Cementos Pacasmayo SAA (CPAC) 2015 Q3 法說會逐字稿

Good morning and welcome to the Cementos Pacasmayo's Third Quarter 2015 Results Conference Call. With us today are Humberto Nadal, Chief Executive Officer; Manuel Ferreyros, Chief Financial Officer; and Claudia Bustamante, Head of Investor Relations.

As a reminder, all participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note that today's conference is being recorded.

During the conference call, management may make forward-looking statements to assist you in understanding its expectations for future performance. These statements are subject to a number of risks that could cause actual results and events to differ materially and I will refer you to the Company's press release of October 28, 2015 and the Company's most recent regulatory filings for discussions of those risks. In addition, statements during this call are based on management's views as of today and it is anticipated that future developments may cause these views to change. Please consider the information presented in this light. The Company may at some point elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so except where required by law.

I would now like to turn the conference over to Claudia Bustamante, [Chief Financial Officer]. Please go ahead.

Good morning everyone and welcome to the Cementos Pacasmayo's Third Quarter 2015 Results Conference Call. Our presenters today will be Mr. Humberto Nadal, Chief Executive Officer and Mr. Manuel Ferreyros, Chief Financial Officer. After today's presentation, there will be a question-and-answer session. Please note that today's call is being recorded and that the contents of this call cannot be reproduced in whole or in part without express consent from the Company.

I will now turn the call over to Mr. Humberto Nadal, Chief Executive Officer.

Thank you, Claudia. Good morning, everyone and thank you once again for joining our quarterly results conference call. The third quarter was a successful one for Cementos Pacasmayo, with achievement in several areas. We base this success basically on our three pillars of our strategy. Firstly, our strategic emphasis on efficiency. This has always been very important to Cementos Pacasmayo, and efficiency measures were the main factor in the double digit EBITDA growth we reported this quarter.

Secondly, our expertise in large projects. This quarter we began production at the Piura facility, the most advanced cement facility in Peru, and probably all of Latin America. Lastly, we are benefitting from the structural advantages of our home market in the northern part of Peru. We have seen early signs of an improvement in demand -- later in the call.

Looking specifically at the results for the quarter, we can see the benefits of our drive for efficiency. Compared with a year earlier, we were able to continue reducing the cost of production and the use of imported clinker. This helped us to deliver a gross margin of 45.1% and an EBITDA margin of 31.8%. In both cases, that's an increase of more than 400 basis points in just 12 months.

This level of efficiency means we can deliver positive financial results even when there is a temporary slowdown in cement demand. In the first nine months of this year, EBITDA is up 10.5%, despite lower demand from the public sector in the first half of the year. At an operational level, this was an important quarter for us due to the progress at the Piura facility, where we have been working for almost four years. The benefits of the plant, it is very clear. The facility will be able to produce 1.6 million tons of cement, at a lower cost than our existing facilities. Piura will also be able to produce 1million tons per year of clinker. This will eliminate the need to use imported clinker, which as all know is (technical difficulty)

Pardon me ladies and gentlemen, the speaker's line was disconnected. please hold. (technical difficulty) Okay, I've rejoined Mr. Nadal into the conference call. You may go ahead, sir. Mr. Nadal, you are alive on the conference. You can go ahead.

To sum up, we're ending 2015 in a very strong position. We've delivered robust financial results year-to-date, despite soft demand from the public sector in the first six months of the year. We're cautiously optimistic in the outlook for demand going forward. The Piura facility is going to add flexibility to our logistics and even greater efficiency to our production. Based on this, and assuming a relatively moderate El Nino, we should close this year with great results.

Operator, we'll now open the floor for questions.

(Operator Instructions) Andres Soto, Santander

Humberto, I guess we lost most of your remarks, so my question is regarding volumes. I see that your volumes increased at a double-digit rate on a sequential basis. I would like to understand if you expect this performance to continue into the fourth quarter of this year and into 2016?

Basically what I said in my speech was that we have seen a strong recovery in the third quarter, specifically last two months or the first two months with volumes in blue, that's why in the end the quarter saw a recovery. What we see of the last semester is along those lines. So in the end, I mean, like we said on the second Q call, we should see our second semester with positive volumes and looking to the future, I think things are starting to look better, basically because public spending has gone up. Once -- now that we [have our] regional governments in place and doing a much of the spending at (inaudible) we're much more optimistic about it.

And regarding 2016, I guess, this will be a more difficult number to predict given the uncertainty of El Nino. What I would like to understand is what would be the impact of a strong El Nino on your results and if there is anything you can do to mitigate those impacts?

