Cementos Pacasmayo SAA (CPAC) 2015 Q1 法說會逐字稿

Good afternoon and welcome to Cementos Pacasmayo first quarter 2015 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, Joshua, and good afternoon, everyone. I'm very pleased to welcome you to Cementos Pacasmayo's conference call to discuss its first quarter 2015 results. This call is for investors and analysts only therefore questions from the media will not be taken. However, 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 Monday, April 27. If you have not yet received a copy of the earnings report, please visit www.cementospacasmayo.com.pe in the Investor 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 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, Raphael, and good morning, everyone. Cementos Pacasmayo results for the first quarter of 2015 we think demonstrate the resilience of our business model as a high-efficiency cement producer in the face of deceleration in the demand environment for cement, particularly for rising infrastructure projects. We delivered very strong operating and financial results bolstered by efficiency and cost reduction initiatives implemented throughout the organization. We also continued to actively manage our balance sheet so as to minimize our exposure to exchange rate fluctuations among other areas. Operating efficiencies including the lower use of imported clinker and continued improvement in clinker cement ratio drove gross profit margin improvement by 200 basis points despite a reduction in sales.

We continued to show G&A leverage, a result we think of the leaner corporate structure put into place and we expect the rate we have achieved to benefit results throughout the year. Overall, these efficiencies drove an increase of 10.5% in EBITDA and a 31.4% jump in net profit. As I just mentioned, the demand environment in Peru for cement weakened in the first quarter as the economy decelerated. In particular, there was reduced demand related to lower public expenditure due to the recent change in regional authorities. This reduction was greater than expected. In the first two months of the year, public investment at the local and regional levels fell 24.4% respectively. However, we must say that we expect this to rebound as the new authorities complete the adaptation process. On the other hand, the self-construction which represents approximately 60% of our total cement output remains resilient with steady demand as compared to the previous year.

Growth estimates for the Peruvian economy remains slightly above the growth for 2014 and despite regional geopolitical complexities and the continuous slowdown in the macro environment, Peru has remained somewhat insulated given its solid fiscal accounts, extensive international reserves, and the lower levels of external debt. At the end of last year, as we all know, the Peruvian government announced it would implement tax cuts and induce capital spending. These measures were a shiny part to offset lower local government spending. These measures along with the start-up of normalized activities like new regional governments I mentioned before should and will commit support to the assumption of growth in the second half. The long-term gains for continued growth in demand for cement is really compelling in Peru.

Despite the tremendous progress made by the country over the last 10 years, there still remains a housing deficit close to 2 million households throughout the country. And with our infrastructure, this deficit is really woefully low, the deficit remaining at almost $90 billion. The government has expressed intention to prioritize investment in infrastructure and has granted the largest amount of public-private partnerships as compared to the last four prior governments. The 2015 plan includes 22 new projects totaling an estimated $4.6 million in investment. The project developed in the northern part of the country will naturally be Cementos Pacasmayo. We have to mention three key projects that are underway so far; which includes first, the upgrade to the Talara refinery where we have already signed a contract for the supply of the cement, the concrete, and the tiles; and we estimate the total cement demand for this project will account for approximately 180,000 metric tons of cement.

The second project in line is our Chavimochic project, which provides irrigation for more than 63,000 hectares of agricultural land. Preliminary works have recently begun and we expect cement demand for this project to account for another 100,000 tons of cement. And finally, the North Highway which will be extended by 900 kilometers; a contract is in place already to supply cement and we expect the total cement demand for this project to account for approximately 40,000 tons of cement. I would now like to give you an update on the latest environment of our flagship project, the Piura plant. As you know, this plant is a vital component to our growth strategy for several reasons. Firstly, it will increase our annual cement capacity by 1.6 million tons just shy of 50% of our existing capacity. Secondly, it will allow us to produce cement at a higher margin than we do currently.

And one key part of this is that we will be adding 1 million tons of clinker capacity. With this additional clinker of capacity, we will be able to cease importing clinker entirely significantly lowering our input costs. In addition, the Piura location would mean our production is much more closely aligned to our end market, which will reduce our freight costs per ton of cement. So to sum up, Piura will increase our scale; but most important, it will improve the amount of EBITDA we generate for every ton of cement we sell. We have been investing in Piura as you know since 2012. I'm very pleased to report that the project continues on time and on budget. As of March 31 of this year, the civil construction of the plant was almost complete. We have contracted cutting edge equipment from Thyssenkrupp, Polysius, and Loesche among other firms and we are setting all the equipment is now on site.

