Earnings Call Transcript - CPAC Q1 2023

Operator, Operator

Good morning, everyone, and welcome to the Cementos Pacasmayo First Quarter 2023 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Ms. Claudia Bustamante, Investor Relations. Claudia, you may begin.

Claudia Bustamante, Investor Relations

Thank you, Denny. 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 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 for joining us today. This quarter, we had to face the challenge of inclement weather. As you probably already know, during March, our country, and specifically the northern region, were deeply affected by a cyclone. This is an extremely rare occurrence that left many without a home or livelihood. So I would first like to take a moment to extend our deepest sense of solidarity with them and their families and the promise that as a company, we will always continue helping as much as possible. Cyclone Yaku mainly affected the regions of Tumbes, Piura, Lambayeque, and La Libertad. This phenomenon and the rainy season in general have led to economic losses estimated at $4 billion. Our sales this quarter were understandably affected by this event temporarily, mainly during March when sales volume decreased by 23% compared to the same period of 2022. Nonetheless, due to proper cost management and the decrease in the use of imported clinker, we were still able to increase our EBITDA margin by almost 1 percentage point, reaching 25.1%. I would like now to focus first on our capacity to respond, like on other occasions, to a crisis like this, and then to focus on the future and how we can all make sure that we are better prepared for the next time this happens. As soon as we realized that the amount of rain, especially in the Pacasmayo area, which is not usually as vulnerable, was going to have severe consequences, we promptly deployed our crisis management plan. This plan addresses the effects of climate-related events through our strategy that involves immediate action in coordination with local authorities and communities in our areas of influence. The first step in this plan is to pump the water out, and we used our mixer trucks to store this water. Once everything was dry, we had to remove any solid waste to clear the way for proper transit and to prevent diseases. Only then, and let me stress this, only then could we provide clean drinking water. In many areas of our country, the sewage system is still undeveloped. And when floods and landslides occur, there's a possibility of collapse posing a very alarming safety threat. We can say we successfully focused on preventing this from happening. We could then move on to sanitizing the streets. Luckily, our experience with COVID was extremely valuable here as we were already sanitizing streets using our own mixer trucks. We believe that our crisis plan worked, and we were able to mitigate and reduce the risks in an effective manner. Now that the immediate crisis has, for the time being, subsided, we need to focus on prevention straightaway so that we can be certain that when another weather-related disaster comes, we are better prepared than this time. Although there has been much discussion about the inefficiency of the reconstruction plan, the reality is really different. And the reality is that part of this plan has, in fact, been successfully executed, although much lower than initially proposed. The reconstruction plan included hospitals, schools, and preventive works such as dams, river defenses, and drainage systems. The schools and hospitals have been built and were very much needed. Now the preventive works are pending. Given the current state of structure in the North and considering that there is a possibility that such phenomena may happen soon, these preventive works have to be prioritized. Pacasmayo has plenty of evidence to support that building with proper materials and correct design makes a world of difference in terms of resilience. We have designed and built using the infrastructural taxes scheme part of Avenida Bayovar, Avenida Vicente Suarez, and Avenida Jose Lama, all of them in Piura. These roads were built using concrete and designed after our extremely careful analysis of the type of salt in order to mitigate potential natural disasters, including proper drainage. The results speak for themselves. These roads have endured the recent heavy rains without any significant damage and much better than any other alternative. We need to insist on the importance of building resilient infrastructure since extreme climate patterns will continue, and we need to ensure that as a country we are prepared to face them. This has indeed been a different quarter. I will now turn the call over to Manuel to go into more detailed financial analysis.