I'll answer your question in two parts. First, looking into next year there are two things that we have to consider; one El Nino and two elections. As you know, by July we'll have an (inaudible) we will have elections. So that always brings a little bit of a change in mood into the country. Regarding El Nino, what I've been seeing in the last two months, we've gone from high charges from a very strong El Nino who are -- I would say chances of a regular El Nino. The way this impacts basically is, you have to understand that 60% of our sales goes to self construction. If it rains and pours it's hard for them to build. But when it rains and pours, it may last one weak, weeks, and during which the self-construction activity is a little bit lower, but then it comes up. And also like I said in the call, (inaudible) is after the [El Nino] comes the recovery works, which demand a lot of cement. You have to repair probably some roads and bridges, whatever has been deteriorated. So in the end I think that the balance over a year period, I mean what you lose at the beginning, you probably make up towards the end.

How do we prepare? Well, first of all, our facilities are now fully prepared in terms of -- they are ready to receive heavy rains. Point number two, we make sure, we ensure that all our warehouses throughout the northern part of Peru have enough stock to supply. Demand indicates that some of our -- I was interrupted -- luckily for us, we operate -- we have three facilities. So I mean it's most probably that any market will be reached for any of these facilities. So like I say in the end, hard to predict.

Daniel Sasson, Itau BBA.

I'd like to better understand your evolution of your Piura rampup. I know you're going to start to produce clinker in the fourth quarter of this year. And with that, you expect to eliminate completely the use of imported clinker, which should lower your cost of production. So, I guess my question is, when are you going to be able to fully stop clinker imports? Is it going to be in the fourth quarter of 2015 already? And my second question is too on this matter. What would be -- are you still confident with the 400 basis points margin expansion on the back of the logistics improvements you're going to have with Piura and also with the lower use of clinker? So, how confident are you that you can grow your margins from the current 32% to somewhere around 35% or 36% that would be? Thank you for the questions.

First of all, we have stopped importing clinker all along. I mean what we have imported in the past should be more than enough for us when Piura comes in. We will be producing clinker before the end of the year, somewhere probably around December we should be producing these. And our idea is to ramp it up real quick to 70% more or less capacity utilization. Luckily, like I mentioned in my -- when I spoke, I mean operating this milling and this first facility was really, really [brief], and we expect, even though clinker is a little harder, we should be able to ramp up very quickly. So my answer to the question is, we will import no more clinker. Whatever we have imported this year, which I believe was [360,000 something] tons that's it for us and we will not import any more clinker, either this year or the coming year.

Regarding your second question, I mean -- and here we have to be very precise. I mean we are up to 31.5% EBITDA margin. I will always say that, like you mentioned, Piura should bring in another 300 points, or luckily 400 points. We are very confident in that. I mean, we're going to be pushing hard for that in terms of efficiency, but we have to see. I mean, everything in the paper looks very good, so far so good with the plan. But we remain on target of reaching that kind of EBITDA increase when Piura is fully operational.

One other thing, if I may. Do you still expect a final answer on the go or no-go for the first part of the Pacifico project toward the end of this year or should it be postponed to the first quarter maybe of next year? Thanks.

I think we should expect it before the end of the year. If it gets pushed back at little bit, it won't be more than some weeks, but we are right now assessing all our final numbers, so, hopefully by the end of the year, we'll have some kind of light on the decision.

Benjamin Theurer, Barclays.

So first of all, well actually we've lost a lot of the speech at the beginning, maybe you've had that, but nonetheless like to ask it. You've had already quite some volume out of the Piura plant during the quarter and obviously you've just been operating at just a couple of days, basically, back in September. Can you give us a little bit of an idea how you are going to shift capacity up to Piura from our plants in terms of volume production into the fourth quarter and going forward? You mentioned already the 70% capacity utilization, but just to get a little bit of a sense of where you're potentially going to slow down production at Pacasmayo and serve more from Piura, and how that might then -- well, I can make up for how that may affect profitability, but that would be question number one and then I have an additional follow-up.

I mean the thing is -- I mean our strategy once we have Piura fully operational is to run on a multi-plant scheme. Basically the last ton dispatch should come from the plant that would give us highest contribution for the last ton, and that's a combination of efficiency [in this] market and logistics. I would say that we intend Piura to probably account for 40% of our total production and that would mean shutting down some of the less efficient [plants of] Pacasmayo. So I would say if we were to take a picture six months from now with everything completely normalized, probably around 40% or 40-something-percent should come from Piura. This number may vary a little bit, higher or lower, depending on the activity of Northern markets, or the markets a little bit more towards the South.

