Cementos Pacasmayo SAA (CPAC) 2013 Q2 法說會逐字稿

Good morning, and welcome to Cementos Pacasmayo's Second Quarter 2013 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

Thank you, Jennifer, and good morning, everyone. I'm very pleased to welcome you to Cementos Pacasmayo's Second Quarter and First Half 2013 Conference Call on this day, the 31st of July, 2013. This call is for investors and analysts only; therefore, questions from the media will not be taken. If you're a member of the media and have questions, please contact i-advize following the call at 212-406-3693.

I will now introduce our speakers. Presenting on behalf of Cementos Pacasmayo are Mr. Humberto Nadal, Chief Executive Officer; Mr. Manuel Ferreyros, Chief Financial Officer; and Ms. Claudia Bustamante, Head of Investor Relations. They will be discussing Cementos Pacasmayo's results per the press release distributed yesterday. If you have not yet received a copy of the earnings report, please visit www.cementospacasmayo.com.pe to download a copy or contact i-advize in New York.

Comments made today by Cementos Pacasmayo's management may contain forward-looking statements, which are subject to various conditions that may differ materially. We ask that you refer to this disclaimer as guidance on these matters. It is now my pleasure to introduce Mr. Humberto Nadal, Chief Executive Officer of Cementos Pacasmayo, for his presentation. Humberto, please go ahead.

Thank you, Rafael, and good morning, everyone. Thanks especially everybody for joining us today to discuss the Company's performance in the second quarter and the first six months of 2013 as well as recent developments.

As we have done in the past, I will begin with a basic overview of Pacasmayo's business and then discuss some of the main highlights and conclude with an update of the Company's current projects before handing it over to Manuel, who will go into much more detail in the financial discussion and basically the numbers.

Once again, we are very happy and pleased to say that Pacasmayo's results were driven by very strong numbers of the construction sector. In the second quarter of 2013, cement sales volume grew by 9.1% thanks to basically domestic demand, continued [to stay] very, very strong dynamics. Even though the second quarter the global markets experienced a general slowdown, the impact on the Peruvian economy was more moderate, showing the resiliency we must stay established so an adequate level of reserves at the central bank.

It is estimated at this point that the Peruvian GDP will still grow between 5.3% and 6% this year. More importantly so that only growing interment is turning on very profitable turns and that's -- and Manuel will go into detail, but we are very happy with our gross profit hitting 45% and EBITDA margins hitting also 31% numbers that we think are very satisfying and an effect of the enormous effort the Company is doing in getting operational efficiencies.

In terms of other matters, the Consumer Confidence Index remains very high at level above 50 points and [may be] explained by a recovery in the confidence of middle, low and -- in medium low and low income families. Segments are directly related to basically self construction that drives Cementos Pacasmayo's demand.

On the other hand, we also are very optimistic about the infrastructure projects in the future. The government has announced some weeks ago a very aggressive program of close to $780 million in infrastructure investment. Many of these projects, around 10 of them, will be in another region and that will convey a very important positive cement demand into the future.

Regarding our projects, first in terms of the Piura project, we are very happy to announce that at the end of May the Company obtained the approval of the environmental impact study for the construction of the plant.

We expect construction to begin probably around the middle of September of this year, and this would mean that we will be online to have the plant up and running by 2015 in the first -- sometime in the first semester. Also, we have already selected a construction company -- this was last week -- and we are very, very happy and very confident that [Lecasadees] will be up and running by 2015.

Regarding the [Phosphate] project, we filed the environmental impact study with the Minister of Energy and Mines in May of this year, 31st of May, to be exact. We estimate this recommendation will take around a year, even though we are seeing very strong signs from the government trying to speed up some of these processes, but we still remain confident that a year should be a time this process should take.

The slight delay in some of the results of our studies had to do with the fact that during the basic engineer (inaudible) that the basic engineers the face of our project where you have to think and really understand the project. We have taken our project a couple of months more than we are expected, but this is because now we are very -- even more confident than we were before in terms of the final product we will be obtaining and in terms of the process we will be undertaking to develop basically the plant.

At this point, I can say that sometime during this coming third quarter we'll be able to have numbers on the feasibility study and, of course, as soon as we have them, [when it basically is concluded], we will be coming to the market to show exactly the levels of CapEx, the OpEx and give much more color and detail on the profitability of this project. But at this point, we remain very optimistic and confident, both in the projects and in the time by which we will deliver the project into production.

