Earnings Call Transcript - CPAC Q4 2023

Operator, Operator

Good day, ladies and gentlemen. Welcome to Pacasmayo's Fourth Quarter 2023 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, Mrs. Claudia Bustamante, Sustainability and Investor Relations Manager. Mrs. Bustamante, you may begin.

Claudia Bustamante, Sustainability and Investor Relations Manager

Thank you, Tim. 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 our 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 our quarterly results conference call, and thank you so much for joining us today. This quarter, we continued to focus on our strategy which led us to deliver outstanding results in terms of profitability. We reached a gross profit margin of 39.4%, almost 9 percentage points higher than the same quarter of last year. This significant increase in margin was mainly due to the lower production cost of our new kiln in Pacasmayo, which also allowed us to replace imported clinker with our own clinker, as well as to the decrease in the cost of coal. Considering that we now have this additional capacity that is both efficient and more environmentally friendly, we decided to make an impairment to our vertical kilns. This non-cash effect affected EBITDA, but our adjusted EBITDA increased 29% year-over-year this quarter, and adjusted EBITDA margin reached 30.5%. Outstanding quarterly results have allowed us to reach a record adjusted EBITDA of PEN518.3 million in 2023, the highest in all the history of Pacasmayo. We firmly believe these are remarkable achievements, especially considering that in terms of demand, it was a very challenging year due to social conflict and Cyclone Yaku that affected our sales in the first half of the year. We are convinced that efficiencies achieved will be sustainable over time, making for a very promising 2024 as volumes should continue the positive trend we started seeing in the second half of last year. In terms of our long-term strategy, I'd like to take this opportunity to look back on our digital strategy and how we have progressed over time. If you look at the digitalization of our commercial strategy, we have now migrated completely from a traditional model to a fully digital one. For example, in the Construction segment, we continue to enhance Mundo Experto, an ecosystem of digital solutions that targets the needs of foremen, self-builders, and individual consumers. We also have ConstruyeXperto, a digital platform for foremen that provides them with daily tools and training to help them improve professionally. For hardware stores, we have Ferrexperto to help them grow their business, digitalize the orders, and get training on topics linked to their main needs. For our concrete clients, we have PacasPro, a platform that provides comprehensive solutions for each project, including online scheduling and real-time tracking of orders. This year, we are focused on improving our service to the Concrete segment, adapting it to the unique needs of its clients, creating new tools to set different prices according to what each client requires. Finally, we know that digitalization is needed not only for commercialization but also to enhance internal processes. This is why we are taking the necessary steps to become a fully data-driven organization. We have created a data and analytics committee to prioritize sponsored initiatives and create the first agile unit in Pacasmayo. We are also in the process of designing and making available a corporate data ecosystem and implementing solutions that generate value for our business. We are convinced that these tools and certainly more to come in the future, along with AI, will be key to the success of our business in the upcoming years. I would like now to briefly mention an important milestone for IO, our solution aimed at families that need help to finance their construction needs. Through an intelligent purchasing method, people are able to define a building project and buy the materials that they need on a monthly basis at their own pace until they have all of the materials required to carry out their chosen projects. In December, after consistently making these monthly payments, one of our clients was able to build this new roof. We are very proud, extremely proud of this achievement, and we'll continue to promote IO so more families can build a safe home. Finally, I would like to highlight our continued and renewed commitment and belief in our country. Despite the instability and extremely complex political scenario we have been immersed in since 2020, we decided to bet on the future growth of Peru, as we have been doing for over 65 years, and invested around $85 million to optimize our clinker capacity and a further $3 million to restore our old Piura to improve connectivity in the event of heavy rains. We firmly believe that the country holds great potential, and by standing by in good times and bad, we will see it reach that potential in the near future. I will now turn the call over to Manuel to get into a more detailed financial analysis.