Manuel Ferreyros, CFO

Thank you, Humberto. Good morning, everyone. As Humberto mentioned, our first quarter 2023 revenues were affected by the temporary decrease in demand, reaching PEN 480 million, an 8.6% decrease when compared to the same period last year. The gross profit also decreased but significantly less, achieving PEN 160.6 million, a 2.7% decrease when compared to the same period of last year, mainly affected by decreased sales, partially offset by lower costs from decreased use of imported clinker. Consolidated EBITDA was PEN 120.7 million this quarter, a 5.3% decrease when compared to the first quarter of 2022. However, it is important to note that the EBITDA margin was 25.1%, a 0.8 percentage point increase when compared to the first quarter of 2022. Turning to operating expenses, administrative expenses for the first quarter of 2023 increased 8.1% when compared to the first quarter of 2022, mainly due to an increase in personnel expenses as a result of increasing workers' profit sharing and an increase in salaries in line with inflation. Selling expenses during this quarter increased slightly, only 2.9% compared to the same period of last year, mainly due to expenses related to the development of digital platforms. Moving on to a different segment, sales of cement decreased only 4.2% this quarter compared to the same period of last year, mainly due to the temporary decrease in demand because of the flooding and landslides caused by Cyclone Yaku and intense rainfall afterward. However, gross margin increased 1.1 percentage points in the first quarter of 2023 compared to the first quarter of 2022, mainly due to the reduction in the use of imported clinker. During this quarter, concrete, pavement, and mortar sales decreased 22.3%, mainly due to a significant slowdown in sales volume for both private and public works, which deepened due to the interruption in construction caused by the heavy rains. Gross margin decreased 1.6 percentage points in the first quarter of 2022 when compared to the same period of last year, mainly due to the lower dilution of fixed costs because of the decreased sales volume. Sales of free cash materials during the first quarter of 2023 also decreased, affected by the rain. The decrease in sales was 30.9% compared to the same period last year, and the gross margin was negative, mainly due to lower dilution of fixed costs as heavy free cash demand was stored due to the lack of larger projects and the effect of flooding during the quarter. Net profit decreased 4.8% this quarter compared to the same period last year, mainly due to a temporary decrease in sales. In terms of debt, our net debt-to-EBITDA ratio was 3.2x, which is a level we expect to sustain. It is important to mention that this February, we paid the remaining $132 million of our 10-year international bond without incurring any additional cost due to the exchange rate effect. As I mentioned before, we have already obtained a loan to pay for this bond. To summarize, these quarterly results show our ability to manage costs and seek profitability when faced with challenges on the demand side. We are confident that we will continue delivering positive results during the rest of the year. Thank you, and please, Humberto.

Humberto Nadal, CEO

Now we are open to questions.

Operator, Operator

Okay, Claudia, I don't have any questions from the phone lines. Do you have any from the webcast?

Claudia Bustamante, Investor Relations

Yes, we do. The first question is about the club deal and the grace period. What do we estimate to start paying the interest on those first disbursements from the previous years? And when would we start paying interest on the last disbursement in February of this year?

Humberto Nadal, CEO

The club deal, we will start paying the first coupon in August of this year. It's approximately PEN 40 million, and it's going to renew in five years because this is a seven-year loan with a grace period of two years.

Claudia Bustamante, Investor Relations

The next question is, I'd like to know what could we expect in terms of cement volumes over the next quarter, given the already mentioned heavy rains in the region as well as the expected El Nino to come ahead? Do you guys plan to revise your volume estimates for 2023?

Manuel Ferreyros, CFO

Well, I think it's a very good question. We are behind in volumes this quarter because of the weather. As we speak, the impact of the weather is now very clear. We are starting to recover. There are three things that are very important. Number one, the government has put a special fund to rebuild the north. Number two, as you all know, regional authorities were elected and started working in January of this year. They've been focused intensely on the weather over the last three months, and so the learning curve should be now much faster. Lastly, all the programs of the government have been revised and reboosted. Therefore, we are, I would say, very optimistic that starting around probably June, volume should recover very quickly, and we will see in time how much we can recover of the volume we did not perform in the first quarter.

Claudia Bustamante, Investor Relations

What are you expecting in terms of market dynamics for the following months in terms of sales construction and reconstruction initiatives related to the cyclone that is currently affecting the North?

Humberto Nadal, CEO

Well, I think self-construction has always been the core of our business, and that will remain the case. As I mentioned before, I think reconstruction plans are well underway. The government is allocating a substantial amount of resources, and hopefully, they'll be able to deploy these in the coming weeks, not even months, because they are concerned that some kind of phenomenon may come again, and we need to be prepared.

Claudia Bustamante, Investor Relations

The next question is, what type of actions are you currently evaluating to mitigate the impact of a strong to extraordinary El Nino?

