humberto Nadal, CEO

Thank you, Luis.

Operator, Operator

Next, we go to Alejandro Chavelas with Credit Suisse. Please go ahead.

Alejandro Chavelas, Analyst

Hello, Pacasmayo team, congratulations on the results and the strong performance during June and July. My question relates to earlier comments made in this call, but the July demand seems to be really strong. You seem confident that it is not a one-off but will continue throughout the second half of the year. What are you hearing on the ground from the consumers? Is there a possibility that this could be inventory restocking rather than a strong trend? I want to understand what you're thinking on that front. You sound confident, just trying to get a better sense of the market.

Humberto Nadal, CEO

Thank you, that’s a very good question indeed. When we started on May 20, we had been out of stock in hardware stores. So, the first 15 days of operation, it was clear we were just replenishing stocks. Stock levels in our markets are very low in our factories and harbors; nobody has more than three, four, or five days of stock, so the replenishment of stock was the initial phase. Those days have long passed. While operations were good in late May, we were cautious because we said we were just replenishing. June was tougher, but what we're seeing in July shows growth of 10% week-over-week for six consecutive weeks. Therefore, I think that's not merely stock replenishing; that reflects strong demand returning quickly. So yes, I would agree, cautiously optimistic this time.

Alejandro Chavelas, Analyst

Okay, thank you very much.

Operator, Operator

Next, we go to Froylan Mendez with JPMorgan. Please go ahead.

Froylan Mendez, Analyst

Hi, guys, thank you very much for taking my question. Perhaps trying to look at the other side, what could go wrong in your optimistic outlook? I mean, I tried to think that there has to be a part of the demand that has to be hurt. I guess private construction is going to be the sector most impacted. You would need a very strong incremental infrastructure sector to compensate for the volumes lost in the private construction sector. Could you explain what sectors you expect to be impacted because of the crisis?

Humberto Nadal, CEO

Sure. I think it’s a very good question. What can go wrong? Clearly, health issues remain a concern. The numbers are still high in Peru and continue to rise. If we were to face another quarantine, it would be detrimental not only to Pacasmayo but to the entire country. That’s something we believe is improbable but still possible. I fully agree that construction companies are taking longer than the self-construction segment to come back to work, but even though many are hurt, the government has launched strong programs for new houses, and infrastructure needs will drive demand. And let's keep in mind the agreement with the British Government—7 billion soles is a lot of money to be spent over 15 months, more than ever seen in our region before. The significant public spending should help maintain infrastructure demand. While private construction may be hurt due to people losing jobs, the government and private sector are eating into this loss effectively. The recovery in the self-construction sector reflects ongoing employment, as agriculture is doing well, and fishing has held up. These factors together maintain enough demand.

Froylan Mendez, Analyst

Fair enough. Thank you so much.

Operator, Operator

Next, we go to Adrian Huerta with JPMorgan.

Adrian Huerta, Analyst

Hi, Manuel and Humberto. Thank you for taking my call. Most of my questions were already answered. But, thinking a bit further, there’s great news with the PEN7 billion expected to be spent over the next couple of years – over the next 15 months – but thereafter, what can we expect on further investments and where will the money possibly come from? Is the government already working on something to make this, not as large but an ongoing spending program?

Humberto Nadal, CEO

The construction agreements with the British Government will play an essential role in the future. There are two things I can take from our meeting. First, it was a very small but efficient team. Point number two is they clearly told us that the government is using the successful northern projects as a test to expand this operational model across infrastructure projects, which, as you know, totals over 160 billion for the whole country. If this program works over the next 15 to 18 months, these 7 billion are just the beginning of reconstruction, and more funds are expected. I think the government will use this experience to instill a similar system as it sees success, which is fantastic for long-term infrastructure development.

Adrian Huerta, Analyst

Thank you, Humberto.

Humberto Nadal, CEO

Thank you.

Operator, Operator

[Operator Instructions] And next, we go to Francisco Suarez of Scotiabank. Please go ahead.

Francisco Suarez, Analyst

Thank you so much. Congrats on the news and thanks for your efforts. As Luis Pardo said, this is very helpful for all of us. A follow-up question on Luis Pardo’s comments: I understand the structural differences in your end-market exposures in northern Peru, specifically regarding agriculture and the fishing season's importance in self-construction. However, does the fact that it is not as densely populated in the north, in contrast to Lima, also play a role in the recovery we're seeing in cement shipments? Regarding the funds from the UK, is there a need to implement certain protocols under COVID for your contractors and clients? Will this affect the overall disbursement of funds or pose lesser risk?

Humberto Nadal, CEO

Hi, Francisco. Thank you for your questions. I'm going to address the second part first. We spent over a month rigorously working on our protocols, which is why we are fortunate not to have had any incidents since reopening two months ago. We are very strict with these protocols and have extended them to our associates, suppliers, and hardware stores. The British authorities were very impressed by the precision in our protocols. We have learned from peer companies globally that graced us with their expertise as they have dealt with COVID beforehand. I am confident that we are in a good position regarding COVID measures. Regarding the first part of your question, northern Peru, unlike the south, does have three cities with over a million people. They might not be as significant as Lima, but their spread across various cities appears to respond well to economic pressures. Lima operates quite differently; in Lima, the pharmaceutical sector is significantly smaller than in the north or even southern parts of Peru. The northern region requires substantial new infrastructure development, including houses, hospitals, malls, etc., so that population distribution helps, but it also relates to the fact that demand remains robust due to necessary construction.

Francisco Suarez, Analyst

No, that makes perfect sense; that’s a great answer. Thanks again for your efforts, and congrats again.

Operator, Operator

This concludes our question-and-answer session. The floor returns to Humberto Nadal for closing remarks. Mr. Nadal, please go ahead.

Humberto Nadal, CEO

Do you hear me?

Operator, Operator

Yes, you're on.

Manuel Ferreyros, CFO

Yes, now we can hear you.

Humberto Nadal, CEO

Thank you. I think this has been indeed the most challenging quarter in Pacasmayo's history, but at the same time, we are extremely proud of how we navigated it and the resulting outcome. We believe that there are many reasons to be more than cautiously optimistic about the demand in the second half of this year. You all know us well enough to understand that we wouldn't express this level of optimism unless grounded in fact. We believe that the robust performance of the self-construction segment and the commitment to public sector projects via our agreement with the British Government will lead to a V-shaped recovery. Most importantly, we consider ourselves in a very strong position, both financially and operationally, as well as in terms of developing and implementing digital tools to tackle these new challenges. We'll remain focused on creating long-term value. At this point, we’re committed to the health and well-being of our people and our communities. I want to thank you all for your continued support for our company, and as always, Manuel, Claudia, myself, and the entire team are always available. We are sure that when we meet again in three months, we will be looking at very positive results. Thank you very much for your time today, and please stay safe.

Operator, Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.