Manuel Ferreyros, CFO

Thank you, Humberto. Good morning, everyone. Our fourth quarter 2023 revenues were PEN511.4 million, a 4.2 percentage decrease when compared to the same period of last year. Gross profit, however, increased by 23.6%, achieving PEN200.16 million, mainly due to lower costs as we discontinued the use of imported clinker now that our new kiln is fully operational, as well as the lower cost of coal. Consolidated EBITDA decreased by 1.2%, mainly due to the impairment of our vertical kilns, as Humberto mentioned before. But without this effect, the adjusted EBITDA was PEN156.1 million, a 29% increase compared to the previous year. Despite the decrease in revenues, we believe operational efficiencies and lower raw material costs mentioned before are key factors driving our performance. For 2023, revenues decreased by 7.8% when compared to the same period of 2022, mainly due to lower levels of public and private investments as well as the negative impact of Cyclone Yaku during the first quarter of the year. However, gross profit increased by 5.7% when compared to the previous year, largely due to efficiencies achieved during the second half of the year and higher average prices. Adjusted EBITDA increased by 4.9%, and adjusted EBITDA margin increased by 3.2 percentage points when compared to the same period of last year. Turning to operational expenses, administrative expenses increased by 3.8% this quarter compared to the fourth quarter of 2022 and by 3.1% in 2023 compared to the same period of last year, in line with inflation. Selling expenses increased by 12.8% this quarter compared to the fourth quarter of 2022, mainly due to an increase in advertising expenses and expenses related to the advancement of our digital strategy. During 2023, selling expenses increased by 2.1% compared to the previous year. Moving on to the different segments, sales of cement decreased by 7.3% in the fourth quarter of 2023 compared to the fourth quarter of 2022 and by 5.8% in 2023 compared to 2022, mainly due to the decreased demand from the self-construction segment as well as from private and public works. However, gross margin increased by 11.7 percentage points during the fourth quarter of 2023 and by 5 percentage points during the entire year when compared to the fourth quarter of 2022 and the whole year, respectively, mainly due to cost optimization as we reduced the consumption of imported clinker and replaced it with clinker produced in the new and much more efficient kiln in Pacasmayo as well as the lower cost of raw materials, such as coal. During this quarter, we are glad to report that sales of concrete pavement and mortars continued their positive trend, increasing by 34.3% when compared to the fourth quarter of 2022, mainly due to increased sales of pavement for the Piura Airport. During 2023, sales of concrete, pavements, and mortar decreased by 4% when compared to the same period of last year, mainly due to a decrease in public and private investment during the first half of the year. Gross margin decreased by 1.8 percentage points in the fourth quarter of 2023 compared to the fourth quarter of 2022 and by 4.1 percentage points in 2023 compared to 2022, mainly due to lower margins for larger infrastructure projects. Sales of precast materials also increased by 19.8% compared to the fourth quarter of 2022, mainly due to increased public investment this quarter for the construction of related projects. Gross margin increased by 26.6 percentage points in the fourth quarter of 2023 and by 10.7 percentage points in 2023 compared to the fourth quarter of 2022 and the entire year, respectively, as higher sales volumes allowed for dilution of fixed costs. The net profit decreased by 7.7% this quarter when compared to the same quarter last year and by 4.5% in the whole year compared to last year, mainly due to the non-cash effect of the impairment of our vertical kilns. However, if we do not consider this effect, net profit for the year would have been PEN194.7 million, a 10.1% increase when compared to the previous year, mainly due to operational efficiencies mentioned before. In terms of debt, our net debt to adjusted EBITDA ratio was 3 times, which is a level we expect to sustain and progressively decrease as EBITDA increases, since we currently do not plan to incur any additional debt. To summarize, this quarter's results show the continued benefit of focusing on cost management and operational efficiencies, preparing for an improving demand environment. We are confident that we will continue delivering positive results during the following quarters. Please can we now open for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Fernando Romero from Abaco Capital. Hi, Fernando, can you hear us? We might need to move on to another question for now. Fernando, are you there? Sorry, let's quickly move to a different question and perhaps we can get back to Fernando later. Next, we have a question from Natalia Leo from JPMorgan. Please go ahead.

Natalia Leo, Analyst

Hi. Thanks for taking the question and congratulations on the results. I would like to understand the growth in gross margins better. You mentioned that lower energy costs and the new kiln contributed to the lower production costs. Can you specify how many percentage points were due to lower energy costs and how many were attributed to the new kiln? I want to understand the potential for growth going forward.