All of technology at Piura is advanced, but one element in particular I would like to highlight is that we will be using a multi-fuel kiln, which will provide flexibility in terms of how we generate heat for the plant. Investment to date on the plant amounts to $255 million, approximately two-thirds of the total investment of our project. We have begun the electrical work at the plant and the next specs include of course the whole commission of the cement line, the commissioning of grinding imported clinker for initial cement production. Based on the progress we made so far, we now expect to begin cement production in the third quarter of this year. The plant will reach utilization rate of around 70% of both clinker and cement towards the end of this year at the maximum the beginning of 2016 when the initial investment in the plant will be complete.

Looking ahead, we see weaker than anticipated cement demand in the remainder of the first half of the year. But we do foresee acceleration in the second half of this year as the newly elected authorities increase spending as well as increase investment in large infrastructure projects. Based on this outlook, we expect full-year 2015 cement volumes to grow at a pace similar to the GDP growth of the northern region. In this environment, we believe our market-leading efficiency will be a crucial competitive advantage while the beginning of operations of the Piura plant late in the year will offer a further boost. In summary, we think the results for the first quarter demonstrate that we can deliver healthy financial results even while our growth volumes are decreasing. We are well positioned to continue this trend and we'll be able to show meaningful operational leverage if there is even a modest improvement in demand.

Thank you very much for attention. And I will turn the call over to Mr. Manuel Ferreyros, our CFO. Manuel, please go ahead.

Thank you, Humberto. As Humberto mentioned, the results of our first quarter showcase our ability to deliver strong double-digit financial results even with a reduction in our topline result related to current demand trends in the Peruvian economy.

During the first quarter, cement production volumes at the Pacasmayo plant fell in response to reduced demand by local and regional governments while the Rioja Plant remained stable. Clinker production in the Pacasmayo plant had a scheduled stoppage of the vertical kilns during the quarter resulting in a 13.1% reduction in clinker production. Clinker production at the Rioja Plant increased by 19.1% with higher volumes of production for inventory. During the period, we also reduced the amount of imported clinker by 41.1% and anticipated in eliminating imported clinker as Piura becomes fully operational.

Finally, quicklime production increased by 37.8% as compared to the prior year quarter driven by an increase in demand. Total revenues during the quarter decreased by 3.2% year-to-year to PEN290.6 million with the increase in sales of quicklime of 75.9% to PEN19 million, partially offsetting a reduction in sales in other categories including cement, concrete, and blocks. Cement, concrete, and blocks sales fell by 4.9%. However, the gross margin increased 2 percentage points compared to the first quarter 2014 underscoring the operational efficiencies put in place, lower use of imported clinker, and improvements in the clinker cement ratio. The strong operational and financial results prevailed in the quarter with the Company reporting a gross profit increase of 2.8% compared to the same period of 2014, mainly driven by cost optimization in the production of cement.

Specifically gross profit of cement, which represented the largest portion of the sales, increased 2.2%. This was offset by a decrease in concrete and blocks gross profit. During the first quarter of 2015, operating expenses decreased 1% as compared to the same period of 2014 with further personnel and third-party expenses reduction in accordance with the reduction policy underway. EBITDA increased by 10.5% to PEN89.2 million with an EBITDA margin of 30.7%, 3.8 percentage points higher than the prior year quarter as a result of the higher gross margin and operational results. Finally, the net income increased 31.4% to PEN52.3 million on cement cost optimization, reduction in administrative and selling expenses, and positive impact of FX hedging strategies.

In terms of CapEx, as of March 31, 2015 the Company invested PEN150.3 million, which represents PEN91 million allocated to the new Piura plant and the remainder to existing plant upgrades on the phosphate project. In summary, given the current backdrop for demand, we are pleased with the results of the quarter which highlight the impact of our efficiency initiatives and cost reduction strategy undertaking. While we still expect to see weakness for the remainder of the first half of cement demand, we expect some acceleration in the second half of the year as the new elected local officials increases spending and the larger infrastructure project gets back on track. And as Humberto mentioned earlier with just a modest level of improvement in demand, we expect to report meaningful operating leverage.

This concludes my presentation. Thank you for your attention. I'm now going to turn the call back to Humberto for closing comments.

Thank you, everybody. Like I said, I mean I would like to thank in advance for everybody joining the call. We remain optimistic about the outlook for the cement industry in Northern Peru despite what we consider a temporary headwind in demand. We have a very strong market position and industry-leading efficiency. We have to keep in mind that the Piura plant will provide an initial boost of both and will have an immediate impact on results starting in the fourth quarter.

Operator, we will now open the floor for questions.

