Cementos Pacasmayo SAA (CPAC) 2014 Q4 法說會逐字稿

Good morning, and welcome to Cementos Pacasmayo's Fourth Quarter 2014 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, please begin.

Thank you, Katie; and good morning, everyone. I'm very pleased to welcome you to Cementos Pacasmayo's conference call to discuss today, February 17, 2015, the fourth quarter and full-year 2014 results. This call is for investors and analysts only; therefore, questions from the media will not be taken. If you are 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 Mrs. Claudia Bustamante, Head of Investor Relations. They will be discussing Cementos Pacasmayo's results per the press release distributed on Friday, February 13. If you have not yet received a copy of the earnings report, please visit www.cementospacasmayo.com.pe in the Investors section 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 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. Please go ahead, Humberto.

Thank you, Rafael; and good morning, everyone. As always, thank you very much for joining us this morning to discuss our performance for the fourth quarter and the full year of 2014. I will begin with an overview of the main operational highlights the end of the year. And then, I will provide an update also on Pacasmayo's main projects and achievements. And then, I will turn the call over to Manuel, so he can go into more detail on the financial review for the period. [From then on], of course, we will be more happy to take any questions.

I'm very, very pleased to say that we saw the year 2014 with positive results. Indeed, it has been a year of many achievement despite also a year of many challenges. We believe that we have made the best of all these factors by continuing to make operating improvements and investments in our projects. During 2014, the (technical difficulty) faced slower growth, impacting of course consumption and therefore cement demand. As a consequence, our cement sales volume for the year remained flat compared to the previous year. However, we continued to achieve healthy margin [in research] and operations. Our commitment to improve our gross margins through cost cutting and operational efficiencies allowed us to achieve a very good last quarter of 2014, with a consolidated EBITDA of PEN113 million which represents an increase of over 32% compared to the same period of the previous year; while on a year basis, we are happy to say that the consolidated EBITDA grew by almost 5% as compared to previous year.

Looking ahead, in terms of both GDP and the construction sector in Peru, after some months of decline, we have seen a slight recovery during the last quarter of 2014, which we expect would remain an increase in strength during the next two years. We believe this because mainly driven by an increase in government in investment infrastructure also a much high anticipated local and regional government spending, and of course, the recovery of internal demand as the government stimulus packages begin to take effect. The Peruvian GDP is expected to grow at around 4% for the coming year, up from 2.3% which we closed 2014.

As we have mentioned in the year in the previous calls, the current [recession] has expressed their intention to increase and accelerate the investment infrastructure according to Proinversion. The government has already granted their largest amount of public-private partnership in history really as of January of this year. Such number has been [unblocked] at PEN1.7 billion of investment in infrastructure. Similarly, the government is actively promoting a higher number of public wealth tax deductions and in 2014 Proinversion reached an amount of over PEN600 million in investment commitments in over 80 projects. As we have mentioned also in the previous quarters, there are three projects that are particularly relevant for us in terms of cement demand in the Northern region of Peru. We are very pleased to inform that two of them are already underway and already buying cement. We upgraded the Talara refinery and the highway in the Northern part of Peru in the Sierra. These are excellent news, as it materializes the demand we have been expecting also last year. You will recall that most cement sales have been driven by us in the previous years, while we are convinced by infrastructure deficit of the country, which still stands at $90 billion will be the source of increased demand over the coming years for cement.

In addition, it is very important to note in the case of the north part of Peru where we operate that the Ministry of Housing, Construction and Sanitation has announced the construction of a brand-new city entirely planned around the hydraulic Olmos project in Lambayeque. The construction of this city is expected to start on March this year and the Government has already allocated PEN140 million for such investment.

In the fourth quarter, cement production volume at Pacasmayo plant remained flat compared to the fourth quarter 2013, but the Rioja plant continued to show very strong result, increasing its production by 15% as compared to the previous year. (inaudible) in the quarter, we continued with our cost control and reduction program aimed at optimizing the administrative structure of the Company. This has been an enormous effort in the part of our management of the Company to be able to achieve better results and makes us look with extreme confidence into the future.

In terms of our projects, (inaudible) we are very pleased that we remain according to schedule, both in terms of budget and in terms of timing. As we come closer to the finalization date of the project, we are very confident that in the second part of this year, Pacasmayo, we'll be able to enjoy the benefits having our brand-new plant in Piura.

Lastly, regarding the phosphate project, currently, and I think I mentioned this on the last quarter, the project is in the process of incorporating the value engineering (technical difficulty).

Again, please stay on the halt while we reconnect our speakers. We now have our speakers in conference.

So I'll go ahead?

Yes. Please go ahead, Humberto.