Of course, we'll continue to update in the progress on both the Piura and the Phosphate project in the coming months. But like I say, probably sometime in the third quarter we will come into the market to give much more information in terms of the Phosphate project.

Before turning the call to Manuel, I also want to highlight a very relevant event that took place in this quarter. For the third consecutive year, our Company was selected to be part of the Lima Stock Exchange Good Corporate Governance Index for the 2013-2014 period. This index includes a list of 10 companies and basically -- that basically incorporate basic international practices with regard to corporate governance. For us, it's very important, as you all know, Pacasmayo is always pushing in the highest level of good corporate governance and being a part of this index since (inaudible) we have motivates us to keep doing the good work in this area.

That concludes my comments. I will now turn the call over to Manuel to discuss the financial performance for the period. Manuel, please go ahead.

Thank you, Humberto. Good morning, everyone. Thank you for joining us on the call today. I will discuss in more detail the second quarter and the first half of 2013, focusing on the main aspects that have impacted our results before proceeding to the Q&A session.

Let me begin by saying that we continue to report strong results, reaffirming our growth and leadership in the Northern region of Peru. As Humberto mentioned, during the second quarter cement sales volume increased 9.1% compared to the second quarter of last year, mainly driven by the self construction segment as a result of economic growth in the Northern region of our country.

Gross margin increased by 8.4 points, mainly due to the implementation of efficiencies in the production process which reduced our electricity costs, improved our coal mix, allowed for the replacement of imported additives with local ones, and the lower consumption of imported clinker. Additionally, a reorganization of the maintenance department was implemented, which allowed for the optimization of third-party services.

In terms of our results of our product during the second quarter of this year, sales of cement, concrete and blocks reached PEN262 million, representing an increase of 21.5% when compared to the same period of last year, while for the first half of 2013 this figure reached PEN519 million, an increase of 18.3% compared to the same period of last year, mainly driven by an increase in cement sales, which rose 17% on sales growth of concrete, which rose 63.2%, representing an increase in sales volume of 58.1%. Our gross profit of cement, concrete and blocks increased by PEN35.5 million, from PEN93.6 million to PEN129.1 million, representing a growth of 37.9%.

Turning to sales of construction supplies during the second quarter, this figure decreased 35% compared with same period of previous year, primarily explained by the implementation of competition in sales of the steel rebars. However, the gross margin remains at the same levels when comparing the second quarter of this year with the second quarter of last year.

Similarly, quicklime sales decreased 28.8% in this quarter. Nevertheless, gross margin increased 11.7% -- 11.7 percentage points in the second quarter of this year compared to the second quarter of last year, mainly explained by lower consumption of energy and decreased fixed costs as well as higher prices.

Moving on to operation expenses, our administrative expenses remained stable compared to the second quarter of 2013 and 2012 despite the increase in sales volume. During the second quarter of this year, selling and distribution expenses increased 2.9% as a result of slight increase in advertising expenses in line with higher sales volume. It is worth noting that the amount spent on advertising and promotion is below 1% of our total sales.

Our operating profit increased 72.9% in the second quarter of 2013 compared to the second quarter of 2012, mainly due to the implementation of efficiencies in the production process mentioned above. Despite this extraordinary result, net profit decreased 21.7% in the second quarter of this year compared to the second quarter of last year, mainly because of the exchange rate fluctuation, which went from PEN2.58 to PEN2.78 per $1.00. It's important to mention that this is a non-cash effect.

Our consolidated EBITDA increased 60% during the second quarter of 2013 compared to the same period of last year, reaching PEN91.5 million, mainly due to cost improvement that I mentioned before an expenses remaining flat compared to the same period in 2012.

In terms of CapEx, as of June 30, 2013, the Company reported total of selling capital expenditures of PEN118.7 million, including investments in the nuclear plant, improvements in the Pacasmayo and Rioja plants, construction at the diatomite brick plant, concrete and aggregates equipment, the Phosphate project, as well as other investing activities.

I would like to conclude my presentation by saying that we are committed to continue working hard to consolidate and improve our results and to complete our projects in a timely manner. Thank you for your continued interest and support. This concludes my portion of the presentation. Thank you for your attention. Operator, may we begin with the Q&A session, please?

Yes, thank you. At this time, we will open the floor for questions. (Operator Instructions). Our first question comes from Andres Soto with Santander.

Thank you, Humberto and Manuel. Congratulations on the strong results. I have several questions, if I may. The first one is how much of the volume increase that we saw in this quarter can be attributed to the calendar effect and how much is, let's call it, sustainable growth that you may expect evolving into the rest of the year?