(Operator Instructions) Adrian Huerta, JP Morgan.

Just one question regarding if you can explain a little bit the difference in the economic growth in the northern region of Peru versus the whole country and what are the main reasons for that? And why the recovery on volumes in the second half that you're expecting, and is this just mainly on the back of demand from these three infrastructure projects that you talk about? Thanks.

We like to separate the GDP growth from the country to compare to north, we have to go to specifics. I think in the case of the north, the [construction] industry should come back stronger this year after a very bad performance last year, but that only comes usually during the starting of the second quarter of the year. In terms of demand, just two key things here. The drop in public investment of 20% something or 40% something is really very strong. And if we see, I mean two weeks ago we had an event for investors where the four regional operation general, which are fantastic authorities, and they are very eager to start working, start investing, and start spending their money; but they are all new to this. So, the fact I think they are very qualified people and they have already started so many things.

That's why we think we are very optimistic about public investing coming on very, very strongly in the second part of the year. Like I said before, self-construction and private investment are doing okay, the thing is our public investment. And the second part, what I mentioned the three infrastructure projects and I mentioned the tonnage for each of them so you have an idea. So far all those plants reach amount close to 400,000 tons, we have only budgeted 5,000 tons. If you had asked me this question six months ago or eight months ago, we should be 25% on to that volume, this volume should come in the second part of the year. Those two things, I mean the renewed public investment and the three very important infrastructure projects are what make us very optimistic about the second part of the year.

Thank you, Humberto. Appreciate it.

Andres Soto, Santander.

The first is regarding political cycle in Peru. We are just entering the last year of one administration, we are going to be in full swing for Presidential elections very soon. Do you see that as a potential risk for this outlook of demand in the second part of the year and early in 2016? And my second question is regarding the phosphates project. Can you please give us an update on this and when we are going to see some numbers or some outcome from the studies that you are performing?

In the first part, Peru was strong in the last year on an organizational based on regional government. So basically what I said before and I think the spend is going to come is on a regional level. These authorities are new and they've already been elected and they are in place in January. So, they have their own dynamics and they are the ones that are going to be controlling the wallet on the coming months. I think the Presidential election of course will increase the political noise at a national level. We don't expect cement demand to come at all from the national level. So, I don't see any interference with the Presidential election what I said when I answered Adrian's question. On the second part on the phosphate project and I think I mentioned this in our last call. On the second part of this year, we shall have the final adjusted numbers of the basic engineering that will result in a new macro visibility study and by the end we will release them into the market.

Okay. Thank you very much.

Andre Pinheiro, Itau BBA.

First regarding your cost cutting potential, we've seen in the last few quarters that margins have been benefiting by lower imported clinker use and also the other cost cutting initiatives that the Company has been implementing. Just to understand with the start-up of Piura, you mentioned previously that we could see a benefit in terms of margins around 300 basis points to 400 basis points. Just to understand would that be on top of the current margins or the margins that we saw last year because right now we're using a bit less clinker in the mix? And the second question, just regarding the second quarter volumes, I mean you mentioned in the release that second quarter volumes are still a bit weak. Should we expect that volumes will decline versus first quarter levels or should we see a slight recovery quarter-over-quarter? Thank you.

To answer the first question. When we mentioned an increase with the Piura plant, that's on the current margins where EBITDA boosts up [43], 300 basis points on the EBITDA margin based on where it's right now. Because like I mentioned before, all the efficiency and all the lower SG&A are sustainable that's why I think Piura should bring an additional boost. And on the second part of your question regarding second quarter, I think things are going to be still looking weak and that's why I think both Manuel and myself focused strongly on the second semester where we think the projects and the new authorities should really come stronger. Like I said, we really have to be aware that self-construction and private investment, they are doing okay. The thing is about the public and that I think is more reasonable to expect the boost in the second semester, I mean second quarter.

Perfect. Thank you. That's very clear.

(Operator Instructions) Francisco Suarez, Scotiabank.

Congrats once again for having this super cost control on your operations last year and of course with the current execution of Piura because it is really heading right on schedule. If I may the first question is related presently with Piura. You already indicated to us that you may reach utilization levels of 60% for the beginning of next year. Can you actually share with us a little bit of what might be the utilization rates that you may reach at Piura for the third and fourth quarter of this year?

Like I said, it all has to do with the ramp up even though this is state of the art technology, how fast we're able to achieve that. I said in my presentation that 70% should be achievable towards the end of the year considering which we'll be starting in the third quarter, I mean from 0% to 70%, I mean let's hope it goes like a Ferrari. We won't do it in 4 seconds, but we will do as fast as we can because we are very aware of the [opportunities] to come. But by the end of the year, we should be at 70%.