Okay. Like I was mentioning about the phosphate project, we have hired (inaudible) to act as a project management consultant, a PMC. (inaudible), engineering process and of course on the rest of our project and we have [concluded] that by the second part of this year, we'll have the final numbers and that would help us to make the final investment decision.

In conclusion, our forward curve for this year remains positive based on what we've seen in the last quarter in terms of the [current] economy. And also and fundamentally based on all the improvements we've done over the last year that we are convinced as sustainable and risks help us (technical difficulty) in the future. And this will also be boosted by the operation at [Piura] plant in the second part of this year. We'll continue to work to become more efficient and competitive in order to deliver sustainable results to our shareholders.

Now, that concludes my presentation and I'll hand it over to Manuel to discuss more in detail the financial results.

Thank you, Humberto. Good morning, everyone. Thank you for joining us today. I will be discussing the fourth quarter and full-year financial results in more detail as per the press release issued last Friday, focusing basically on the financial highlights before we proceed with the Q&A session.

Despite the slowdown in the Peruvian economy, Pacasmayo delivered positive results for the last year. As a result of our tight cost and expense controls as well as operational efficiencies, I would like to point out that our market share position remains very strong. For the full year and the fourth quarter of 2014, cement sales volume remained flat, mainly explained by the construction of consumption impacting directly the cement demand. During 2014, a slight increase in the temperature of the water affected two main sources of income in the north, fishing and agriculture. This has in turn affected jobs in the area, directly impact the self-construction segment, which continues to be our main driver.

In terms of results by province, for the fourth quarter, sales of cement concrete and block reached PEN284 million, a decrease of 0.5% compared to the fourth quarter of 2013. This decrease was mainly due to a slower sales of concrete, which were down 13.4% in the quarter. This will delay the execution of public and private projects. Also, sales of blocks decreased 11% during the period. For the full year, cement sales, our main product, increased 1% compared to 2013 while for the fourth quarter increased 1.8%. This is explained by higher demand as a consequence of a slight recovery in the economy. During the fourth quarter 2014, the gross margin increased 5.4 percentage points compared to fourth quarter of 2013; while for the full year, it increased 0.9 percentage points compared to 2013 as a result of high operational efficiencies. Quicklime sales posted an outstanding increase of 175% during the quarter, mainly due to a higher sales volume.

As Humberto mentioned, this quarter has been exceptional in terms of the operational results. The gross profit during the fourth quarter increased 13.7% compared to the fourth quarter of 2013, mainly driven by cost optimization in the production of cement. Specifically, gross profit of cement, which represents the largest portion of sales, increased 13.6%. These results were partially offset by decrease in concrete and blocks gross profit.

During the fourth quarter of 2014, operating expenses decreased 14% compared to the fourth quarter of 2013, mainly due to a decrease in administrative expenses and also decreased 5.4% for the full year.

Finally, the net income was impacted positively by a combination of sales increase of 2%, cement cost optimization, reduction in the administrative expenses, positive impact of the FX hedging strategies, lower tax paid and an extraordinary income. Compared to the fourth quarter of 2013, the net income increased 92.9%. And for the full year, the net income increased year-on-year basis 24%. As a result, consolidated EBITDA for the quarter increased from PEN85.8 million in the fourth quarter of 2013 to PEN113.6 million in the fourth quarter 2014, equal to an increase of 32.4%.

In terms of CapEx, as of December 31, the Company invested PEN587 million allocated towards the following. Basically, the new Piura plant, which the Company invested PEN506 million, maintaining of the Pacasmayo and Rioja plants, concrete and aggregates equipment, the phosphate project, as well as some minor activities.

To conclude, we like to highlight that notwithstanding the challenging environment in which we faced weaker demand for the region, we managed to achieve stable financial results, which were driven mainly by cost optimization in our core business, cement as well as expenses control initiative and FX hedging strategies which proved positive for our bottom line. In 2015, we expect to continue strengthening our gains achieved in our 2014 results and we look forward to beginning operation of our new Piura plant during the second half of this year, which will create even more efficiencies in our operations.

With this, I conclude my portion of our presentation. Thank you all of you for your attention. Operator, (technical difficulty).

Thank you, sir. At this time, we'll open the floor for questions. (Operator Instructions) Vanessa Quiroga, Credit Suisse.

Hi, thank you for the call and good morning. My question is regarding the projects that are starting construction phase, the Talara refinery, the hydraulic infrastructure of Chavimochic and the North Highway. And I was wondering if you could provide an estimate of how much tons of cements or cubic meters of concrete will be needed for these projects?

And the other question would be about the projects that you mentioned that are being promoted by Proinversion. If you could mention some examples of the projects that would be located in the area of influence of Pacasmayo and approximate timing for the start of construction phase for those? Thank you.