And then I have one question, it's a balance sheet related question actually. There was an increase during the quarter in your accounts payables. Do you have any explanation on why that went up compared to the quarter before? As you trade a number of payables, you basically doubled in the first quarter versus the second quarter. Is that something we should expect to reverse or is this more or less the level that you want to maintain in terms of payables in the balance sheet? That would have been from Manuel, but it seems he is disconnected.

I mean I can't answer from top of my head, but some of the payables, I mean some -- Piura, sometimes I mean the projects there are a bit delayed in terms of the payables. That could be attributable to that. I wouldn't want to create numbers in my head, I'm not computer aware. So, we should try to wait for Manuel for that. I know -- I recall now. It has to do with the dividends we're paying. I just recalled, I mean because of the date you said, it had to do with dividends which now have been paid, so it should go back to normal levels.

Dario Valdizan, Onyx.

Humberto, just wanted to ask you a couple of questions. Regarding the volumes, you were saying that they have picked up in the last couple or two months, if I recall correctly. Would you say that -- what kind of growth are you seeing, something around 4%, 5%. What are you looking at and how this puts you for the end of the year? On the last call, you were saying that perhaps you're going to finish flat year-on-year. Is that still your expectation? What's the volume outlook? That will be my first question. Then I have another two questions. Thank you.

The first one, I mean, when I say two months, you know we're talking between 3% and 4%, but that includes (inaudible). What I'm seeing of this semester looks also very good. Are we going to manage to close the gap? Hard to tell. I don't think so, but I mean the gap that we had that was close to 5-point-something-percent. Indeed I mean it should go down dramatically. Maybe we'll get [closer to this] -- I mean it will be less than half of what it was on the first semester.

And regarding the Piura plant, did you have, on your cost, I didn't see that, but do you have any one-off this quarter because of the initiation of the operation on the Piura plant, or there was no one-off on this quarter? And then I have one last question after that.

Go with the next question, so I can answer both together, if you don't mind, Dario.

Yes. No worries. The other question was regarding the margin. If I look at your EBITDA for cement was PEN102.9 million compared to PEN92.4 million on the second quarter, with a stable EBITDA -- I mean gross margin of 51.4%. So that would say that your margin, on your EBITDA margin for cement has fallen [300] basis points or 200 something, 42.8% on this quarter, compared to 45% on the second quarter. I wanted to know if this was just related to the one-off, the payments that you were doing regarding administration fees or was related to something else?

No, has to do with what you are mentioning.

Okay, perfect.

(multiple speakers) but that's the answer.

And I wonder if you had a chance to see about the one-off regarding the Piura plant, if there was any cost?

There was some cost. I don't have the exact details here and of course we have lost Manuel. I'll make sure he gets back to you with an answer.

Yeah, no worries. Well, thank you very much and congratulations for the results.

Francisco Suarez , Scotiabank.

The question is actually a follow-up question on the previous made before, in this case relates with -- what is the amount of severance payments that were affecting margins in this quarter, it is something in the range of 200 basis points of sales, it's something like that? And also in Piura, already you have mentioned this and indeed that was one of the reasons of why you were able to distribute more dividends than expected, that you can't experience savings on the -- if I recall correctly, you have spent already $230 million in Piura up to date out of a budget of a [$286 million] or so. So the question here is, if we should be seeing -- what is left out of that budget that should be spent, or in other words, what could be the final amount of the CapEx related to Piura?

I go with the second first. The budget originally was [$286 million]. We are almost done there, so probably we should come in between $20 million to $20-something-million under the budget. That should be our final number. I don't see anything that should deviate us from that, because I mean most of the works are done. We are already in the commissioning of the clinker plant, so we have very few workers there. So, yes, we are going to be saving within $20 million to $21 million on the Piura plant.

And you already mentioned and actually you cautioned us to be a little bit conservative on margins for the fourth quarter and actually the third quarter, once that the Piura plant was coming into stream. Do you still think that we should be more cautious on our margin prediction for the fourth quarter as the overall production of Piura stabilizes?

I have already said in the last call, I think the margins we're achieving are sustainable. They are still seeing very little of Piura. I got this question before. I mean, are we still targeting 34%, 35% EBITDA margin in Piura, the answer is yes. So I think it's going to be a matter of how fast we get there. With clinker coming in the last part of this year, for sure, the next semester will be fully -- be able to deliver on our offer. But I think it's going to be going up little by little, depending on Piura. But whatever (inaudible) we have now, which I think are really, really competitive considering we are still using imported clinker, I think between that and the target margin, I mean it's going to be a matter of some months.

And lastly if I may on prices, you already mentioned that ready-mix prices are increasing now. So the question here is, should we expect that trend to follow in the next quarters. And what about cement prices as well?

