Cementos Pacasmayo SAA (CPAC) 2013 Q3 法說會逐字稿

Good morning, and welcome to Cementos Pacasmayo's third quarter 2013 conference call. (Operator Instructions) 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 conference call to discuss its third quarter and first nine months results for 2013 on this day, 29th of October 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 and joining us from Lima, Peru 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. Once again, thanks everybody for joining us today and for your continued interest in our Company. Today I would like to begin discussing the highlights of the -- really before discussing the highlights of the quarter, I would like to provide you an update on, as you know, a very important phosphate project that we've been working on for several months.

As I offered in our last call, all the basic engineering and feasibility study are now concluded showing indeed good results. Even though we were expecting to make the information public on this call, we are planning to delay this announcement for the time being. The reason for this is currently our international partners, mainly Mitsubishi, is in the process of reviewing the results and the Board of Directors of Fosfatos Pacifico has not taken place to discuss the [BFS].

As you may understand, our high standards for corporate governance don't allow us to make the information before it's reviewed by the board of FdP. (Inaudible) by our partners is quite thorough and considering their vast experience in the (inaudible) we will work on many changes and recommendations that will -- we will have in order to ensure the maximum profitability of the project. Once FdP's board has approves the BFS, we will be able to move ahead and provide you all with very solid projections about the CapEx levels and the cost as well as profitability.

Like I said, I would like to emphasize that (inaudible). Like I said, we are very happy with the outcome of the BFS. As I mentioned, in Pacasmayo we are, I would say, very confident on the feasibility and profitability of the project.

Moving now to results, even though during 3Q 2013 we saw a slight slowdown in the Peruvian economy, the economy is still going very strong. We expect, we estimate it to grow around 5.5% by the end of the year. This level we think is very robust and high compared to current global growth rate. And it's also important to note, I was just reading a nation-wide survey done by APOYO Consultoria showing that nearly 30% of households are planning to expand, remodel or paint their homes in the next 12 months demonstrating the sector's indeed strength.

In terms of financial and economic results, Manuel will go into detail into them. But let me allow to comment one thing where I think that the fact that our, all of our financial and economic indicators grew more robustly and the volume increased. These are clear reflection of the Company getting profitability. And as you all know, we are very focused in maximizing (inaudible) profits for the Company.

In terms of our mills, in terms (inaudible) of our expansion, we have made significant progress in the nuclear plants. On October of this year, I mean some weeks ago, we started construction of a nuclear plant after awarding the construction, the consortium is made up by [Hotacamade] and [Naturescape] (inaudible) from Chile, both firms with extensive and proven track record.

I personally visited Germany six weeks ago and I can assure all equipments plant are now ready and we intend to begin the shipping towards Peru on November. At this point we affirm the commitment that production on the new plant will begin on the first semester of 2015 as originally planned.

(Inaudible) very happy with the results, profitability. We also, I mean, we have a high expectation (inaudible) proceeds, like I said we will reduce some numbers in the coming week. And I will turn the call now to Mr. Manuel Ferreyros who will review more in detail 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 briefly review the Company financial as per the earnings release issued yesterday focusing mainly on the financial highlights before we proceed to the Q&A session.

As Humberto mentioned, despite the slight slowdown in the economy, this quarter was another outstanding quarter for the Company. We are firm in our growth and leadership in the northern region of Peru.

During the third quarter our sales increased 8.5% and operating profits 18.5% compared to the same period of last year. In terms of results by province, during the third quarter sales of cement, concrete and blocks reached PEN298 million representing an increase of 14.7% compared to the same period of last year. This increase was mainly driven by cement concrete -- cement and concrete sales which grew 11.6% and 33.4% respectively. The first nine months of 2013 the figure accumulated PEN817 million, an increase of 17% compared to the same period of last year.

Regarding production, it is important to mention that our combined cement production increased 3.3% during the third quarter of this year compared to the same period of last year and 6.1% during the nine months of this year compared to the previous -- to the same period of the previous year. This is due to higher utilization of our equipment to satisfy the growing demand.