Got it. And the second question relates with overall prices because so far you have been able to expand margins mostly on reduction in cost in general. But what is in your view the overall output that we should have in terms of prices? Are you seeing more leeway to expand prices going forward?

I think like you said, so far our margin boosting effort has been on cost cutting. I think we will see movement in prices in the rest of the year. We (inaudible) to not so much with prices per se with our commercial strategy that I cannot discuss right now, but we should be in place in the coming months. So I think for the second semester, the average price should be definitely higher than where we are right now.

Okay. Thank you very much. Congrats again.

Dario Valdizan, Onyx.

Congratulations for the operating results despite the decrease in volumes. First, you were saying earlier, Humberto, that what explains a lot of the contraction is the public sector. If one looks at your past presentations for your sales, about 23% comes from public sectors. So if we wanted to just get a feeling of how much this impact is and we excluded the portion of the volumes that go to the public sector on a year-on-year basis if I take the 584 tons that you got for the first quarter of 2014, that will be about 134,000 tons. How much would your growth have been if you exclude the public sector?

You have to realize one thing in our public sector, unlike self-construction where it's built ton by ton because we have millions of consumers. The public sector grows by chunk because Peru with big projects. So like I say, it's very hard to surmise mathematics of how much would have grown, it's unlike self-construction. So, it has to do a lot with the projects that will be implemented. And the reason (inaudible) when we met the regional operations like I said two weeks ago, besides the three big projects; we have like 12 or 13 much smaller projects. But if they come in, they should increase demand but like I say, it's not like I can do a mathematical exercise, it should be 10% or 12% or 15% more. It has to do a lot with how we would keep in time in getting to them. Does that answer your question? What I'm trying to say is I mean it has a lot to do in a public sector, but it's much more concentrated demand in a fewer number of projects. It's not about (inaudible) self-construction.

No, I understand that portion. My point was the following. If I look at the other companies in Peru, the contraction is much less significant although we consider that some of them have a base very similar to you in terms of self-construction being 50% of their sales. So it kind of raises a flag of concern when you see 7% when the other ones either if you exclude exports in case of Piura, you still have a contraction that is in line with the average for the country talking about 3% or 2% contraction. So, my question was trying to just exclude that factor you have public sector issue with the elections and so on, how much would that have been in a normalized way? But leaving that apart, does the 3% growth for this year still hold despite these difficult volumes first quarter?

Hard to tell even though we are optimistic about the second half. I think volumes will come back. At this point it seems hard to think that 3% year-over-year will be achieved. It has a lot to do of what we will be able to do with prices also in the second semester. But in terms of volumes, like I say it's hard to tell at this point. I mean we are optimistic, but I think in terms of revenues, revenue based growth is going to depend more on prices rather than what happens on volumes.

No, I was just going for volumes. I was wondering if you are going to be able to achieve that 3% growth in volumes for cement?

At this point, I mean my answer would be no.

Okay. And finally, if I remember correctly, I think in the fourth quarter call for last year you mentioned that you're expecting to use perhaps about 450,000 tons of clinker this year. So far this first quarter you used 77,000 tons. Does the low demand in volumes means that you're rethinking the quantity and these 450,000 if that was the number that was discussed, I don't remember exactly what the number was, is no longer in play is a lower number, what your expectations of imported clinker will be for this year?

I mean the fact that we have lowered the clinker factor of course despite the lower demand. When we think of the number for the year, we are thinking more in terms of 320,000 tons of imported clinker.

320, 000 tons, perfect.

And also it has to do, Dario, with the fact that with Piura been so much more clear when it's going to come in, we were able to manage more of security stocks of imported clinker.

I just wondered because I was looking at the numbers that I have from imports and I calculated that you have around 180,000 tons of imported clinker reserve. I was wondering if you were going to have to go and buy some more. So if 320,000 tons was the number and you have 180,000 tons, you still have to import a little more during the year, is that your mindset for that?

I think I mean your calculation of 180,000 tons may be a little bit low. We still intend to have, if I am not mistaken, one more shipment of clinker coming in, but not to worry. So, 100,000 tons or something seems too high, more in the 60,000 tons something number that we still will need to buy.

Thank you very much.

Daniel Rojas, Bank of America Merrill Lynch.

My question is regarding the type of fuel you're going to use at Piura and if you could share with us a sense of what is the cash cost on a per ton of cement basis of this new operation compared to your existing operations? Thank you.