I think cement prices we need to (technical difficulty) price increases first part of this year. At the end, all in all for the year, we're going to be, for the first time I think above inflation for the year. And I think the fact of the matter is, we are going to keep pushing on the coming year.

Could you elaborate a little bit more on the sources of efficiency year-over-year? Is it actual (technical difficulty) less use of imported clinker as a proportion resulting in a better margin or is it actual efficiencies related to the production of clinker itself?

I think it's like a good diet. I mean it's a combination of (inaudible) first of all, we've been able to up our [kiosks] both number two and number three in Pacasmayo with very high production rates, very efficient use of energy. Point number one. Point number two, I think over the last two years we have been in a very strong program building the headcount from more competitive stance. I think we are there and reaching optimal level. Number three, we've been able now to increase use of our local anthracite coal. It's cheaper than bituminous where (inaudible). That's point number three. Point number four in terms of the SG&A, I think we've been able to keep them on line. It's not been a -- I think it's quite a combination of all these things that have been able to give us this additional efficiency. Also you were mentioning the imported clinker. Some point -- I think last year, we were probably using 0.5 million tons, for this year we have not. So I think it's a combination of these will deliver the margins.

Another question if I may. I don't know if I'm way off with comparative costs. But is there a point where -- just to -- and already it's a sort of fictional scenario, but demand slows down so much that you have to go down on the new Piura plant at a usage factor, which is very low and that increases volume -- per ton cost so much that it's actually better to import clinker, keep imported clinker than using your own Piura plant?

No, the answer is definitely no. I mean unless we are at a [catastrophic] situation with demand, just to realize that the difference between the cost of the imported ton of clinker already in our plant versus our own, I mean it's clearly [enormous]. I mean, that's why we have Piura. I mean when I talk that we are going to go up to 70% utilization capacity of Piura from the start, I don't see any scenario where what you're saying could happen. I mean, absolutely not.

Felipe Ucros, BTG.

Congrats on the results. I guess most of my questions have been asked, but now that we have all of you back in the line, I'll ask one of the questions that was asked before, again. Can you calculate or give us an idea of how much the SG&A was driven by the severance costs?

Yes. The cost of this one-time was around PEN8 million.

Soles, right?

Yes, soles.

Thank you.

Jasmine, Credicorp Capital.

Do you have any more development with regards to the [CapEx] plan, any better idea of CapEx commitment and potential funding options for this?

So, like I said in a question -- on a previous question, I had said in the 2Q call, we have now finished -- almost finished the updated [bank] feasibility study and we're right now at the early stages of assessing the project, their needs, their profitably and everything. So at this point, I mean we're not totally confident. We've really fully analyzed the numbers. I mean, I don't -- it covers everything -- anything into the market. The one thing I may say and I said it to guys on the call is that, I think if we were to go ahead, I think the Piura project has given us credibility and a lot of increased experience to deliver large-scale projects and now we will only undertake a project if the profitability and the numbers are there, considering of course the risk factors. I mean we're almost a 58-year company. We're very prudent. And I think this is something that should give a lot of confidence to our shareholders and we will go ahead if a project really means very good numbers for the Company.

Dario Valdizan, Onyx.

I just wanted to take advantage that Manuel was back to ask him about the costs, one-off costs this quarter related to the initiation of operation of the Piura Plant, if there was any?

Yes, definitely. But more than cost, there are a lot of (inaudible) expenses during this year to put on operations at Piura Plant.

Do you have a number, a ballpark number that you can give us?

Yes. [Additional] expenses should be around PEN10 million that is basically --

Training costs.

Okay. So there was nothing related directly to the initiation of the operation?

No it's related basically to the training costs.

This concludes our question-and-answer session. I would now like to turn the conference back over to Humberto Nadal for any closing remarks.

Thank you. First of all, our apologies for the technical problems. Trust me, we are here and we've always been here to answer the questions. Sometimes technology can pull up us. But like I say, I mean I think we're closing a great third quarter. We are very optimistic about our Piura plant, which is now a reality and will be a full reality by the end of the year. I think all the work that we've done over the last [three] years on efficiency will really pay off big time when Piura comes online.

And as for the future, we remain very optimistic. I think the fundamentals of the cement demand in Peru and the possibility of growth are still there, regardless of a year that has been pretty weak. I think we should, as a country, regain the growth starting next year, hopefully the higher growth. And like I said, Cementos Pacasmayo will benefit from that. Once again, my apologies for the technical problems. If any of you guys have any questions, I mean of course you have Manuel, Claudia and myself available at all times and thank you very much for your interest in Pacasmayo.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.