In terms of clinker, total clinker production volumes of the Pacasmayo plant decreased 13.1% in the third quarter of 2013 compared to the third quarter of 2012 mainly due to the stoppage of the vertical kilns in the Pacasmayo plant. This was mainly explained by an unscheduled stop of one of our cement mills.

It is important to highlight that as to as to-date the vertical kilns as well as the mill are fully operational. As a result, during the third quarter of 2013 the Company used 139,000 tonnes of imported clinker that represent 29.2% more than last year.

The gross profit from cement, concrete and blocks increased by PEN21.6 million, an increase of 18.6% compared to the third quarter of 2012. It is important to note that despite a larger consumption of imported clinker, the gross margin for this segment increased 1.5 percentage points due to the implementation of efficiencies in the production process, which reduced costs.

During the sales of construction supplies, during the third quarter of 2013, this figure decreased 19.2% compared to the same period of the previous year. This is primarily explained as an increase in competition in the segment. However, gross margin increased 0.6 percentage points compared to the third quarter of last year.

Likewise, quicklime sales decreased 43% in this quarter mainly due to a lower demand from the mining industry. However, quicklime gross margin increased 3.5 percentage points in the third quarter of 2013 compared to the same quarter of 2012 mainly due to the lower consumption of energy and decreased fixed costs.

Moving on to operating expenses, administrative expenses increased 17.9% in the third quarter of 2013 compared to the third quarter of 2012. This is mainly explained by one-time items such as severance packages and the classification of cost to expenses.

Sales and distribution expenses remained stable for the quarter compared to the same period of the previous year. It is worth noting that the amount spent on advertising and promotions is still below 1% of sales.

All those results led to a consolidated EBIT increase of 17.6% compared to the third quarter of 2012 reaching PEN90.2 million.

In terms of CapEx, as of September 30, 2013, the Company invested PEN152 million allocated towards the following. The new Piura plant, the phosphate project, some concrete and aggregates equipments and then others.

In conclusion, we are confident in our current financial and operational results. With the Company's strong fundamental and adequate financial structure, Cementos Pacasmayo will continue generating value for its shareholders. Once again, our financial results have outperformed our volume growth reflecting on all efforts to permanently increase profitability.

This concludes my presentation, my personal presentation. Thank you for your attention. Operator, we will begin with the Q&A session please.

Yes, thank you. (Operator Instructions)

Francisco Suarez, Scotia Bank.

Thanks a lot for the color provided on Page 4. It's always very helpful. Congrats on these results.

If I may, and if I understood correctly on the efficiencies reached in the quarter, Manuel, does these efficiencies have to do with the fact that, if I remember correctly, you have long inventories of coal at the beginning of the year. So perhaps by now you are starting to book coal at cheaper prices. Is that part of what explains the overall improvement in the margins that we have seen?

Yes, that's one of the reasons, but another reason is also we've reduced labor force, we're more -- we increased our efficiency in our plant, not only costs directing to coal but all the other kind of costs including labor cost.

Okay (multiple speakers).

And operational, reach our operational efficiencies also.

Okay, so what if -- I mean, if this shutdown didn't happen in this quarter, what might be the overall level of EBITDA margins for the quarter excluding the extraordinary clinker purchases to third-parties?

It's around one point higher, should be one point high.

Okay, correctly. And now switching, if I may, to the initial remarks provided by Humberto, thank you for that, that was very helpful. So does the overall disclosure that you will be providing to the market on their feasibility and engineering studies for the phosphate business, is that delayed because Mitsubishi is reviewing that result and not because of the volatility that we have seen in phosphate rock recently, is that correct?

Absolutely correct. I mean, like I said before, both basic engineering and the BFS have been concluded with very positive result. As you may understand, I mean Mitsubishi has its own internal procedural process. But it has no relation with what's happening in the market because you have to realize that in the end these are projects that will play out in the long-term. I mean prices can fluctuate, going up and going down. We won't begin production before two or three years from now. So really current prices are not that relevant for the value of the project. Like I said, it has to do more with corporate governance than anything else.

Okay, thank you, very clear. Thank you for this, and congrats again for the result.

(Multiple speakers).

Andres Soto, Santander.