I think the calendar effect, if I understand you correctly, that was basically the months of March, April where the Easter factor was there, I think what we see here --

(inaudible) idea.

I think what we see here is a growth of a little around 8% for the first semester and I think you have to estimate the year. I think that's the level we're going to be seeing for the next six months.

Thank you, Humberto. My second question is regarding the building materials segment. What is -- I understand the poor results are the result of competition. What is the strategy with this business line? Are you keeping -- are you trying to decrease prices or what is the plan with this line?

Here, like (inaudible) said, this is basically part of our whole commercial strategy has to do with the fact that making all our DINOs a one-stop shop for all the self construction segment. So in the end, as long as we can make our decent number and we have to continue to making sure that our DINOs have the necessary products and we are going to keep focusing on what the competition is doing, just to make sure that the DINOs commercial proposition to the market remains competitive.

Perfect. Regarding margins, how do you -- you had a significant margin improvement this quarter. How do you see margins evolving for the rest of the year?

The margin was sustainable the rest of the year. Gross margin should be -- we should end the whole year around 44% as a consolidated basis.

And my final question is regarding the Phosphates project. I know that we still have no figures on that, but given what is happening with the potash industry, how would you see the effect on the feasibility of this project at this point?

Like I said before, for sure we'll come up with the feasibility numbers this coming quarter, the third quarter. You have to keep in mind or bear in mind that this project will not be up and running before 2016. So even if you see the projections of the market towards the future, I think by the time this is up and running the numbers -- we're pretty confident they [should be okay] on the margins we're going to be seeing are very attractive.

Okay. Thank you very much.

Thank you. Our next question comes from Benjamin Theurer with Barclays.

Good afternoon. First of all, congratulations, good results. I actually have one question on the impact on the FX on the earnings per share. Are you considering, because of that volatility, to enter into any kind of hedging contracts, or do you have any kind of hedging contracts? Because I couldn't find anything on that in the reports. It seems like [straight that] the depreciation had the negative impact. But just to understand, going forward, what's the exposure on the US dollar denominated bond? And all of the other questions have already been answered, so that's the only one left over. Thanks.

Benjamin, yes, we have a natural hedge in the future with the Phosphate project. Total sales of the Phosphate will be in dollars. So as we should start [having] revenues in 2016, we should have enough income to pay the whole loan of the bonds. At the moment, we have 40% of the total amount of the bonds in dollars right now, so the FX effect, if the soles continues [the devaluation] the FX effect would impact in a very less amount.

Okay, perfect. Thank you very much.

Thank you. Our next question comes from [Joswill Bevega] with BBVA.

Good morning to everyone and thank you for the conference call. I would like to know if those improvements on the production process you mentioned are sustainable, especially regarding the lower use of imported clinker. Actually, I would like -- I would be very appreciative if you can give out more detail on those improvements.

Second, as regard to your increase incapacity and essential comp are further out, maybe you have a target for that rate? And finally, can you tell the average price for this quarter and if you are considering tweaking it or reducing it? And that will be all. Thanks.

I will try to answer the questions even though the second one I didn't quite get it. But on the first, I think, the improvements Manuel mentioned in his part are sustainable, of course, because it has to do basically with productivity or machinery. We have our mills, we have our kilns doing -- we have done, I think, a very good job in the maintenance last year and what we're seeing should be sustainable.

And, of course, the degree to which we're using imported clinker has to do with two things -- one, the demand; and number two, the productivity of the equipment. I think we should remain there, so I think we are very optimistic about using just enough amount of clinker to complement that.

In terms of the pricing, we did our price increase in February of this year. Of course, due to the devaluation, the pricing dollars has dropped in the last month. But from here into the rest of the year, I think our prices should remain pretty stable. And you asked something about the clinker capacity. Could you repeat me your question, please?

Yes. That's because I have seen that the capacity utilization rate for a clinker has increased very important, so I was -- I would like to know if you have a rate -- a target for that rate because so far that is around 90%, I think. You also have mentioned -- yes, you also have mentioned that some [stuff at plant] isn't going to be -- is not going to be again, I think?

In terms of the physical capacity of clinker, we are -- we are going to keep the number you mentioned right now. We're working our kilns as much as we can, and that should remain there. I don't foresee any increase in that number. And what was it -- what was the last part of the question?

If you had a target for that rate. Maybe you are considering to increase the capacity utilization rate or not?