Thank you for the question. Our three main projects which I mentioned was the Talara refinery, the highway in the North and the [iteration] projects amount altogether to a little bit under 0.5 million tons of cement demand. And these should be calculated over a period of probably 2.5 to three years. Like I said in the past, I mean we don't control the timing of the projects. By the time -- the two of them are already working on buying cement (inaudible) these will carry out over the next two or three years. But then, the second part of your question, there is a very large list of projects of Proinversion, the North part of Peru, (inaudible) infrastructure. We have, for example, I mean, a huge project which is (inaudible) project that is (inaudible) work. I mean that would require around 850,000 tons of cement. It is still at an early stage, it is pushed by the (inaudible) firm in Peru and this is an example of a very large project, (inaudible) lots of penetration (inaudible) of airports, for example. Now, it has been already approved per the (inaudible) shutdown, so we can remove all the landing strips, which we also done in concrete and I could go one by one, I mean we're talking a very big example to smaller examples by the (inaudible) I mean that the degree of infrastructure (inaudible) as in the rest of the country substantial and I think Proinversion is finally getting the act together and pushing for a public-private partnerships to get into (inaudible) project. I think the last example, there is a bypass road into Piura, it's a project of I believe PEN90 million that accounts for 20 something kilometer. Like I said, the list is very long; hopefully, there's an (inaudible) looks in many of these projects go down from the project stage into the execution stage.

Thank you very much.

Thank you. Andres Soto, Santander.

Thank you, (inaudible) for the presentation. My question is regarding guidance for 2015. Can you give us an idea of what are your expectations in terms of volumes for this full year based on these projects and the ongoing recovery that you've already seen in the main business segment?

Yes. Hello, Andres, yes, our guidance for sales dispatches are basically around 3%, 2.5%, 3%. The prices should grow with inflation, I would say around 2%. So altogether, we should increase sales in around 5%.

Perfect. Thank you very much. Bye-bye.

Thank you. Benjamin Theurer, Barclays.

Hey, good morning, Humberto; good morning, Manuel. Thanks for the call. Just one follow-up question actually on Andres' question in terms of guidance and looking into next year. So clearly, sales that makes sense and it sounds reasonable in terms of assumption, but with the cost initiatives and the savings we've seen in the fourth quarter, what are you expecting in terms of gross margin and EBITDA margin going into 2015 and also considering that towards the end, you should get the benefits from the more efficient plant with Piura, et cetera? So do you have already some sort of a guidance in terms of profitability into next year? Thanks.

Yes. What we have estimated is our EBITDA normalized cement should be around 30% for 2015.

Okay. Perfect. Thank you very much.

That means it will go around 1.5% higher than 2014 because we have an extraordinary income in 2014 that was the sales of some stock that we made.

What was that exactly what you sold, because that's basically driving a lot of the margin expansion in 2014? Well, there is not much left, at least from the balance sheet what I can see. But what was that related, that sale, what you've basically done here in the fourth quarter?

Yes. This is a small participation we had in a company called (inaudible) is a controlling company of UNACEM. So (inaudible) we had for quite a while and it came to a point where we just decided we'd make no sense for us to stay on it. We have been talking to potential buyers for years out and finally we got a price that we thought was reasonable, so we decided to sell it.

Okay, perfect, thank you.

Thank you. Francisco Suarez, Scotia Bank.

Hi, good morning, Humberto, Manuel, congrats on how you were handling this downturn, very well managed. And the follow-up question to Benjamin's on the potential improvements in margins, I noticed that as a percentage of sales, do your overall sales means that your expense have fallen by roughly [300] basis points compared to the last year? How much of that reduction should be seen as a structural change and how much of that should be just as a temporary gain?

Yes, we will say all of the reduction, we are going to spend that for 2015 also.

Got it.

If I may elaborate in that and we are very careful, because when you start a cost-saving program, you have to be indeed careful to take out things that may already decided, but enough to go inside the bone of the muscle. Here, this has been a result of a very long process of finalizing the processes and everything to make sure that what we were achieving was a stronger company with lower (inaudible) expenses and something that is sustainable, that's what I said in the beginning of my presentation that we believe that all the cost-cutting programs are something that we will see into the future, because they are a result of a very thorough, solid thought process.

Got it. Very clear. Thank you for that. And lastly, if I may. So far, the weaker nuevo sol might provide you a little bit of leeway to increase prices if UNACEM increases prices as well. Any comment on potential price hikes for this year in cement?

Well, like Manuel mentioned, I mean the guidance is around inflation as within 2%, 2.5%. Of course, we will remain very attentive of what happens in the market and depending what all the players do, I mean, overall we [don't] make the best decision to keep our balance sheet in market share and profitability.

Well clear. Thank you and congrats, again. Thank you.

Thank you.

Thank you, [Andres].