In Piura, we're going to use fully 100% of [unprocessed] coal that's local coal. At the moment in Pacasmayo we are using around 95% or 96% of local coal so the use of imported coal is diminishing a lot. And also the operating cash cost for the Piura plant is going to be under $140.

And how does this compare to your existing operations?

It will depend on the type of fuel, but I would say that Pacasmayo operation excluding the vertical kilns is around $52, $53.

One more thing I wanted to add to Manuel's comment. I mean you were mentioning about the fuel base. Also you have to recall that the Piura plant is a dual energy plant and it's going to operate basically on coal, but it's also designed to operate with natural gas. This is something that we are researching extensively and if we find the potential of being supplied by gas in the amount at a competitive price, it is something that Piura should also operate in the future.

So I'm guessing for you to have flexibility on which fuel to use, you're not going to enter into long-term contracts for this, right?

Not in the case of coal. I mean we've been operating with many suppliers. If you recall, we have our own reserves of coals so if something happens with the prices, we can always activate that. There is really no place for long-term contracts in coal. If we were to enter in the case of gas, it's because we were able to sign a long-term contract with somebody.

Okay. Thank you. That's very clear.

Carlos Rojas, Andino.

Congratulation on your numbers, I think they are outstanding with the very slowdown in the economy. Most of them already been answered so I'm going to go with the first one. If you exclude the formula that was used on your Piura plant, how was the negative growth in the first quarter? I'm just trying to take out these big projects that you were using for yourself. The second one is you talk about something about (inaudible) and there was noise in the paper here. I don't know if you already sold that and if that is okay with the government or is there something that we should be expecting that could arouse them later? And the last one is about you had a good sales of [products] in the last quarter and I would like to know if that's a contract that is going to expire soon or do you think that could last in the future? Thank you.

Let me tackle the first two questions and maybe I'll come back to the third because I didn't quite get it. I mean the amount for our Piura plant was almost nothing in the first semester because like I said civil construction was almost finished by the end of last year so that really had little impact in our sales. In the case of Fosfatos, if I got correctly your question, I mean there was there were some issue in the press where we had problem with the government. Now (inaudible) context, we have no problem with the government under the (inaudible) we have done. Of course the first one had a little more trouble than us, but so far so good and our relationship with the government both on a local and regional level is really solid. And could you repeat me, Carlos, your third question please?

You had a great utilization of [gallons] and I want to know if that's possible in the future or it was a one-time effect?

That has to a lot to do with [Talara] demand and I think that will still be in place for probably remaining of this year. I mean I think that's the exceptional event happening. It has to do a lot with how the project goes and it has lot to do with the fact they're going to start producing their own (inaudible) so far and the numbers are very good, but it has to do a lot with that.

And just one more question. I'm coming from a meeting with another investor and there was the economy minister and he was saying that he was quite optimistic on April and May numbers about the local governments starting to deploy some capital again. Are you seeing that or you haven't seen that yet in the north?

I don't see it, he's optimistic.

Okay. Thank you.

Dario Valdizan, Onyx.

Just to verify one thing that I heard before in the call, I just wanted to double check with you guys. Of the Talara, Chavimochic, and the road the 200 kilometers. If I add it together, that gives you about 320,000 tons. If I understood correctly that you were expecting obviously if everything goes well about 20% of that volume during the second half of this year. Is that correct what I understood?

Dario, what I said was like that so far we've already dispatched 5,000 tons and if the project has been on the schedule, at this volume we should have already touched 20%. I would expect in the rest of the year hopefully, but once again these are we don't run. If I see the schedules of 18 months ago, at this point we should have already 20% into those tons.

Okay. That's clear. Thank you very much.

(Operator Instructions) And at this time, I'm showing no further questions. I'd now like to turn the call back over to Mr. Nadal for closing remarks.

Humberto, go ahead. It's closing remarks.

I once again thank everybody for joining us today and always thanks for your interest. I mean all your questions always help us look into different aspects, many we have not seen in the past. But we remain very optimistic, I think the Company is doing everything they can to add value to the table. I think Peru is going through a slower moment. We will come back I am convinced about that. And I think the fact that Piura is almost done is very important for us because it's a risk that we have no more in our pipeline. And I think the future like I said and as a point of representation, the future for cement demand in Peru in the long term is compelling. I think the construction deficit and the home deficit still is there and aside from the temporary headwinds, I think we should be doing very well and we really look forward to a much better second semester and of course in the future to come. Thank you, everybody, for your time. And of course if you have any questions, you have Claudia, Manuel, and myself always available. Thank you very much.

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