No. Between 90% to 92%, that should be where we are right now, that should remain as the target.

Okay. Done with me. Thanks.

Thank you. (Operator Instructions). Our next question comes from David Ross with Chevy Chase Trust.

Hello. I'm just wondering, and this may be a follow-up to the previous question, but can you give us some numbers on how much clinker was purchased for the quarter and if your run rate for 250 for this year still holds -- 250,000 tons, I'm sorry?

Yes. In this quarter, we've used 21,000 tons of imported clinker.

Okay. And in terms of planning for the full year, are you still looking at 250,000 tons?

Yes. We have used 133,000 tons in the first six months and we expect to close the year between 250,000 and 280,000 tons.

Okay, perfect. Thank you.

You're welcome.

Thank you. Our next question is from [Rodrigo Dyer] with [Andino Asset Management].

Hello. Thanks for accepting the call. You mentioned earlier in the call that you had 40% of exposure of the bond in US dollars. My question, though, is regarding the 60% balance. Is that hedged with the internal demand that you have in dollars, or is it because you used financial instruments? That's the first question.

Then I would like to know if the launch of production in Piura still is the same or you are thinking about some delay because of permissions like we're seeing almost in every project in Peru?

Manuel, if you can take the first one, I'll take the second one.

We have from total debt summation [$130.00] right now in dollars and we have an exposure to exchange rate of $180 million. What I have mentioned to this has a natural hedge because our total incomes from 2016 going forward will be in dollars because it's our total revenues of the Phosphate will be in dollars. So we're analyzing right now if we should take a hedge or not, but it's not -- this is not a cash effect to our financials. We're still analyzing.

And regarding the Piura project, like I mentioned in the presentation, we got the environmental impact study approved some weeks ago, so at this point we remain even more confident because that's a big permit that could have delayed things and it came right on time. So at this point, we're looking at the end of the first quarter of 2015 Piura plant up and running.

The machinery starts arriving Peru in November of this year. Like I said, we already picked a construction company a couple of weeks ago and by this September we start the building. So I don't see anything really standing in the way of reaching the starting up date.

Thank you very much.

Thank you. Our next question comes from Francisco Suarez with HSBC.

Hi, thank you. Good morning. Congrats for the results. And thank you again for the color that you have provided on the key [persector] projects that we see here. My question is related -- subject relates how likely is your overall mix and ready-mix to be maintained at the [14] levels that we are seeing at this moment? And if that might require more additional CapEx from you in the terms of -- in the sense of mixers or anything on that front?

Like you've seen in the numbers, ready-mix is having a fantastic year, and this has a lot to do and will have a lot to do with infrastructure in the future. All said, $780 million of infrastructure coming to [real place] in the coming years, we will have to do individual leverage in terms of CapEx, like you mentioned, mixers and everything. But like I said, that would have to do if those things come really into place.

At this point, we have done our investments for ready-mix for the year, a little bit over $2 million, if I'm not mistaken, and we are okay for the rest of the year, even though the growth has been very high. And the reason for this basically is because we are being able to achieve extremely high productivity on our mixers. We've worked for the last 18 months into really not only putting more CapEx into the business, but also in making sure that we're getting every single cubic meter from that ready-mix infrastructure and we're doing so.

So in the future, in infrastructure, for example, they talk a lot about the refinery in the north, which is a $2.7 billion project, if all this comes into place, we will have to put more money into ready-mix. But, of course, that would be good news because the ready-mix would keep growing at the levels we are seeing this year.

That's very clear. Thank you for that. An additional question on actually want one on margins and utilization rates in clinker. Do you have to schedule any other major maintenance stoppage in your facilities for the rest of the year? And when that could actually be taken place, because that is one of the many reasons of your overall sequential improvement in margins for this quarter, isn't it?

The answer is no. We stopped kiln number three earlier in the year. We finished the stoppage of kiln number one and two. So no, we don't have any major maintenance stops in the rest of the year.

Fantastic. Thank you and congrats.

Thank you. (Operator Instructions). We have no further questions in the queue. I would like to turn the call back over to Humberto Nadal for closing remarks.

Thank you, and thanks, everybody, for joining this call. Of course, we've tried to provide everybody with the most detailed information we have. And, like always, I like to close the call. I mean Manuel, Claudia, myself, we always remain here if you have any questions.

Please feel free and we will be happy to do our best to answer them. And once again, thanks very much for your time and I guess we'll be talking three months from now.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.