Manuel Ferreyros, CFO

We expect to achieve around a 28% EBITDA margin for the entire year, primarily due to a significant decrease in coal costs compared to last year. Additionally, we are no longer using imported clinker. When we compare this to last year's average EBITDA margin of approximately 25.5%, we anticipate a margin of around 28% for 2024.

Natalia Leo, Analyst

Okay. Great. Understood. And if I may have another question, I was just wondering, how do you see volumes for 2024, the impact from El Nino, could they decrease even more this year or should we expect maybe flat volumes?

Humberto Nadal, CEO

I believe volumes will experience moderate growth, and I don't anticipate a decline. An extreme El Nino in the North is predicted to have a 0% chance according to the authorities, so it shouldn't have any impact. Additionally, there is positive news coming from the North, such as the recently signed government-to-government agreement with Canada to develop Chavimochic. Because of this, I expect volumes to grow, and according to Apoyo, they estimate around 4% growth. While I might not be that optimistic, I would estimate growth between 2% and 4%.

Natalia Leo, Analyst

Great. Thank you so much.

Humberto Nadal, CEO

You’re welcome.

Operator, Operator

Okay. Thank you. So our next question, we have a text question from John Elco from Seminerio, and he asks regarding Pacasmayo's dividend policy, is there any limit to distribute previous year's retained earnings?

Humberto Nadal, CEO

Technically, there is no limit. I mean, we've been very consistent in our dividend policy over the last, I believe, five to seven years. The philosophy behind that, I mean, first of all, it's not the CEO that decides, it is for the Board to decide, and eventually for shareholders meeting to ratify. But our idea is, I mean, we have no need for cash, and we have in excess that we're giving out in dividends. So if anything, the biggest limitation would have been the cash position of the company. But in terms of accumulated profits, there is no limitation.

Operator, Operator

Thank you. We have a question from Gerard Fort from AFP Integra. Hello. I have a few questions regarding the vertical kilns impairment for this quarter. Are you expecting more impairments in the first quarter of 2024? What is the impact of this impairment on the clinker capacity in Pacasmayo? In the MDA report, you mentioned that the total capacity at the Pacasmayo plant was 1.8 million, lower than the 2.1 million anticipated with the new Pacasmayo kilns. Why did you include the impairment in the operating income? Since it is a nonrecurring nonoperating expense, it shouldn't affect the EBIT to EBITDA figures, similar to donations which are also categorized as an operating expense. Thank you.

Humberto Nadal, CEO

Thank you for your question. We do not anticipate any further impairments. The value of the virtual kilns has been fully accounted for and reduced to zero. As for the capacity of Pacasmayo, we have removed the vertical kilns, which were providing eight vertical kilns, and we are now adding 600,000 tons of capacity from kiln number four.

Operator, Operator

Perfect. Thank you. So we have a voice question now from Karely Medina from Interseguro. Please go ahead. Hello. Karely, can you hear us? Hello, can you hear us? So we'll just give it a few minutes just to see if any more questions come in, and then perhaps we can go back to Karely.

Humberto Nadal, CEO

And just as we wait for the question, I mean, one thing to extend to the answer to the last question, when asked me, I mean, why do we register the impairment in operating expenses, that's according to the accounting principles. I mean, that's the way it's supposed to be.

Operator, Operator

Understood. Thank you. Look, I'm not seeing any more questions. So at this stage, perhaps I can hand back to Humberto and Manuel for closing remarks.

Humberto Nadal, CEO

Thank you. Well, in closing, I have to say that 2023 was indeed a very challenging year. Social unrest, inclement weather, and the overall slowdown of economic growth in Peru affecting cement and building solutions demand. Nevertheless, we were able to achieve record results in terms of EBITDA and remarkable profitability by focusing on operational efficiencies and our long-term strategy with an enormous component of digital commercial tools. We foresee a more favorable demand environment in 2024 and feel we are very well prepared with kiln number four in Pacasmayo to fully take advantage of this scenario. Our focus on digital innovation and business sustainability has provided us with the tools to do so. Let me close by saying we remain extremely optimistic about the future of our country and particularly on the future of our region. Thank you, everybody, for joining us today, and always thank you all for your renewed interest in our company. Have a very nice day.

Operator, Operator

Thank you. That concludes the call for today. Thank you, and have a nice day.