Humberto Nadal, CEO

We have been, I think what Yaku showed is that we are very prepared. Our plants suffered no damage at all, and our logistics chain was able to be very resilient. So really, who needs to be prepared is not Pacasmayo. It is actually the region. And like I mentioned in the previous questions, both the regional and national government are, as we speak, working intensively to ensure that we have as much preparation as we can possibly have.

Claudia Bustamante, Investor Relations

The next question, what percentage of total sales are geographically located in the affected regions of Tumbes, Piura, Lambayeque, and La Libertad?

Humberto Nadal, CEO

90% if you consider La Libertad. If you were to exclude La Libertad and focus only on the regions affected by the recent rainfall, Tumbes, Piura, and Lambayeque would be around 40%.

Claudia Bustamante, Investor Relations

How much did the use of imported clinker decrease compared to the first quarter of '22 and to the fourth quarter of 2022? And what was the impact on margins?

Manuel Ferreyros, CFO

The total amount of clinker that we've used in the first quarter of 2023 has been very minimal, around 3,000 tonnes of clinker. Compared with the same period last year, it was around 100,000 tonnes. So that affected our costs last year by around PEN 23 million.

Claudia Bustamante, Investor Relations

Could you share guidance regarding sales and EBITDA for this year 2023? Besides this impact of El Nino in the country, are you expecting a sales construction decrease?

Manuel Ferreyros, CFO

I think we're very optimistic that, like I said before, we're going to recover. We will see by the end of the second quarter. But I would say that by the end of the second quarter, we may be very close to the EBITDA that we performed last year. Even though the sales of the first quarter have been very poor, we are very optimistic about a quick recovery.

Claudia Bustamante, Investor Relations

The next one is on pricing. How much was the average increase in prices year-over-year of cement in this quarter?

Humberto Nadal, CEO

Last year, we were very strong on price. We were able to recover profitability through price. This year, in these first three months, as you may understand, due to the weather and everything, we made no price adjustments and do not intend to do any in the coming months because we think that we did enough last year.

Claudia Bustamante, Investor Relations

The next question is, in the event of a long El Nino, what are the possible risks that you can face in the following months regarding supply chain purchases, inventory, and transportation costs?

Humberto Nadal, CEO

In terms of supply chain inventories, I mean, as you know, we are very conservative and we use the last eight to nine months of limestone, seashells, and coal. So from that standpoint, we are pretty cautious and have always been. In terms of interruption of the logistics chain, we will have to be more concerned about how to get to the market. That is unpredictable. Even though Yaku was very strong, we only stopped for maybe a couple of days, then we resumed operations. The fact that we have three plants, two in the north, and our distribution channel spread all over the North really helps cover whichever area cannot be reached by the logistics chain, as it can be supplied from somewhere else.

Claudia Bustamante, Investor Relations

And then finally, as you showed in the first slide of the presentation, the advantage of building with concrete, do you see a higher growth rate of sales of concrete as a preparation for El Nino?

Humberto Nadal, CEO

The answer is a definite yes, capital letters, because authorities have seen the advantages of concrete compared to asphalt. So I think what the government is trying to do now in terms of reconstruction will be done mostly with concrete.

Claudia Bustamante, Investor Relations

I think those are all the questions. So I'll now turn it over to Humberto for closing remarks.

Humberto Nadal, CEO

For the past couple of years, it seems that we have faced a whole spectrum of challenges. First, a global pandemic, then the constantly changing political environment in Peru and instability, and now extreme weather patterns that are very harmful to our countries and limited infrastructure. But we have taken these challenges as we should, as learning opportunities, and we can now adapt and react faster. This gives us confidence that we are well prepared to face the future. These are crucial moments for our country. Let us take the recent flooding as a sign and opportunity to actually push for all of the structural needs, reinforcing and planning that have been necessary for many years. If anything, besides resilience, there’s a very positive outlook for our country, and that's where we are. We have been operating in Peru for more than 65 years, contributing to the northern part of the country. If you ask me, these are the most optimistic moments in the last 10 years. Thank you, everybody, for your interest in our company. And as always, we remain at your disposal. Thank you.

Operator, Operator

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