Felipe Ucros, BTG.

Yes. Good morning and congratulations on the results. Two very short questions. The first one is, clearly, you're seeing lower SG&A and you think that most of it is going to be permanent. Where are you seeing those cuts, is it personnel, is it letting go personnel from the existing plants and prepping for the new plant that's starting up or where are you seeing those changes on SG&A? And the second one is surrounding your cost of goods sold, it was clearly much better this quarter, but it seems that it is a one-time result from shutting down the vertical kilns and using a clinker that you had already purchased and have in storage, meaning that most of that didn't show up in this quarter, but I wanted to make sure that that's what we're seeing, if you could comment on that? Thank you.

Well, basically, regarding the second question, clinker would use around 73,000 tons this quarter. We have a very (inaudible) for the next year around 250,000 of what we'll use in the whole year, around 450,000 tons of project clinker for next year. Prices of (inaudible) clinker are going down. So we should expect some recovery in the costs concerning the project clinker because the cost of transportation has gone down as a consequence of the cost of oil.

I think regarding the first part of your question, I mean the cost cutting is all across the board. We have all the way from a reduction of personnel, the headcount has come down the last year dramatically. That also has to do with energy optimization processes, it has to do with high operational efficiency of the machines, has to do with the coal mix of our usage. So in the end, it's a combination, like I said, when I answered Francisco's question, this is not about a cost-cutting program, this is about an optimization program and the focus has been to try to bring every single dollar we can bring from different areas, (inaudible) whether it's personnel, whether it's processes, whether it's transportation to the (inaudible) the margins.

Okay. Great. Understood. Thank you.

Daniel Rojas, Merrill Lynch.

Hi, good morning, gentlemen, thank you for the call. I just wanted to insist a bit on what my colleagues were asking before me in terms of your optimization of cement production costs. Could you give us an idea, if this is coming because you're reducing the clinker factor (inaudible) something related to the mix you're using, just some granularity on how you're able to get into a gross margin almost 50% in the fourth quarter? Thank you.

Let me try to expand on the idea I was talking to a little before. It's a combination of factors. For example, I mean, in terms of the composition of cement, we are going to lower clinker factors and the (inaudible), it's not about lowering the clinker factor, it has to do what you operate the clinker with. So in this case, we are increasing the proportion of lime (inaudible) into a mix which is cheaper than clinker. So in the end, what we are achieving is, I mean the same quality cement with a lower -- with a composition of (inaudible) in a lower cost and of course some impact the gross margin.

And point number two, like I said, is indication of anthracite coal has been at record highs last year is, as you all know, is lower than imported Colombian coal. So all these things collaborate little by little to be able to obtain the margins we were obtaining and to address also a previous question, they were talking about, is this a one-time event, because we shut down these efficient vertical kilns, those kilns were already shut a while ago. So we have already explained that. This has more to do with the structural design of some cement.

And in terms of using alternative fuels, is this something you are contemplating or is this something we should expect in the future? What is your idea regarding alternative fuels?

I mean we are all for alternative fuels, in terms of environmentally-friendly fuel. I think I've already (inaudible) I mean, for us to operate, you need two things. You need a company like us, which is willing to use them but then you need the supply. So I can't -- (inaudible) Brazil, for example, use of used tires is very important, there's no available supply of used tires. We've done some things with (inaudible) plant and we are always looking for alternative fuels. At this point, I mean we don't see any specific source of alternative fuels that we will jump into in the coming future.

Thank you.

(Operator Instructions) Adrian Huerta, JPMorgan.

Hi. Good morning, everyone. I have two questions. The first one is the guidance of a 3% increase in volumes for this year, does that include anything from the three infrastructure projects? And then, the second one is, what should we expect in terms of a dividend for this year? There was a nice increase last year. So what should we expect this year? Thanks.

This is Humberto. Yes. I mean the guidance includes everything; and of course, the three main infrastructure projects. Like I said before, I mean, depending how fast or how much on target we are, we will be closer now to the guidance. In terms of a dividend, we should probably expect something similar to last year, but I mean, like we said before in the range between $20 million to $30 million is what we should be expecting.

Thank you, Humberto. Appreciate it.

Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Nadal for closing remarks.

Well, like I said at the beginning, thanks everybody for joining us today. Thank you especially for your renewed interest in our Company. We are closing a year I think was very important for us because there are some years where many things have been going to favor. This was a year where I think we did a lot of internal work and that's why you have such positive results. And I think this internal work will be especially meaningful for the coming two years. We'll remain very optimistic about the guidance about the regional growth of our Company and if you have any other questions to myself, Manuel and Claudia, we're always available to take them at any convenient time for you. So thank you very much for your time.

Thank you, ladies and gentlemen, this concludes today's conference. You may now disconnect.