My question is related to how do you perceive the current economic environment in Peru, in particularly in the north part of the Peru, which is the region you operate? The slowdown that you -- that we have seen so far this year, do you believe this is the bottom of it, how volumes are performing in October and what will you -- what will be your expectations for next year?

Sure. Like I said, we remain very confident on the capacity of Peru to grow, especially the north to grow. What we've been seeing in the last three, four months, more than the slowdown, it's more of on an erratic behavior of the economy. We believe -- I mean, I just saw the (inaudible) central bank on the nature of the (inaudible) that the fourth quarter will once again pick up the growth rate.

We remain very confident in the outlook for the north and we remain very confident on the (technical difficulty) for next year for many reasons. One of (inaudible). I mean, the housing revenue is still there and we see a lot of private investment going into housing, and one thing that's starting to pick finally is infrastructure.

As you may know, I mean, Peru holds a $90 billion infrastructure [debit sheet] and there is many projects that are already been announced for us in the north in terms of guidance for raw material division. We are expecting on the -- more engagement of the refinery in terms of (inaudible). So I think I mean we are very confident that our demand of cement will be driven not only by housing that we have seen in the past years but (inaudible) finally the infrastructure debit sheet will start to kick in and that's why we remain very confident in growth for the next year.

Thank you. And specifically going to cement volumes and recent performance, have you seen any changes in the past trend during October?

Sorry, any changes in what?

You said that this is not a slowdown but an erratic behavior. But what about growth in October, is it robust again or is it sort of same weak performance?

Yes, I think, like I said, let's go back to the beginning of the year. When we talk about volatility, we were talking beginning of the year recommend (inaudible) anywhere between 6 and 8. What we see now is we're going to be growing in that range but in the lower part of that range. That's why we (inaudible) that is not dramatic at all and we remain on the same range. The difference is instead of reaching a 7 to 8 mark we will be closer more to the 6 to 6.5 mark. But that's where we see it right now.

Okay, thank you very much.

Dario Valdizan, BTG Pactual.

Congratulation on the result. I had two questions and I apologize because I came a little bit to the call. I heard that you were saying that some of -- one of the reasons why the delay on the release of the studies was because Mitsubishi was undergoing their own internal process to evaluate the results. But I didn't hear if you had a timeframe in which you think they will be concluding this and allow you to publish the results. That was one question.

And the other one was, if you could give us a little bit of color regarding the plant in Piura. If I understand you, you're using seashells for the clinker there. And I'm not that familiar with that type of resource. If you could give us a little bit if that affects in any way costs for production? Thank you.

Sure, Dario, thanks for the question. On the first part, like I said before, Mitsubishi is doing their internal process of approval. (Inaudible) about a timing for us to be releasing the BFS numbers, we're talking about a timeframe of weeks. I cannot tell you exactly how many, but it should be more in the weeks kind of number. Like I said, it's more subject to them than to us.

Going to the Piura plant, seashells, I mean this is something that's done in many [countries] in the world, but Chile is the first one that comes to my mind when I think about it. And you have to understand, I mean, there's --there's differences with this as a lime plant. Basically in terms of the quarry, this requires more blasting. So in terms of that party it's more efficient than the -- than your normal lime mine. Besides that, in terms of quality and cost and everything, there should not be enormous differences with lime, it's only in the mining part. But, all in all, I mean, when we made the decision of building a plant in Piura, this is something, of course, we took into consideration and that's why we are also very confident that the Piura plant will have a very competitive cost considering even the seashells requisites that are easier -- they are easier to mine than lime.

Great. Thank you very much.

Thank you. [Alberto Arguelles], [Compus Peru].

It's actually a two-part question which is a follow-up on two previous questions that other people asked. One is regarding the efficiencies that you actually were able to achieve in the third quarter given the pace of more imported clinker. You mentioned that there were planned efficiencies, there were coal prices and some labor force efficiencies. But what about the -- some -- the clinker-cement ratio, how has that evolved?

And that's related to the second question, which is related to the Piura plant. Do you foresee, due to the fact that you're going to be using a different process involving seashells, that the clinker-cement ratio could be affected by that process or not? Thank you.

The first part, I mean, we are on 72% at clinker (inaudible), and that should remain constant. And going to the Piura question, we'll have to actually see the production process, but at this point, I mean, our plans are to keep the clinker ratio between 70% to 72% in the coming years even with the Piura plant kicking in.

Okay, thank you very much.

Thank you. (Operator Instructions)

[Rodrigo Dyer], Andino Asset Management.

I have a couple of questions. The first one is, as of today and hearing everything there is a delay in projects in Peru, basically they're the permits, what would you say would be the quarter of commercial production in Piura, with the plant of Piura? We know it's 2015, but we know that the government has been delaying a lot of permits. So we would like to know if you have moved forward with that.

That is one. And the second one relates to the phosphate plant. Is there a minimum rate of return that you would be accepting for the developing the phosphate plant? And if that is the case what would be the minimum return?

Yes, regarding the first part, you may all know, I mean, we have the environmental impact study already approved in Piura for some month now and all the permitting in terms of the construction, we already have it, that's how we -- why we started building in October. So in terms of permitting, we have no concerns at all. We are moving ahead.

And the reason I said it so confident that there will be production in the first semester of 2015 is the fact that there is no permitting left up, left in the year for us. So like I said, I mean we -- at this point we are very confident on the timing for that.

In terms of our internal rate of return for the phosphate project, like I said, this is something that for the same reasons I said at the beginning, and we want to be very careful because we have partners here. This is something I will not discuss till we can make the numbers public. The only one thing I can -- there are two things I can tell say. I mean, like I said the results look good (inaudible) we're okay with that. And like I said, in the end the only thing that we're always pursuing is for the creation of value to shareholder. And of course that has to be represented to a competitive [IRR].

Thanks.

David Ross, Chevy Chase Trust.

We saw a sizable increase in the administrative expenses. Is this a short-term effect or are we looking -- should we be modeling a permanent increase in the run rate?

Yes, as I mentioned in our presentation, this is basically for two reasons. Number one it's our allocation of -- from cost to expenses, and the other one is both are non-recurrent, basically 70% to 80% of this are non-recurrent expenses.

Okay, and just a quick follow-up. You mentioned in the release severance packages as being a part of this. Was there a force reduction that occurred?

Yes, basically there's been some reduction. First the retirement of top management, and, second, some retirement of the labor force, we gave the compensation for the retirement. So this should impact in our cost in the future, no.

Okay, thank you.

Thank you. Francisco Suarez, Scotia Bank.

It is about DINO basically. We have seen a lot of underperformance of this whole business. What can you tell us on the strategy to follow on the -- for the next quarters and what are the problems that you are facing in addition to the competition, anything that might be coming up on increasing the overall (inaudible) of distributors or so forth, anything that you can share with us on that?

Sure. You have to realize, I mean, DINO is fundamentally -- is a fundamental piece of our commercial structure, our commercial structure intended to maximize our market share profitability in cement, and that we have to look at DINO. I mean, the reason we keep increasing the (inaudible) DINOs is because we want to have a permanent presence and very volatility present in the market.

That being said, what's happening with the construction supply here, I mean that in the end the margin we make is enough to cover our business expenses. And it's something that -- I mean, that's one of the reason (inaudible) the overall profitability of the Company. So you really have to look at it. We will always see DINO as our commercial branch to ensure that we have a very good commercial position in cement.

And like I said, construction price only complement our intention to keep all the necessary products or the basic structure. But it's our profitability, profitability (inaudible) cement.

Okay, thank you very much. Take care.

Thank you. We have no further questions at this time. I would like to turn the call back over to Mr. Humberto Nadal for closing remarks.

Thank you everybody. Like I said, thank you very much for the continued interest in the Company. I want to close the call with a very positive note because as Manuel said, I mean we are very happy with the results (inaudible) very strong performance of the Company. And I'm sure in the coming weeks we will be back again to discuss the phosphate project.

And if you have any questions regarding cement or phosphate or everything, of course, you have myself, Manuel and Claudia, you can reach out. Thank you very much for your time.

Thank you, ladies and gentlemen. This concludes today's teleconference. You my now disconnect.